SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

( X )    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   For the Fiscal Year Ended January 31, 2004

                                       or
(   )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

               For the transition period from ________ to _______

                         Commission File Number 33-12755

                            SHARPER IMAGE CORPORATION
             (Exact name of registrant as specified in its charter)

                         Delaware                             94-2493558
              (State or other jurisdiction of              (I.R.S. Employer
              incorporation or organization)              Identification No.)

        650 Davis Street, San Francisco, California              94111
         (Address of principal executive offices)             (Zip Code)

               Registrant's telephone number including area code:
                                 (415) 445-6000

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, par value $.01
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
      Yes  _X_                                         No ___

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. _X_


Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes _X_                        No ___

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<PAGE>

The aggregate market value of the voting common stock held by  non-affiliates of
the Registrant based on the reported last sale price for the common stock on the
Nasdaq National Market on July 31, 2003, was $353,076,885.

         There were 15,519,236 shares of Common Stock, par value $.01,
                         outstanding on April 12, 2004.

                       Documents incorporated by reference
Portions of Registrant's  Proxy Statement for the Annual Meeting of Stockholders
presently  scheduled to be held June 7, 2004 are  incorporated by reference into
Part III of this report.

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                                     PART I

         This Annual Report on Form 10-K and the documents  incorporated  herein
by reference of Sharper Image  Corporation  (referred to as the "Company,"  "The
Sharper  Image," "it," "we," "our,"  "ours," and "us")  contain  forward-looking
statements  within the  meaning of federal  securities  laws that have been made
pursuant to the provisions of the Private  Securities  Litigation  Reform Act of
1995.  Such  forward-looking  statements  are  based  on  current  expectations,
estimates and projections about the Company's industry, management's beliefs and
certain   assumptions   made  by  the  Company's   management.   Words  such  as
"anticipates,"  "expects," "intends," "plans," "believes," "seeks," "estimates,"
or  variations of such words and similar  expressions,  are intended to identify
such forward-looking  statements.  These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict.  Therefore,  actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those set forth herein under "Factors Affecting Future
Operating  Results"  on  pages  13  through  22 as well as  those  noted  in the
documents incorporated herein by reference.  Unless required by law, the Company
undertakes  no  obligation to update  publicly any  forward-looking  statements,
whether as a result of new  information,  future events or  otherwise.  However,
readers  should  carefully  review the  statements set forth in other reports or
documents the Company files from time to time with the  Securities  and Exchange
Commission,  particularly  the  Quarterly  Reports on Form 10-Q and any  Current
Reports on Form 8-K.

Item 1. Business

Overview

         The Sharper Image is a leading specialty  retailer of innovative,  high
quality  products that are useful and entertaining and are designed to make life
easier and more  enjoyable.  We offer a unique  assortment  of  products  in the
electronics,  recreation and fitness,  personal care,  houseware,  travel,  toy,
gifts and other categories.  Our merchandising philosophy focuses principally on
new and creative proprietary Sharper Image Design products and exclusive Sharper
Image branded products and, to a lesser extent, on third party branded products.
We design and develop our Sharper  Image Design  products,  while  Sharper Image
branded  products are generally  designed by us with third parties..  We believe
that our unique  merchandising and creative  marketing  strategies have made The
Sharper Image one of the most widely recognized retail brand names in the United
States of America.

         The  Sharper  Image was  founded  in 1977 by  Richard  Thalheimer,  who
currently  serves as Chairman and Chief Executive  Officer.  We mailed our first
catalog in 1979, began the expansion into store operations in 1981 and commenced
online operations in 1994. We market and sell our merchandise  primarily through
three  integrated  sales channels:  The Sharper Image stores,  The Sharper Image
catalog,  which  includes  revenue  from all  direct  marketing  activities  and
television  infomercials,  and the Internet.  We believe that this multi-channel
approach  provides  us  with  significant  marketing,   advertising,  sales  and
operational   synergies  and  provides  our  customers  with  enhanced  shopping
flexibility and superior customer service.

         Our merchandising  strategy emphasizes products that are innovative and
new-to-market.  In recent years,  we have focused  significant  resources on the
development  and marketing of our Sharper Image Design and Sharper Image branded
products.  Sharper  Image Design and Sharper Image  branded  products  typically
generate  higher  gross  margins  than other  products,  minimize  direct  price
comparisons  and, we  believe,  strengthen  The  Sharper  Image brand as well as
broaden our customer reach. The percentage of our total revenues attributable to
Sharper Image Design and Sharper Image branded products was approximately 73% in
fiscal 2003 and 76% for fiscal 2002.

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<PAGE>

         Our store  operations  generated  the highest  proportion of our sales,
representing  58.6%  and  57.2% of total  revenues  for  fiscal  2003 and  2002,
respectively.  As of January 31, 2004,  we operated 149 The Sharper Image stores
in 37 states and the District of Columbia.  The Sharper Image stores  present an
interactive and  entertaining  selling  environment that emphasizes the features
and  functionality  of our  innovative,  fun and useful  products and allows the
customer to interact with and experience the product while shopping. Our average
store sales per square foot are consistently above industry averages, and during
fiscal 2003 and 2002, we generated average sales of $676 and $627, respectively,
per square foot. For our stores opened for more than one year, our average sales
per square foot was $710.  During  fiscal  2003,  we opened 25 new stores and we
closed three stores at lease maturity.  We plan to increase our number of stores
by 15%-20% during fiscal 2004.

         We also offer our products  through direct  marketing  activities.  The
Sharper Image  catalog,  an award  winning,  full-color  monthly  catalog,  uses
dramatic visuals and creative product descriptions  designed and produced by our
in-house  staff of writers and  production  artists.  The Sharper  Image catalog
generally  features  between  200 and 250  products  in  each  monthly  catalog,
increasing to over 350 products  during the holiday  shopping  season,  and also
serves as a  significant  advertising  vehicle  for our stores and our  Internet
operations.  During fiscal 2003 and 2002 we mailed  approximately 86 million and
78  million  The  Sharper  Image  catalogs  to over 18  million  and 16  million
individuals,  respectively.  We also  conduct a television  advertising  program
through  infomercials on a select few of our most popular  products.  For fiscal
2003,  19.9% of our total  revenues  were  generated  by our  catalog and direct
marketing operations,  including revenue generated directly from catalogs, print
advertising,  single product  mailers and television  infomercials,  compared to
23.0% in fiscal 2002.

         The Sharper  Image  products  are also  marketed  through our  Internet
operations,  primarily  through  our own Web  site  which  we have  operated  at
sharperimage.com  since  1995.  The  Sharper  Image  was an early  entrant  into
Internet  retailing,  and has  participated  in online  shopping since 1994. Our
Internet  operations  generated 14.7% and 13.5% of total revenues in fiscal 2003
and 2002,  respectively.  In  addition  to our Web site,  we offer our  products
through Internet marketing agreements with Google,  eBay, MSN Shopping,  Amazon,
Linkshare,  Yahoo! Shopping,  Catalog City, and AOL. We believe that our Sharper
Image Design and Sharper Image branded products are particularly well positioned
to be marketed and sold over the Internet and that our Internet  operations have
enabled  us to expand and  diversify  our  existing  customer  base.  We plan to
continue  to allocate  resources  to our  Internet  operations  by  establishing
additional  strategic  relationships  with other  Internet  retail  partners and
continuing to enhance the technical capabilities and presentation of products on
our Web site.  We also  operate an auction site where  consumers  can bid to win
products at less than retail  prices.  This provides us with the  opportunity to
broaden our customer base and manage our closeout,  repackaged and reconditioned
inventory.  We  currently  also offer  international  Web sites  where  Internet
shoppers  are able to get local  delivery  of Sharper  Image  Design and Sharper
Image branded products,  which in some cases have been specifically  adapted for
use throughout Europe.

         We are known for our varied product mix and a merchandising  philosophy
focusing on  innovative,  well designed,  high quality  products that are either
developed by The Sharper  Image,  exclusive  to The Sharper  Image or in limited
distribution.  In product lines where we compete  directly with other retailers,
we generally  choose to sell the best available  version of the product with the
most advanced features.  Manufacturers and inventors  frequently  approach us to
launch  technologically  advanced  products  with  features  that are unique and
innovative.

         During fiscal 2003 and 2002, we continued the expansion of our in-house
Sharper  Image Design  product  development  function.  The  percentage of total
revenues attributable to Sharper Image Design and

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<PAGE>

Sharper Image branded products was approximately 73% of total revenues in fiscal
2003,  compared with  approximately  76% in fiscal 2002. The popularity of third
party branded  products such as digital cameras and massage chairs during fiscal
2003  contributed  to the lower  percentage  of sales coming from Sharper  Image
Design  and  Sharper  Image  branded  products.  Our  goal  is to  increase  the
percentage of total  revenues  attributable  to Sharper Image Design and Sharper
Image  branded  products,  although we cannot  assure you that this will happen.
Sharper Image Design and Sharper Image branded  products  generally carry higher
margins  than third  party  branded  products  and we plan to continue to devote
resources  to our  Sharper  Image  Design  product  development  efforts and our
Sharper Image brand merchandising philosophy.

         Our business is highly  seasonal,  with sales peaks in the  end-of-year
holiday shopping season as well as for Mother's Day, Father's Day and graduation
gift-giving. See "Business--Seasonality."

         In  addition  to  our  primary  business,  we  leverage  our  name  and
reputation  through our Corporate  Incentives and Rewards  program and wholesale
sales of Sharper Image brand  products,  which include  Sharper Image Design and
Sharper Image branded products.  We also have wholesale  marketing  arrangements
with established retail chains,  such as Linen `n Things,  Bed, Bath and Beyond,
Circuit City, May Department Stores and Federated Department Stores.

The Sharper Image stores

         Our store  operations  generate  the highest  proportion  of our sales,
representing  58.6% of total  revenues for fiscal 2003 and 57.2% in fiscal 2002.
The  Sharper  Image  stores  present an  interactive  and  entertaining  selling
environment  that emphasizes the features and  functionality of our products and
allows the customer to  experience  the product  while  shopping.  We have three
store  formats:  The Sharper Image  stores,  The Sharper Image Design stores and
outlet stores.

         Each store is generally staffed with  approximately 8 to 12 associates,
including a manager,  an  assistant  manager,  a senior sales  associate,  sales
associates  and other  support  staff.  A number of our high  volume  stores are
staffed with 15 to 20  associates.  Our store managers have an average tenure of
over  five  years.  Our  store  personnel  are  compensated   primarily  through
commissions.  In order to  maintain a high  customer  service  level,  our sales
associates undergo  considerable  training on our many new and often technically
oriented  products.  The Sharper  Image stores are designed by our visual design
and  creative  staff  at  our  headquarters  in  San  Francisco,  California  to
standardize, where possible, layout so as to simplify their operations.

         The  stores  are  operated  according  to  standardized  procedures  to
maintain  high level of  customer  service,  merchandise  display  and  pricing,
product demonstration, inventory maintenance, personnel training, administration
and  security.  The original The Sharper  Image stores  typically  have 2,200 to
3,000 square feet of selling space and approximately  1,300 to 2,200 square feet
of storage and administrative space. The typical cost of leasehold improvements,
before landlord contributions, but including fixtures, equipment and pre-opening
expenses,  averages $400,000 to $550,000 per store.  Initial inventory for a new
The Sharper Image store has generally cost approximately $200,000. Outlet stores
are  approximately  half the cost of the original The Sharper Image  stores.  We
also operate a second retail format of The Sharper  Image Design  stores,  which
are approximately half the size of the original stores. The Sharper Image Design
stores typically  consist of between 1,200 to 2,000 square feet of selling space
and feature  higher margin Sharper Image Design and private label  products,  in
addition to other top selling  merchandise.  As of January 31, 2004,  we had 136
The Sharper Image  stores,  nine The Sharper Image Design stores and four outlet
locations for a total of 149 stores.

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         Over the past five years,  we have been updating the look and appeal of
our new retail stores and remodeling select existing stores.  The updated format
presents an open, fresh and inviting  environment designed to appeal to both men
and women and  highlight  our Sharper  Image  Design and Sharper  Image  branded
products and  attractive  product  packaging.  The average cost of converting an
existing  store to the new format is  similar  to that of  building a new store,
which ranges from  $400,000 to $550,000,  subject to  leasehold  allowances.  We
intend to continue to selectively  remodel stores utilizing the new store format
typically at the time of the store's lease renewal.

The Sharper Image catalog and direct marketing

         The Sharper Image catalog is a full-color  catalog that is mailed to an
average of five to six million  individuals each month,  with an increase to six
to eight million  individuals  during the Father's Day and graduation months and
an increase to nine to 13 million  individuals  during the holiday  season.  The
Sharper Image direct marketing operations, including revenues generated directly
from catalogs,  single product mailers,  print ads and television  infomercials,
generated  19.9% of our total  revenues in fiscal 2003 and 23.0% in fiscal 2002.
Our catalog has been  recognized  for  creative  excellence  by leading  catalog
industry trade groups. The catalog is currently the primary  advertising vehicle
for our retail stores and our Internet business. During fiscal 2003 and 2002, we
mailed  approximately  85 million and 78 million The Sharper  Image  catalogs to
over 18 million and 16 million households, respectively.  Circulation and number
of pages of The Sharper Image catalog is under  continual  review to balance the
costs of mailing the catalogs with the revenues generated. The mailings increase
significantly  for the peak seasons of Mother's Day,  Father's  Day,  graduation
gift-giving  and the holiday  shopping  season to reflect the seasonal nature of
the  business.  In fiscal 2003 and 2002,  we  increased  our focus on the use of
television infomercials and single product mailers highlighting select products.

         The  Sharper   Image   catalog   design  uses   dramatic   visuals  and
problem-solving and benefit-oriented  product  descriptions.  The catalog design
features the most important products  prominently.  The number of items featured
each month ranges  between 200 and 250 products  during the first three quarters
of the year,  increasing to more than 350 products  during the holiday  shopping
season in the fourth quarter. The Sharper Image catalog is designed and produced
by our  in-house  staff of writers and  production  artists.  This enables us to
maintain  quality  control  and  shorten  the  lead-time  needed to produce  the
catalog.  The monthly  production and  distribution  schedule  permits  frequent
changes in the product selection.  During fiscal 2003, The Sharper Image catalog
contained  between 52 and 96 pages for  non-peak  months and  between 52 and 128
pages for the peak seasons of Father's Day and the holiday shopping season.

         We have  developed  a  proprietary  customer  database  of more than 17
million  names,  which we use regularly.  We collect  customer names through our
catalog and  Internet  order  processing,  as well as  electronic  point-of-sale
registers in our retail stores.  The names and associated sales  information are
merged daily into our customer master file. This daily merge process  provides a
constant source of current  information to help assess the  effectiveness of the
catalog as a form of retail  advertising,  identify  new  customers  that can be
added to our in-house  mailing list without using  customer  lists obtained from
other  catalogers,  and  identify  our top  purchasers.  To further  enhance the
effectiveness of our catalog  mailings to individuals in the customer  database,
our in-house staff utilizes our statistical  evaluation and selection techniques
to  determine  which  customer  segments are likely to  contribute  the greatest
revenue per  mailing.  We have  established  a data bank of top  purchasers  who
receive preferred services,  including  invitations for special sales events and
enhanced  customer  service.  During  fiscal  2003 and  2002,  we  expanded  our
television  infomercial  presence by highlighting  several popular Sharper Image
Design and private label products on cable and national broadcast  stations.  We
believe that this type of direct  marketing  will

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broaden the existing  customer base and will also increase  customer traffic and
sales in retail store locations.

Internet operations

         The Sharper Image was an early entrant into Internet retailing. We have
participated in online shopping since 1994, and have maintained our own Web site
at sharperimage.com  since 1995. Revenues from our Internet operations including
auction  sales  increased to $95.1  million in fiscal 2003 from $69.2 million in
fiscal 2002. During fiscal 2003, revenues from our Internet operations including
auction sales increased 37.4%,  transactions increased 34.4% and average revenue
per transaction  increased 1.9%. Our Internet  operations benefit from our brand
name, customer base, The Sharper Image catalogs and unique product offerings, as
well as our  multimedia  approach to  advertising.  We believe  that The Sharper
Image  catalog in particular  is a  significant  factor in  generating  Internet
sales.   In  addition,   we  are  able  to  leverage  our  catalog   operational
infrastructure  for fulfillment and customer  service  experience,  providing us
with a significant advantage over Internet retailers who have not developed such
capabilities.  Shoppers on the Web site have the  convenience  of  exchanging or
returning  products  purchased  through the Internet at our store locations.  We
send out periodic email campaigns to our list of Internet shoppers. These emails
include sneak  previews of newly  released  products and special offers that are
intended to drive sales in all selling channels.

         Our goal is to make  sharperimage.com  a Web  site  that  provides  our
Internet  customers with an interactive  experience similar to The Sharper Image
stores.   We  continue  to  update  our  Web  site  by  incorporating   advanced
technologies to improve our product presentations and make our site increasingly
customer  friendly,  while retaining our  entertainment  quality.  Our Web site,
www.sharperimage.com,  incorporates  much of the look and feel of the new  store
design. It includes features such as dynamic browsing,  inventory status,  order
tracking,  Flash  technology,  gift guides by category and product,  and catalog
quick order. We continually  evaluate,  test and enhance the Web site and during
fiscal 2003 we added an online gift  registry and upgraded our customer  service
area.  We have also  enhanced  our backend  systems by updating  our servers and
programs to ensure the speed and efficiency of the Web site.

         In fiscal 2003 and 2002,  the editors and readers of Internet  Retailer
Magazine honored sharperimage.com as one of the industry's 50 best Web sites.

         We  also  have  an  established  Internet  auction  site  which  allows
customers to bid on and acquire a broad range of new,  returned,  repackaged and
refurbished  Sharper  Image  products for less than regular  retail  price.  Our
products are also featured on eBay's auction site, as well as on our eBay store.
Most  products  purchased  on the  auction  site  have  the same  warranty  that
accompanies  full price  products and customers  also enjoy a thirty-day  return
privilege.  We believe that bidders have an enhanced  level of confidence in our
operations  since,   unlike  many  other  Internet  auction  sites,  we  are  an
established  retailer with an inventory of well-known  products  under  warranty
with established return policies. The auction site not only offers consumers the
enjoyment  of bidding and winning  products at less than retail  price,  it also
allows us the  opportunity to effectively  manage our closeout  products,  while
maintaining gross margin goals.

         We are pursuing  additional  steps to achieve  continued  growth of our
Internet operations.  These steps include technological  improvements,  dramatic
visual  presentations,  development  of  international  Web sites in Europe  and
establishment of strategic Internet marketing arrangements.  We have established
relationships  with  Google,  eBay,  MSN  Shopping,  Linkshare,  Amazon,  Yahoo!
Shopping, Catalog City, and AOL.

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Other operations

         In addition to our store, catalog and Internet operations, we also have
a business-to-business  operation, which includes wholesaling, our Sharper Image
Corporate Incentives and Rewards program and licensing.  We also derive revenues
from our customer list rental program.

         Our business  development  department is the primary group  responsible
for  wholesale  marketing to other  retailers,  including  fine  department  and
specialty stores in the United States,  as well as retailers in other countries.
We have wholesale marketing  arrangements with established retail chains such as
Linen `n Things,  Bed, Bath and Beyond,  Circuit City, May Department Stores and
Federated  Department Stores. This group's sales increased by 54% and were $27.0
million in fiscal 2003, as compared to $17.5 million in fiscal 2002.

         Under the Sharper Image Corporate  Incentives and Rewards  program,  we
sell product,  rewards cards,  incentive and  merchandise  certificates to major
corporations  and  not-for-profit  entities,  who in turn  distribute them under
their  programs to increase  their  sales,  or to motivate and reward their high
achiever  employees and best  customers.  The Sharper Image stores,  catalog and
Internet Web site are the primary  means of offering,  delivering  and redeeming
the incentives and gifts.  We record revenues and expenses for our Sharper Image
Rewards  program through our stores,  catalog and direct  marketing and Internet
operations.

         We continue to pursue  opportunities  in foreign  countries,  primarily
through  wholesale and Internet  channels as well as through  limited  licensing
arrangements.  For fiscal 2003 and 2002,  international sales accounted for less
than 1% of total revenues.

Merchandising, sourcing and development

     Merchandising

         Our   merchandise   mix   emphasizes   innovative   products  that  are
new-to-market,  unique  Sharper Image Design and Sharper Image branded  products
which are generally available  exclusively through The Sharper Image, or branded
products not available in broad distribution.  We choose each product separately
because our sales are driven by individual  products,  and our marketing efforts
focus on each item's unique  attributes,  features and  benefits.  This approach
distinguishes  us from other  retailers  who are  oriented  more to  category or
product  classification.  We adjust our merchandise mix to reflect market trends
and customer  buying habits.  New products are selected or developed and brought
into our merchandise mix based on criteria such as anticipated popularity, gross
margin, uniqueness,  value, competitive alternatives,  exclusivity,  quality and
vendor performance. As a result of such shifting emphasis among individual items
and  depending  on  the  customers'  demand  and  the  level  of  marketing  and
advertising programs, the mix of sales by category changes from time to time and
the sales volume of individual  or related  products can be  significant  to any
particular  reporting  period's total sales.  The effect of changes from year to
year  in the mix of  sales  by  category  can be to  increase  or  decrease  the
merchandise  gross  margin  rates since  margins  vary  according to category of
merchandise.

         Our current merchandise  strategy is to offer an assortment of products
with emphasis on Sharper Image Design and Sharper  Image  branded  products.  We
intend to continue to focus on offering  products in the $20 to $500 price range
to appeal to a wide  customer  base.  We also intend to continue to increase our
Sharper Image Design and Sharper Image branded product offerings.

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<PAGE>

         Sharper Image Design  products are produced for us on a contract basis,
substantially  all by  manufacturers  in Asia,  primarily  China. We provide all
product specifications to the contract  manufacturers.  Development lead-time is
generally  in  the  range  of  12  to  18  months,   although   certain  product
introductions may require a shorter or longer lead-time.

         We generate information frequently on merchandise orders and inventory,
which  is  reviewed  by our  buyers,  our  senior  merchandising  staff  and top
management.  We average new offerings of approximately 50 to 100 products during
the peak selling  seasons.  We carefully  consider  which  products  will not be
offered  in future  months  based  upon  numerous  factors,  including  revenues
generated,  gross  margins,  the cost of catalog and store space devoted to each
product, product availability and quality.

     Product sourcing

         The  process of finding  new  products  involves  our buyers  reviewing
voluminous  product  literature,  traveling  extensively  throughout  the United
States  and  Asia to  attend  trade  shows  and  exhibitions  and  meeting  with
manufacturers.  We enjoy relationships with many major manufacturers who use The
Sharper Image regularly to introduce their newest products in the United States.

         We  purchase   merchandise   from   numerous   foreign   and   domestic
manufacturers   and   importers.   We  had  a  single   supplier  that  provided
approximately  21% of our net  merchandise  purchases in fiscal 2003.  In fiscal
2003 and 2002, substantially all of the products offered by us were manufactured
in Asia, primarily China.

     Product development

         Our Sharper  Image  Design  group has over ten years of  experience  in
designing and developing new products, as well as finding new product ideas from
outside  sources.  The  product  development  group  meets  regularly  with  the
merchandising  and sales  staff to  review  new  Sharper  Image  Design  product
opportunities,  product  quality  and  customer  feedback.  From these  creative
sessions,  product  ideas  are put  into  design,  development  and  production.
Successful  product  introductions  during the past  three  years  include:  Car
Console Cooler; Feel Good Fan; Turbo Groomer 5.0; Automatic Eyeglass Cleaner; CD
Shower Companion; Ultrasonic Jewelry Cleaner; Personal Entertainment Center; Big
Screen Travel Clock;  CD Soother Alarm Clock with 20 Soother  Sounds;  DVD Power
Tower; Electric X7 Scooter; Hot and Cold Mini Fridge; Ionic Breeze GP Silent Air
Purifier with Germicidal Protection;  Ionic Breeze Personal Air Purifier;  Ionic
Breeze Quadra Silent Air Purifier; Ionic Conditioning Quiet Hair Dryer; "Now You
Can Find It"  Wireless  Electronic  Locator;  Personal  Cooling  System;  Shower
Companion Plus; Sound Soother 20; and the Talking Travel Companion.

         In  addition,  we emphasize  and work with  vendors to develop  private
label products focusing on unique and innovative features that would distinguish
us from  competitors.  Successful  private label  introductions  include,  among
others, several uniquely styled stereo systems, as well as various personal care
and  home-related  products.  We believe  that the appeal of the  Sharper  Image
Design  and  Sharper  Image  branded  products  also  serves as a key  factor in
broadening our customer base and enhancing and  strengthening  our brand appeal.
Our  goal is to  continue  to  increase  sales  of these  products  through  the
introduction  of new, and the continued  popularity  of existing,  Sharper Image
Design and private label products.

                                                                               9
<PAGE>

Customer service

         We  are   committed  to  providing  our   customers   with   courteous,
knowledgeable and prompt service.  Our customer service and catalog sales groups
at the  corporate  headquarters,  in  Little  Rock,  Arkansas  and  in  Ontario,
California  provide  personal  attention to customers who call toll free or send
emails to  request a catalog  subscription,  place an order or  inquire  about a
product.  Our customer service group is also responsible for resolving  customer
problems promptly and to the customer's complete satisfaction.  We also contract
with  third  party  call  centers  for  additional  sales and  customer  service
representative  coverage. These third party call centers are subject to the same
high-level expectations of customer service as our internal staff.

         We seek  to hire  and  retain  qualified  sales  and  customer  service
representatives in our store,  catalog and Internet operations and to train them
thoroughly. Each new store manager undergoes an intense program during which the
manager is trained in all aspects of our business.  Sales  personnel are trained
during the first two weeks of employment, or during the weeks before a new store
opens, and updated periodically with on-going sales training sessions.  Training
for sales personnel  focuses  primarily on acquiring a working  knowledge of our
products  and on  developing  selling  skills and an  understanding  of our high
customer  service  standards.  Each sales  associate is trained to adhere to our
philosophy of "taking ownership" of every customer service issue that may arise.
We have also developed ongoing programs  conducted at each store and by district
that are  designed  to keep  each  salesperson  up to date on each  new  product
offered.

Order fulfillment and distribution

         We own a fulfillment and distribution facility in Little Rock, Arkansas
of  approximately  110,000  square feet.  During  fiscal 2003, we entered into a
lease for a  distribution  center in  Richmond,  Virginia,  and  re-located  our
distribution center in Ontario,  California to a larger space. We currently have
leased facilities in Little Rock,  Arkansas,  Ontario,  California and Richmond,
Virginia,  totaling  approximately  350,000 square feet for mail order and store
fulfillment needs, returns processing and storage. Our merchandise  generally is
delivered to the catalog and Internet  customers and to The Sharper Image stores
directly from our  distribution  facilities.  Some products are shipped directly
from the vendor to the  customer  or to the  stores.  The  shipment  of products
directly from vendors to the stores and customers reduces the level of inventory
required  to be  carried  at the  distribution  center,  freight  costs  and the
lead-time  required to receive the products.  Each catalog order is received via
remote terminal at the  distribution  facility after the order has been approved
for  shipment.  Our goal is to ship the majority of catalog and Internet  orders
within 24 - 48 hours after the order is received. We believe that the additional
distribution  center and added  capacity will allow us to reach our goal.  Store
customers generally take their purchases with them.

         Maintaining sufficient inventory levels is critical to our business and
sales and inventory  information about store, catalog and Internet operations is
provided on an ongoing basis to our  merchandising  staff and to top  management
for review. Our stores are equipped with electronic point-of-sale registers that
communicate  daily with the main computer system at our corporate  headquarters,
transmitting sales,  inventory and customer data, as well as receiving data from
our  headquarters.  The sales,  inventory  and  customer  data enable  sales and
corporate  personnel  to monitor  sales by item on a daily  basis,  provide  the
information  utilized  by  the  automatic  replenishment  system,  or  ARS,  and
merchandising  personnel  for inventory  allocations,  provide  management  with
current inventory and merchandise  information,  and enable our in-house mailing
list to be updated regularly with customer names and activity.

         We have  developed  a  proprietary  ARS to improve  sales with  minimal
inventory investment. The ARS generates information on merchandise inventory and
sales by each store location,  which management reviews daily. Sales information
by product  and  location is  systematically  compared  daily to each

                                                                              10
<PAGE>

product's  "model stock" to determine  store shipment  quantities and frequency.
The ARS computes any  adjustments to the model stock level based on factors such
as sales  history by location  in  relation to our total sales of each  product.
Under  this  system,  the  model  stock  is  continually  revised  based on this
analysis. Recommended adjustments to model stock levels and recommended shipment
amounts  are  reviewed  daily  by  a  group  of  our  store   distributors   and
merchandising managers who are responsible for allocating inventory to stores.

Advertising

         While the catalog  remained  our  primary  advertising  vehicle  during
fiscal 2003 and 2002,  we also  broadened  our customer  base through  increased
multimedia  advertising,   including  television  infomercials,  single  product
mailers,  newspapers,  magazines,  radio,  email  marketing  programs,  Internet
advertising and marketing programs, and business-to-business trade publications.
We increased our spending on television media  infomercials,  which  highlighted
selected Sharper Image Design and Sharper Image branded products.  We believe we
will be able to  achieve  our goal of near  break-even  results  on this type of
advertising  due to the broad  appeal of the  products in  conjunction  with the
higher  gross  margin  that  Sharper  Image  Design and private  label  products
generally carry, although there is no assurance that this goal will be met.

         These increased  advertising  initiatives  were utilized to realize our
goal of acquiring new customers,  which we believe will produce additional sales
in the stores, catalog and Internet channels, and business-to-business  sales in
the current and future  periods.  We  continually  re-evaluate  our  advertising
strategies to improve the effectiveness of our advertising programs.

Information technology

         We   maintain  an   integrated   management   information   system  for
merchandising,  point-of sale,  order  fulfillment,  distribution  and financial
reporting.  We believe our system increases  productivity by providing extensive
merchandise  information  and inventory  control.  We  continually  evaluate and
enhance our computer  systems and  information  technology  in  connection  with
providing additional and improved management and financial information.  We have
backup systems for our mainframe and servers located at our distribution  center
in Little Rock, Arkansas.

         Our Web site,  www.sharperimage.com,  incorporates much of the look and
feel of the new store design.  It includes  features  such as dynamic  browsing,
inventory status, order tracking, Flash technology,  gift guides by category and
product, and catalog quick order. We continually evaluate,  test and enhance the
Web site and during  fiscal 2003 we added an online gift  registry  and upgraded
our customer service area. We have also enhanced our backend systems by updating
our servers and programs to ensure the speed and efficiency of the Web site.

Competition

         We operate in a highly competitive environment.  We compete principally
with a diverse mix of department stores, sporting goods stores, discount stores,
specialty retailers and other catalog and Internet retailers that offer products
similar to or the same as some of those we offer.  Many of our  competitors  are
larger  companies  with  greater  financial  resources,  a  wider  selection  of
merchandise  and  greater  inventory  availability.  Larger  retailers,  such as
department stores,  offer a wider range of products and offer the convenience of
one-stop  shopping.  Specialty  retailers,  such as electronic stores, may offer
only a certain  category of products  but often offer a wider range of selection
within a particular  category of product.  Discount  stores may offer  analogous
products at lower price points.

                                                                              11
<PAGE>

         Since  we  offer a more  limited  range  of  products  compared  to our
competitors,  our ability to  anticipate  the  preferences  of our customers and
effectively market and distinguish The Sharper Image brand is critical. Although
we  attempt  to market  products  not  generally  available  elsewhere  and have
emphasized  exclusive  products  in  our  merchandising  strategy,  some  of our
products or similar products can also be found in other retail stores or through
other catalogs or through the Internet. We offer competitive pricing where other
retailers market certain  products  similar to our products at lower prices.  In
addition, a number of other companies have attempted to imitate the presentation
and method of operation  of our catalog and stores and our Sharper  Image Design
products.  Our ability to distinguish our products from similar products offered
by our  competitors is particularly  important in order to maintain  pricing and
because  of the ease  with  which  customers  can  comparison  shop  on-line.  A
significant  portion  of our  sales  and net  income  are  generated  by our air
purification  line of products.  We believe the success of this product line has
and will continue to encourage other companies to imitate these products.

         We compete principally on the basis of product exclusivity,  selection,
brand recognition,  quality and price of our products,  merchandise presentation
in the catalog, stores and on the Internet, our customer list and the quality of
our customer  service.  We have committed  additional  resources to our internal
product  development  group to create and produce Sharper Image Design products,
and to our merchandising team to support a program to increase the Sharper Image
brand  products  exclusively  available  from us. We believe that these  Sharper
Image Design and Sharper Image brand  products  provide a competitive  advantage
for us in our merchandising offering.

Intellectual Property

         We believe our  registered  service  mark and  trademark  "The  Sharper
Image" and the brand name  recognition that we have developed are of significant
value. We actively protect our brand name and other intellectual property rights
to ensure that the quality of our brand and the value of our proprietary  rights
are maintained.  We seek patents to establish and protect our proprietary rights
relating to the technologies and products we are currently  developing,  that we
may  develop,  or that our  competitors  may  develop.  We have  taken  and will
continue,  in the future, to take all steps necessary to broaden and enhance our
patent  protection  by  obtaining  both  utility  and design  patent  protection
directed to our  proprietary  products.  For instance,  we currently own 46 U.S.
utility patents and more than 90 U.S. design patents.

         We have at least six U.S.  utility  patents  and  several  U.S.  design
patents  that  protect  our air  purification  line of  products.  The  earliest
expiration  date of any of these utility  patents is 2018.  In addition,  we own
license rights under a utility patent relating to our air  purification  line of
products.  This patent is due to expire in December  2005. We also have multiple
foreign  and  domestic   pending  patent   applications   directed  to  our  air
purification line of products. Although we believe our existing patents, as well
as our ongoing patent prosecution  efforts,  will continue to provide protection
for our air purification  products,  upon the expiration of our licensed patent,
this product line could face additional competition.

         We own or have rights to various copyrights, trademarks and trade names
used  in our  business.  These  include  The  Sharper  Image(R),  Sharper  Image
Design(R),  Sound Soother(R),  Ionic Breeze(R),  The Breeze(R),  Quadra(R),  and
Ionic Hair Wand II(R),  Personal Cooling  System(TM),  Quiet Power(TM) Motorized
Tie Rack, Shower Companion(TM), and Turbo Groomer(TM).

Seasonality

         Our business is highly  seasonal,  with sales peaks in the  end-of-year
holiday  shopping  seasons  as  well  as for  Mother's  Day,  Father's  Day  and
graduation gift-gift giving. A substantial portion of our total

                                                                              12
<PAGE>

revenues,  and all or  most of our net  earnings,  occur  in our  fourth  fiscal
quarter ending  January 31. We generally  experience  lower revenues  during the
other quarters and, as is typical in the retail industry,  have incurred and may
continue  to incur  losses  in these  quarters.  In  addition,  similar  to many
retailers,  we make merchandising and inventory decisions for the holiday season
well in advance of the holiday selling season. Accordingly, unfavorable economic
conditions or deviations  from projected  demand for products  during the fourth
quarter  could have a  material  adverse  effect on our  financial  position  or
results of operations for the entire fiscal year.  The fourth quarter  accounted
for more than 40% of total  revenues in both fiscal 2003 and 2002.  In addition,
the fourth  quarter  accounted  for all of our net  earnings  in fiscal 2002 and
substantially all of our net earnings in 2003.

Employees

         As of January 31, 2004,  we employed  approximately  2,400  associates,
approximately  60% of whom were full time. We also hire a significant  number of
seasonal  employees  during our peak  holiday  selling  season.  We consider our
associate relations to be good.

Available information

         Our Internet address is www.sharperimage.com.  We make available on our
Web site our  annual  reports  on Form  10-K,  quarterly  reports  on Form 10-Q,
current  reports  on Form 8-K and all  amendments  to those  reports  as soon as
reasonably  practicable  after such  material  is  electronically  filed with or
furnished to the SEC.  Information on our Web site is not incorporated into this
annual report.

Factors Affecting Future Operating Results

         The following factors,  in addition to the other information  contained
in  this  report,  should  be  considered  carefully  in  evaluating  us and our
prospects.  This report  (including  without  limitation  the following  Factors
Affecting Future Operating Results) contains forward-looking  statements (within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Exchange  Act of  1934)  regarding  us and our  business,  financial
condition,  results  of  operations  and  prospects.  Words  such as  "expects,"
"anticipates,"  "intends," "plans," "believes," "seeks," "estimates" and similar
expressions or variations of such words are intended to identify forward-looking
statements,  but are not the  exclusive  means  of  identifying  forward-looking
statements in this report.  Additionally,  statements  concerning future matters
such as the development of new products,  store expansions,  possible changes in
economic  conditions  and  other  statements  regarding  matters  that  are  not
historical are forward-looking statements.

         Although  forward-looking  statements  in this report  reflect the good
faith judgment of our management, such statements can only be based on facts and
factors we currently know about.  Consequently,  forward-looking  statements are
inherently subject to risks and  uncertainties,  and actual results and outcomes
may  differ   materially  from  the  results  and  outcomes   discussed  in  the
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  in results and  outcomes  include,  but are not  limited to,  those
discussed  below and in  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of  Operations"  as well as those  discussed  elsewhere in
this  report.   Readers  are  urged  not  to  place  undue   reliance  on  these
forward-looking  statements,  which speak only as of the date of this report. We
undertake no  obligation to revise or update any  forward-looking  statements in
order to reflect any event or circumstance  that may arise after the date of the
report.

         If we fail to  continuously  offer new  merchandise  that our customers
find attractive, the demand for our products may be limited.

         In order to meet our strategic  goals, we must  successfully  offer our
customers new,  innovative and high quality products on a continuous  basis. Our
product  offerings  must be  affordable,  useful  to the

                                                                              13
<PAGE>

customer,  well made,  distinctive in design and not widely available from other
retailers.  We cannot  predict with certainty  that we will  successfully  offer
products that meet these requirements in the future. Some products or a group of
related  products can produce  sales volumes that are  significant  to our total
sales volume in a particular period.

         If other retailers, especially department stores or discount retailers,
offer the same products or products similar to those we sell, or if our products
become less popular with our  customers,  our sales may decline or we may decide
to offer our products at lower prices. If customers buy fewer of our products or
if we have to reduce our prices, our revenues and earnings will decline.

         Our  products  must  appeal  to  a  broad  range  of  consumers   whose
preferences  we cannot  predict  with  certainty  and may change  between  sales
seasons.  If we misjudge  either the market for our  products or our  customers'
purchasing habits, our sales may decline, our inventories may increase or we may
be required to sell our  products  at lower  prices.  This would have a negative
effect on our business.

         If we do not maintain sufficient  inventory levels, or if we are unable
to deliver our products to our customers in sufficient quantities, our operating
results will be adversely affected.

         We must be able to deliver our merchandise in sufficient  quantities to
meet the demands of our customers and deliver this merchandise to customers in a
timely  manner.  We  must  be  able to  maintain  sufficient  inventory  levels,
particularly  during the peak  holiday  selling  seasons.  If we fail to achieve
these goals,  we may be unable to meet customer  demand,  and our future results
will be adversely  affected if we are not  successful in achieving  these goals.
Our success depends on our ability to anticipate and respond to changing product
trends and consumer demands in a timely manner.

         A significant  portion of our sales during any given period of time may
be generated  by a particular  product or line of products and if sales of those
products  or line  of  products  decrease,  our  stock  price  may be  adversely
affected.

         During fiscal 2003 and 2002, the sales of our air purification  line of
products constituted a significant portion of our total revenues and net income.
Although not as significant,  the sales from our home and portable stereo system
and  massage  product  lines  constituted  a  substantial  portion  of our total
revenues and net income.

         Our future  growth will be  substantially  dependent  on the  continued
increase in sales growth of existing  core and new  products,  while at the same
time maintaining or increasing our current gross margin rates. We cannot predict
whether we will be able to increase the growth of existing core and new products
or successfully  introduce new products,  increase our revenue level or maintain
or  increase  our gross  margin  rate in future  periods.  Failure  to do so may
adversely affect our stock price.

         Poor economic  conditions may reduce consumer spending on discretionary
retail products such as the ones we offer.

         Consumer spending  patterns,  particularly  discretionary  spending for
products such as ours, are affected by, among other things,  prevailing economic
conditions,  stock market  volatility,  threats of war, acts of terrorism,  wage
rates,  interest rates,  inflation,  taxation,  consumer confidence and consumer
perception  of  economic  conditions.  General  economic,  political  and market
conditions,  such as recessions,  may adversely  affect our business results and
the  market  price  of our  common  stock.  We may  not be  able  to  accurately
anticipate the magnitude of these effects on future quarterly results.

                                                                              14
<PAGE>

         Our  success  depends in part on our ability to  internally  design and
develop our Sharper Image Design products.

         We  have  invested  significant   resources  in  and  are  increasingly
dependent on the success of the Sharper Image Design products that we design and
develop. These products have typically generated higher gross margins than other
products and our merchandising strategy emphasizes these products. Some of these
products  or a group of  related  products,  which are  affected  by  customers'
demands and the level of our  marketing  and  advertising  efforts,  can produce
sales  volumes  that are  significant  to our total sales volume in a particular
period.  In order to be  successful,  we must  continue  to design  and  develop
products  that meet the  demands of our  customers,  as well as create  customer
demand for these  products.  Our goal is to  increase  the  percentage  of total
revenues  attributable  to  Sharper  Image  Design  and  Sharper  Image  branded
products,  although we expect this  percentage may decline from time to time, as
it did from 2002 to 2003,  and cannot assure you we will  otherwise  achieve our
goal. If we are unable to successfully  design and develop these  products,  our
operating results may be adversely affected.

         We rely on foreign  sources of  production  and our  business  would be
adversely  affected  if our  suppliers  are  not  able to meet  our  demand  and
alternative sources are not available.

         We must ensure that the products we design and develop are manufactured
cost-effectively.  We rely solely on a select  group of contract  manufacturers,
most of whom are located in Asia (primarily China), to produce these products in
sufficient  quantities to meet  customer  demand and to obtain and deliver these
products to our customers in a timely manner.  These arrangements are subject to
the risks of  relying  on  products  manufactured  outside  the  United  States,
including political unrest and trade  restrictions,  local business practice and
political  issues,  including  issues  relating to  compliance  with domestic or
international labor standards,  currency fluctuations,  work stoppages, economic
uncertainties,  including inflation and government regulations,  availability of
raw materials and other  uncertainties.  If we are unable to successfully obtain
and timely  deliver  sufficient  quantities  of these  products,  our  operating
results may be adversely  affected.  There is increasing  political  pressure on
China to permit the exchange  rate of its  currency,  the Yuan, to float against
the dollar.  Although  substantially  all of our supply  contracts  in China are
denominated  in  dollars,  our  suppliers  could  attempt to  renegotiate  these
contracts if the Yuan/dollar exchange rate were to change.

         We had a single supplier for a number of our products,  located in Asia
that provided  approximately 21% of the net merchandise purchases in fiscal 2003
and is expected to provide a  comparable  percentage  in the future.  If we were
unable  to  obtain  products  from  this  supplier  on  a  timely  basis  or  on
commercially reasonable terms, our operating results may be adversely affected.

         Some of our smaller vendors have limited resources,  limited production
capacities  and  limited  operating  histories.  We have no  long-term  purchase
contracts or other contracts that provide continued supply, pricing or access to
new products and any vendor or distributor  could  discontinue  selling to us at
any time. We compete with many other  companies for  production  facilities  and
import quota capacity.  We cannot assure you that we will be able to acquire the
products we desire in sufficient  quantities or on terms that are  acceptable to
us in the future.  In addition,  we cannot assure you that our vendors will make
and deliver high quality  products in a  cost-effective,  timely manner.  We may
also be unable to develop relationships with new vendors.

         We  depend  on  our  vendors'  ability  to  timely  deliver  sufficient
quantities of products and our business can be harmed by work stoppages or other
interruptions to delivery of products.

                                                                              15
<PAGE>

         All  products we  purchase  from our vendors in Asia must be shipped to
our  distribution  centers by freight  carriers and we cannot assure you that we
will be able to obtain  sufficient  freight  capacity  on a timely  basis and at
favorable rates. Our inability to acquire suitable products in a cost-effective,
timely manner or the loss of one or more key vendors or freight  carriers  could
have a negative effect on our business.

         Our ability to protect our  proprietary  technology,  which is vital to
our business,  particularly our air purification  products, is uncertain and our
inability to protect  these rights could impair our  competitive  advantage  and
cause us to incur substantial expense to enforce our rights.

         We believe our  registered  service  mark and  trademark  "The  Sharper
Image" and the brand name  recognition that we have developed are of significant
value. We actively protect our brand name and other intellectual property rights
to ensure that the quality of our brand and the value of our proprietary  rights
are maintained.  We seek patents to establish and protect our proprietary rights
relating to the technologies and products we are currently  developing,  that we
may  develop,  or that our  competitors  may  develop.  We have  taken  and will
continue,  in the future, to take all steps necessary to broaden and enhance our
patent  protection  by  obtaining  both  utility  and design  patent  protection
directed to our  proprietary  products.  For instance,  we currently own 46 U.S.
utility patents and more than 90 U.S. design patents.

         We have at least six U.S.  utility  patents  and  several  U.S.  design
patents  that  protect  our air  purification  line of  products.  The  earliest
expiration  date of any of these utility  patents is 2018.  In addition,  we own
license rights under a utility patent relating to our air  purification  line of
products.  This patent is due to expire in December  2005. We also have multiple
foreign  and  domestic   pending  patent   applications   directed  to  our  air
purification line of products. Although we believe our existing patents, as well
as our ongoing patent prosecution  efforts,  will continue to provide protection
for our air purification  products,  upon the expiration of our licensed patent,
this product line could face additional competition.

         We cannot  assure  you that a third  party  will not  infringe  upon or
design  around any patent  issued or licensed to us,  including  the patents and
license  agreement  related to our air  purification  line of products,  or that
these patents will otherwise be commercially viable. Litigation to establish the
validity of patents,  to defend against patent infringement claims of others and
to assert  patent  infringement  claims  against  others  can be  expensive  and
time-consuming  even if the  outcome  is  favorable  to us.  If the  outcome  is
unfavorable to us, we may be required to pay damages,  stop production and sales
of  infringing  products or be subject to  increased  competition  from  similar
products. We have taken and may, in the future, take steps to enhance our patent
protection,  but we cannot  assure you that these  steps will be  successful  or
that, if unsuccessful, our patent protection will be adequate.

         We also rely upon trade  secrets,  know-how,  continuing  technological
innovations and licensing  opportunities to develop and maintain our competitive
position.  We attempt to protect  our  proprietary  technology  in large part by
confidentiality   agreements   with  our   employees,   consultants   and  other
contractors.  We cannot assure you,  however,  that these agreements will not be
breached, that we will have adequate remedies for any breach or that competitors
will not know of or independently discover our trade secrets.

         Our quarterly  operating results and comparable store sales are subject
to significant fluctuations and seasonality.

         Our business is seasonal,  reflecting the general pattern of peak sales
and  earnings  for the retail  industry  during  the  holiday  shopping  season.
Typically,  a substantial  portion of our total  revenues and all or most of our
net earnings  occur during our fourth  quarter  ending on January 31. The fourth
quarter

                                                                              16
<PAGE>

accounted  for more than 40% of total  revenues in both fiscal 2003 and 2002. In
addition,  the fourth  quarter  accounted  for all of our net earnings in fiscal
2002 and  substantially  all of our net earnings in fiscal 2003. In anticipation
of increased  sales activity  during the fourth  quarter,  we incur  significant
additional  expenses,  including  significantly  higher  inventory costs and the
costs of hiring a substantial  number of temporary  employees to supplement  our
regular store staff. If for any reason our sales were to be substantially  below
those normally expected during the fourth quarter,  our annual operating results
would be adversely affected. Due to this seasonality,  our operating results for
any one period  may not be  indicative  of our  operating  results  for the full
fiscal year.

         We generally experience lower revenues and net operating results during
our first three  quarters of the fiscal year and have  historically  experienced
losses in these  quarters.  Our quarterly  results of  operations  may fluctuate
significantly  as a result of a  variety  of  factors,  including,  among  other
things,  the timing of new store openings,  net sales contributed by new stores,
increases or decreases in comparable store sales, changes in our merchandise mix
and net catalog sales.

         In addition,  like other retailers, we typically make merchandising and
purchasing  decisions  well in  advance of the  holiday  shopping  season.  As a
result,  poor economic  conditions or differences from projected customer demand
for our products  during the fourth  quarter could result in lower  revenues and
earnings.

         Our  comparable  store  sales  also  fluctuate  significantly  and  can
contribute to fluctuations in our quarterly  operating  results.  Our comparable
store sales are affected by a variety of factors,  including  customer demand in
different  geographic regions,  our ability to efficiently source and distribute
products, changes in our product mix, competition and advertising.

         Our comparable  store sales have fluctuated  significantly  in the past
and we believe that such fluctuations may continue.  Our historic comparable net
store sales changes from the prior fiscal year were as follows:

             Fiscal year               Percentage increase (decrease)
             -----------               ------------------------------

                1999                                12.3
                2000                                29.0
                2001                               (16.0)
                2002                                13.6
                2003                                15.3


         Comparable  store sales are defined as sales from stores where  selling
square feet did not change by more than 15% in the  previous 12 months and which
have been open for at least 12 full months.  Stores generally become  comparable
once they have a full year of  comparable  sales.  We cannot assure you that our
comparable store sales results will increase in the future.  Any reduction in or
failure to increase our  comparable  store sales results could impact our future
operating performance and cause the price of our common stock to decrease.

         We are dependent on the success of our advertising and direct marketing
efforts and our  profitability  will be adversely  affected by  increased  costs
associated with these efforts.

                                                                              17
<PAGE>

         Our revenues  depend in part on our ability to  effectively  market and
advertise our products  through The Sharper  Image catalog and direct  marketing
operations.  Increases  in  advertising,  paper or  postage  costs may limit our
ability to  advertise  without  reducing our  profitability.  If we decrease our
advertising efforts due to increased  advertising costs,  restrictions placed by
regulatory agencies or for any other reason, our future operating results may be
materially  adversely  affected.  We are also utilizing and  constantly  testing
other  advertising  media,  such as  television  infomercials,  radio and single
product mailings. Our advertising  expenditures increased by approximately $26.0
million or 26.7% in fiscal  2003 from the prior  fiscal  year.  While we believe
that increased  expenditures on these and other media have resulted in increased
revenues  during fiscal 2003, we cannot assure you that this trend will continue
in the future.  If our advertising is ineffective and our increased  advertising
expenditures  do not result in increased  sales  volumes,  our sales and profits
will  be  adversely  affected.  We  depend  on  the  continued  availability  of
television  infomercial time at reasonable prices.  Although we do not currently
expect any difficulties in obtaining television infomercial time generally, 2004
is a  presidential  election  year  and  a  substantial  increase  in  political
advertising  may limit the  availability,  or increase the price, of infomercial
time  available  to us.  We  expect  to  continue  to spend on  advertising  and
marketing at increased  levels in the future,  but may not continue to produce a
sufficient  level of sales to cover such  expenditures,  which would  reduce our
profitability.

         Our business will be harmed if we are unable to successfully  implement
our growth strategy.

         Our growth strategy primarily includes the following components:

         o        increase  Sharper  Image  Design  and  private  label  product
                  offerings;

         o        broaden our customer base;

         o        open new stores; and

         o        broaden our sales and marketing channels

         Any  failure on our part to  successfully  implement  any or all of our
growth  strategies  would likely have a material adverse effect on our financial
condition,  results of operations and cash flows. We believe our past growth has
been  attributable  in large part to our  success in  meeting  the  merchandise,
timing  and  service  demands  of  an  expanding  customer  base  with  changing
demographic  characteristics,  but there is no assurance that we will be able to
continue to have such success.

         The  expansion  of our  store  operations  could  result  in  increased
expenses with no guarantee of increased profitability.

         We plan to increase  our number of stores by 15%-20%  annually.  We may
not be able to attain our target new store  openings,  and any of our new stores
that we open may not be profitable, either of which could have an adverse impact
on our  financial  results.  Our  ability to expand by opening  new stores  will
depend in part on the following factors:

         o        the availability of attractive store locations;

         o        our ability to negotiate favorable lease terms;

         o        our  ability  to  identify   customer   demand  in   different
                  geographic areas;

                                                                              18
<PAGE>

         o        the availability and cost of store fixtures;

         o        general economic conditions; and

         o        availability of sufficient funds for expansion

         Even  though we continue  to expand our store  base,  we have  remained
concentrated in limited  geographic  areas.  This could increase our exposure to
customer demand, weather,  competition,  distribution problems and poor economic
conditions in these regions. In addition,  our catalog sales, Internet sales, or
existing store sales in a specific  region may decrease as a result of new store
openings.

         In order to  continue  our  expansion  of stores,  we will need to hire
additional management and staff for our corporate offices and employees for each
new  store.  We  must  also  expand  our  management   information  systems  and
distribution  systems  to serve  these  new  stores.  If we are  unable  to hire
necessary personnel or grow our existing systems,  our expansion efforts may not
succeed and our operations may suffer.

         Some of our expenses will  increase with the opening of new stores.  If
store sales are inadequate to support these new costs,  our  profitability  will
decrease.  For example,  inventory costs will increase as we increase  inventory
levels to supply additional  stores. We may not be able to manage this increased
inventory without decreasing our profitability.  We may need financing in excess
of that available under our current credit  facility.  Furthermore,  our current
credit  facility  has  various  loan  covenants  we must comply with in order to
maintain the credit facility. We cannot predict whether we will be successful in
obtaining  additional  funds or new credit  facilities on favorable  terms or at
all.

         We rely on our catalog  operations  which could have  significant  cost
increases and could have unpredictable results.

         Our success  depends in part on the success of our catalog  operations.
We believe that the success of our catalog  operations  depends on the following
factors:

         o        our  ability  to  achieve  adequate   response  rates  to  our
                  mailings;

         o        our  ability to continue  to offer a  merchandise  mix that is
                  attractive to our mail order customers;

         o        our ability to cost-effectively add new customers;

         o        our ability to  cost-effectively  design,  produce and deliver
                  appealing catalogs; and

         o        timely delivery of catalog mailings to our customers

         Catalog  production and mailings  entail  substantial  paper,  postage,
merchandise  acquisition  and human resource costs,  including costs  associated
with catalog development and increased inventories. We incur nearly all of these
costs  prior to the  mailing of each  catalog.  As a result,  we are not able to
adjust the costs  being  incurred in  connection  with a  particular  mailing to
reflect the actual  performance  of the catalog.  Increases in costs of mailing,
paper or printing would increase costs and would  adversely  impact our earnings
if we were unable to pass such increases  directly on to our customers or offset
such increases by raising  prices or by  implementing  more efficient  printing,
mailing,  delivery and order  fulfillment

                                                                              19
<PAGE>

systems. If we were to experience a significant shortfall in anticipated revenue
from a particular  mailing,  and thereby not recover the costs  associated  with
that  mailing,  our future  results  would be adversely  affected.  In addition,
response  rates to our  mailings  and, as a result,  revenues  generated by each
mailing  are  affected  by  factors  such  as  consumer  preferences,   economic
conditions,  the timing and mix of catalog mailings,  the timely delivery by the
postal  system of our  catalog  mailings  and  changes in our  merchandise  mix,
several  or  all  of  which  may  be  outside  our  control.  Further,  we  have
historically  experienced  fluctuations  in the  response  rates to our  catalog
mailings.  If we are unable to accurately target the appropriate  segment of the
consumer  catalog  market  or to  achieve  adequate  response  rates,  we  could
experience  lower sales,  significant  markdowns or  write-offs of inventory and
lower margins, which would adversely affect our future results.

         We have distribution and fulfillment operations located in Little Rock,
Arkansas,  Ontario,  California  and Richmond,  Virginia.  Any disruption of the
operations in these  centers  could hurt our ability to make timely  delivery of
our products.

         We conduct the majority of our  distribution  operations and all of our
catalog and  Internet  order  processing  fulfillment  functions  from our owned
facility  in Little  Rock,  Arkansas,  and  leased  facilities  in Little  Rock,
Arkansas;  Ontario,  California and Richmond,  Virginia.  During fiscal 2003, we
entered into a lease for a distribution center in Richmond,  Virginia,  which we
are planning to have fully operational  during fiscal 2004. We also use contract
fulfillment and warehouse facilities for additional seasonal  requirements.  Any
disruption in the operations at any distribution center, particularly during the
holiday shopping  season,  could result in late delivery of products and make it
difficult to meet customer demand for our products.

         In  addition,  we rely  upon  third  party  carriers  for  our  product
shipments,  including  shipments to and from all of our stores.  As a result, we
are subject to certain risks,  including employee strikes and inclement weather,
associated with such carriers'  ability to provide delivery services to meet our
shipping needs.

         We are also  dependent on temporary  employees to adequately  staff our
distribution  facilities,  particularly  during busy periods such as the holiday
shopping season.  We cannot assure you that we will continue to receive adequate
assistance from our temporary employees, or that we will continue to have access
to sufficient sources of temporary employees.

         We  experience  intense  competition  in the  rapidly  changing  retail
markets  and if we are  unable  to  compete  effectively,  we may not be able to
maintain profitability.

         We operate in a highly competitive environment.  We principally compete
with a variety of department  stores,  sporting goods stores,  discount  stores,
specialty  retailers and other  catalogs that offer  products  similar to or the
same as our products. We may increasingly compete with major Internet retailers.
Many of our competitors are larger companies with greater financial resources, a
wider selection of merchandise and greater inventory  availability and offer the
convenience  of one-stop  shopping.  Specialty  retailers,  such as  electronics
stores,  may offer only a certain  category of products  but often offer a wider
range of selection within a particular category of product.  Discount stores may
offer analogous products at lower price points. We offer a more limited range of
products  compared to our  competitors,  and if we are unable to anticipate  the
preferences of our customers and effectively  market and distinguish The Sharper
Image  brand  or  if we  experience  increased  competition,  our  business  and
operating results could be adversely affected.

         The U.S. retail industry,  the specialty retail industry in particular,
and  e-commerce  sector are  dynamic in nature  and have  undergone  significant
changes over the past several years.  Our ability to

                                                                              20
<PAGE>

anticipate and successfully respond to continuing  challenges is critical to our
long-term  growth  and  we  cannot  assure  you  that  we  will  anticipate  and
successfully respond to changes in the retail industry and e-commerce sectors.

         We maintain a liberal merchandise return policy, which allows customers
to return most merchandise, and as a result, excessive merchandise returns could
harm our business.

         We make allowances for returns of store,  catalog and Internet sales in
our financial  statements based on historical return rates. We cannot assure you
that actual  merchandise  returns will not exceed our  allowances.  In addition,
because our  allowances are based on historical  return rates,  we cannot assure
you that the  introduction  of new  merchandise  in our stores or catalogs,  the
opening of new stores,  the  introduction of new catalogs,  increased sales over
the  Internet,  changes in our  merchandise  mix or other factors will not cause
actual  returns  to  exceed  return  allowances.  Any  significant  increase  in
merchandise  returns that exceed our  allowances  could have a material  adverse
effect on our future results.

         We may be  subject to risks  associated  with our  products,  including
product liability or patent and trademark infringement claims.

         Our  current  and future  products  may  contain  defects,  which could
subject us to product liability claims and product recalls. Although we maintain
limited product liability  insurance,  if any successful product liability claim
or product  recall is not  covered by or exceeds  our  insurance  coverage,  our
business,  results  of  operations  and  financial  condition  would be  harmed.
Additionally,  third parties may assert claims against us alleging infringement,
misappropriation  or other violations of patent,  trademark or other proprietary
rights, whether or not such claims have merit. Such claims can be time consuming
and  expensive  to defend and could  require us to cease  using and  selling the
allegedly  infringing  products,  which may have a  significant  impact on total
company sales volume, and to incur significant litigation costs and expenses.

         If we lose  our  key  personnel,  we may  not be  able to  successfully
develop and merchandise our products.

         Our success  depends to a significant  extent upon the abilities of our
senior management,  particularly Richard Thalheimer,  our Founder,  Chairman and
Chief Executive  Officer.  The loss of the services of any of the members of our
senior  management or of certain  other key  employees  could have a significant
adverse effect on our business,  financial  condition and operating results.  We
maintain key man life insurance on Mr.  Thalheimer in the amount of $15 million.
The  terms  of  Mr.  Thalheimer's  employment  are  governed  by  an  employment
agreement.  Our future  performance  will depend upon our ability to attract and
retain qualified management,  merchandising and sales personnel. There can be no
assurance  that the  members  of our  existing  management  team will be able to
manage our  company  or our  growth or that we will be able to attract  and hire
additional qualified personnel as needed in the future.

         A single  shareholder exerts  considerable  influence over our business
affairs and may make business decisions which may not be in your best interest.

         As of January 31, 2004, Richard Thalheimer,  our Founder,  Chairman and
Chief Executive  Officer,  beneficially  owned  approximately  21% of our common
stock. As a result, Mr. Thalheimer will continue to exert substantial  influence
over the election of directors and over our corporate actions.

                                                                              21
<PAGE>

         Our common stock price is volatile.

         Our common  stock is quoted on the Nasdaq  National  Market,  which has
experienced  and is likely to  experience  in the future  significant  price and
volume  fluctuations,  which could  reduce the market  price of our common stock
without  regard to our operating  performance.  From February 1, 2003 to January
31,  2004,  the price per share of our common  stock has ranged from a high of $
36.16 to a low of  $14.51.  We  believe  that among  other  factors,  any of the
following  factors  could  cause  the  price of our  common  stock to  fluctuate
substantially:

         o        monthly fluctuations in our comparable store sales;

         o        announcements by other retailers;

         o        the trading volume of our common stock in the public market;

         o        general economic conditions;

         o        financial market conditions;

         o        acts of terrorism; and

         o        threats of war

         Our charter documents,  Delaware law, our stockholders  rights plan and
other agreements may make a takeover of us more difficult.

         We are a Delaware  corporation.  The Delaware  General  Corporation Law
contains  certain  provisions  that may make a change in control of our  company
more difficult or prevent the removal of incumbent directors.  In addition,  our
Certificate of  Incorporation  and Bylaws and our  stockholders  rights plan and
other  agreements  contain  provisions  that may have  the  same  effect.  These
provisions  may have a  negative  impact on the price of our common  stock,  may
discourage  third- party bidders from making a bid for our company or may reduce
any premiums paid to stockholders for their common stock.

Item 2.  Properties

         The Company occupies  approximately  58,000 square feet of office space
for its corporate headquarters in San Francisco,  CA. The Company signed a lease
extension in February 2000,  extending the expiration  date to January 2006. The
Company also leases  approximately 5,600 square feet for its product development
offices in Northern California.

         As of January  31,  2004 the Company  operated  149 The  Sharper  Image
stores under leases covering a total of approximately 595,135 square feet.

         The  Company  owns and  operates  a 110,000  square  foot  distribution
facility located in Little Rock, Arkansas.  Distribution and warehouse functions
are conducted  through this facility,  a 137,000 square foot leased  facility in
Ontario,  California,  a 104,000  square  foot leased  facility in Little  Rock,
Arkansas,  and a 113,000 square foot leased  facility in Richmond,  Virginia and
other  seasonally  occupied  space  rented  by the  Company  in close  proximity
thereto.

                                                                              22
<PAGE>

Item 3.  Legal Proceedings

         We  aggressively  pursue claims  against  companies  with products that
infringe our intellectual property.

         In addition, from time-to-time, we are involved in various disputes and
legal  proceedings that arise in the ordinary course of business.  These include
disputes and lawsuits related to intellectual  property,  product  liability and
employee  relations  matters.  We do not believe  that the  resolution  of these
matters will have a material adverse effect on our financial position or results
of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

          None.

Item 4A.  Executive Officers of the Registrant

          Set forth below is a list of the  executive  officers of the  Company,
together with brief biographical descriptions.

Name                                Position                               Age
----                                --------                               ---
Richard Thalheimer          Founder, Chief Executive Officer                56
                            and Chairman of the Board

Tracy Wan                   President and Chief Operating Officer           44

Jeffrey Forgan              Executive Vice President, Chief                 46
                            Financial Officer and Corporate Secretary

Anthony Farrell             Senior Vice President, Creative Services        54

Craig Trabeaux              Senior Vice President, Retail Operations        47

         Richard Thalheimer is our founder and has served as our Chief Executive
Officer  and a Director  since 1978 and as  Chairman  of the Board of  Directors
since 1985. Mr.  Thalheimer  also served as our President from 1977 through July
1993.

         Tracy Wan has been our  President  and Chief  Operating  Officer  since
April 1999.  Ms. Wan served as  Executive  Vice  President  and Chief  Financial
Officer from August 1998 through  April 1999;  Senior Vice  President  and Chief
Financial  Officer from February 1995 through August 1998; as Vice President and
Chief  Financial  Officer from  September  1994 through  February  1995; as Vice
President  and  Controller  from November 1991 through  September  1994;  and as
Controller from July 1989 through November 1991.

         Jeffrey  Forgan  has  been  our  Executive  Vice  President  and  Chief
Financial Officer since May 2002. Mr. Forgan served as our Senior Vice President
and Chief Financial Officer from April 1999 through May 2002. Prior to that, Mr.
Forgan  served as Vice  President,  Corporate  Finance  with  Foundation  Health
Systems from 1995 to 1998, and was with Deloitte & Touche LLP from 1980 to 1995,
serving as an audit  partner  during  1995.  Mr.  Forgan is a  certified  public
accountant.

         Anthony Farrell has been our Senior Vice President,  Creative Services,
since July 1998.  Mr.  Farrell was a consultant  to The Sharper Image from April
1998 through July 1998.  Mr.  Farrell was senior vice  president,  merchandising
with SelfCare Catalog from March 1991 through December 1997.

                                                                              23
<PAGE>

         Craig Trabeaux has been our Senior Vice  President,  Retail  Operations
since  September  2000.  Mr.  Trabeaux  served as Vice  President,  Stores  from
September 1999 through  September  2000; as Regional  Manager from February 1998
through  September  1999; as Senior  District  Manager from October 1995 through
January 1998; as District Manager from February 1989 through September 1995; and
as Store Manager July 1987 through January 1989.

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         The common stock of Sharper Image  Corporation  is traded in the NASDAQ
National Market under the symbol SHRP. The following  table sets forth,  for the
period  indicated,  the range of high and low last sale prices  reported for our
common stock.

                         Fiscal Year 2003                  Fiscal Year 2002
                       High             Low           High                Low

First Quarter         $21.10          $14.51         $22.68              $10.70

Second Quarter         30.74           19.50          22.85               14.26

Third Quarter          29.09           23.15          22.09               13.90

Fourth Quarter         36.16           27.78          24.95               14.46


         We have not paid cash  dividends  to holders of its common stock and do
not intend to pay cash dividends for the foreseeable future.

         As of April 12, 2004,  there were 368 holders of record and the closing
price of our common  stock was $33.02 per share as reported by the NASDAQ  Stock
Market

                                                                              24
<PAGE>

Item 6.  Selected Financial Data

<TABLE>
<CAPTION>

                                                                 Fiscal Year Ended January 31,
Dollars are in thousands                 --------------------------------------------------------------------------------------
except for earnings                           2004             2003               2002              2001               2000
per share and statistics                  (Fiscal 2003)     (Fiscal 2002)     (Fiscal 2001)      (Fiscal 2000)     (Fiscal 1999)
                                          ------------      ------------      ------------       ------------      ------------
<S>                                       <C>               <C>               <C>                <C>               <C>
Operating Results
Revenue                                   $    647,511      $    513,769      $    389,105       $    414,550      $    300,432
Earnings before income taxes                    42,803            26,956             1,878             28,739            15,541
Net earnings                              $     25,254      $     15,907      $      1,127       $     16,978      $      9,325
Earnings per common equivalent share--
  Basic                                   $       1.75(1)(2)$       1.29(2)   $       0.09(2)    $       1.41(2)   $       0.89(2)
  Diluted                                 $       1.65(1)(2)$       1.21(2)   $       0.09(2)    $       1.34(2)   $       0.85(2)

Balance Sheet Data
Working capital                           $    131,334      $     70,223      $     53,128       $     58,978      $     54,644
Total assets                                   309,555           214,427           162,522            179,323           142,119
Long-term notes payable                           --                --               2,033              2,206             2,366
Stockholders' equity                      $    189,926      $    117,384      $     94,103       $     93,091      $     77,123
Current ratio                                     2.27              1.80              1.88               1.74              1.93

Statistics
Number of stores at year end                       149               127               109                 97                89
Comparable store sales                            15.3%             13.6%            (16.0%)             29.0%             12.3%
increase (decrease)
Annualized net sales per                           676               627               578                763               546
square foot
Number of catalogs mailed(3)                85,247,000        77,772,000        70,135,000         62,252,000        47,581,000
Average revenue per
transaction
  Stores                                  $        142      $        128      $        118       $        117      $        106
  Catalog                                 $        198      $        199      $        174       $        164      $        145
  Internet(4)                             $        148      $        145      $        127       $        108      $         97
Return on average                                 16.4%             15.0%              1.2%              19.9%             16.4%
stockholders' equity
  Book value per share                    $      13.15      $       9.52      $       7.90       $       7.73      $       7.33
Weighted average number of
shares outstanding
  Basic                                     14,446,128        12,327,157        11,904,562         12,036,569        10,516,358
  Diluted                                   15,333,235        13,182,050        12,302,852         12,659,265        11,021,520
</TABLE>

(1)  The  earnings  per  common  equivalent  share  reflect  the  effect  of the
     additional 2.1 million shares issued from the May 2003 stock offering.

(2)  The earnings per common equivalent share reflect the additional 3.0 million
     shares issued from the July 1999 secondary offering.

(3)  Based upon  Sharper  Image  catalog -  excludes  other  specialty  and test
     mailing catalogs.

(4)  Includes  results from  auction site opened in the quarter  ended April 30,
     1999.

Item 7.  Management's  Discussion  and  Analysis  of Results of  Operations  and
Financial Condition

Overview

The Sharper Image is a  multi-channel  specialty  retailer of  innovative,  high
quality  products that are useful and entertaining and are designed to make life
easier and more  enjoyable.  Our unique  assortment of products  offers  design,
creativity and technological  innovation,  in addition to fun and entertainment.
We market and sell our  merchandise  primarily  through three  integrated  sales
channels:  The Sharper Image stores,  The Sharper Image catalog,  which includes
revenue from all direct marketing  activities and television  infomercials,  and
the Internet.  We also market to other  businesses  through our corporate sales,
where  revenues are recorded in each of our three sales  channels and  wholesale
operations.

Our total revenues  increased  26.0% to $647.5 million in the year ended January
31, 2004 (fiscal  2003) from $513.8  million in the year ended  January 31, 2003
(fiscal 2002).  This increase was due primarily to the popularity of our Sharper
Image Design and Sharper Image branded products,  including our air

                                                                              25
<PAGE>

purification  line of products,  the opening of 22 net new stores,  a comparable
store sales  increase of 15.3%,  and an increase in our  multimedia  advertising
which we believe increased sales in all selling channels.

Our store operations generated the highest proportion of our sales, representing
58.6% and 57.2% of total revenues for fiscal 2003 and 2002, respectively.  As of
January 31, 2004,  we operated 149 The Sharper Image stores in 37 states and the
District of Columbia.  As part of our growth strategy, we have opened 25, 20 and
14 The  Sharper  Image  stores,  and closed  three,  two and two stores at lease
maturity,  in fiscal 2003, 2002 and 2001,  respectively.  Our catalog and direct
marketing operations,  including revenue generated directly from catalogs, print
advertising, single product mailers and television infomercials, generated 19.9%
and 23.0% of our total  revenues  for fiscal  2003 and 2002,  respectively.  Our
Internet  operations  generated 14.7% and 13.5% of total revenues in fiscal 2003
and 2002, respectively.

One of our goals is to increase the percentage of total revenues attributable to
Sharper  Image  Design and  Sharper  Image  branded  products,  which  typically
generate higher margins than our third party branded products. The percentage of
our total  revenues  attributable  to Sharper  Image  Design and  Sharper  Image
branded products was approximately 73% in fiscal 2003 from  approximately 76% in
fiscal 2002.  The  popularity  of third party  branded  products such as digital
cameras  and  massage  chairs  during  fiscal  2003  contributed  to  the  lower
percentage  of sales coming from Sharper  Image Design and Sharper Image branded
products.

Our business is highly  seasonal,  with sales peaks in the  end-of-year  holiday
shopping  seaons  as well  as for  Mother's  Day,  Father's  Day and  graduation
gift-gift giving. A substantial  portion of our total revenues,  and all or most
of our net earnings,  occur in our fourth fiscal  quarter  ending January 31. We
generally experience lower revenues during the other quarters and, as is typical
in the retail industry,  have incurred and may continue to incur losses in these
quarters.  In addition,  similar to many retailers,  we make  merchandising  and
inventory  decisions  for the  holiday  season  well in advance  of the  holiday
selling season. Accordingly,  unfavorable economic conditions or deviations from
projected  demand for products  during the fourth  quarter could have a material
adverse effect on our financial position or results of operations for the entire
fiscal year. The fourth quarter accounted for more than 40% of total revenues in
both fiscal 2003 and 2002. In addition,  the fourth quarter accounted for all of
our net  earnings in fiscal 2002 and  substantially  all of our net  earnings in
2003.

Our financial statements for fiscal 2003 reflect certain  reclassifications made
to prior year  financial  statements in order to conform to the January 31, 2004
financial statements.

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements,  which have been prepared in accordance
with  accounting  principles  generally  accepted  in  the  United  States.  The
preparation  of these  financial  statements  requires us to make  estimates and
judgments that affect the reported amounts of assets, liabilities,  revenues and
expenses and the related disclosures. Estimates and assumptions include, but are
not limited to, the carrying  value of  inventory,  fixed asset lives,  deferred
cost recovery period, income taxes and contingencies and litigation. We base our
estimates  on  analyses of which form the basis for making  judgments  about the
carrying  values of assets and  liabilities  that are not readily  apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions or conditions.

We  believe  that the  following  represents  our more  critical  estimates  and
assumptions used in the preparation of our financial statements.

                                                                              26
<PAGE>

Revenue  recognition.  We  recognize  revenue at the point of sale at our retail
stores and at the time of customer  receipt for our catalog and direct marketing
sales,  including the Internet.  We recognize  revenue for sales to resellers of
sales made on a wholesale basis when the products are shipped, which is the time
title passes to the  purchaser.  We record  estimated  reductions to revenue for
customer returns based on our historical return rates. Revenues are recorded net
of sale  discounts  and other  rebates  and  incentives  offered  to  customers.
Deferred revenue  represents  merchandise  certificates,  gift cards and rewards
cards  outstanding  and  unfilled  cash orders at the end of the fiscal  period.
Delivery revenue is recognized at the time of customer receipt.

Merchandise  inventories.  We write down inventory for estimated obsolescence on
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions.  If actual market conditions are less favorable than those projected
by management, additional inventory writedowns may be required.

Accounts  receivable.  Counterparties to our accounts  receivable include credit
card issuers,  corporate marketing  incentive  customers,  wholesale  customers,
installment  plan  customers  for  purchases  of a limited  number of  products,
merchandise  vendors,  and landlords from whom we expect to receive amounts due.
We record an  allowance  for credit  losses  based on  estimates  of  customers'
ability to pay. If the financial condition of our customers were to deteriorate,
additional allowances may be required.

Store  closure  reserves.  We record  reserves for closed stores based on future
lease  commitments,  anticipated  future  subleases  of  properties  and current
risk-free  interest  rates. If interest rates or the real estate leasing markets
change, additional reserves may be required.

Other  accounting  estimates  inherent  in  the  preparation  of  our  financial
statements   include   estimates   associated   with  our   evaluation   of  the
recoverability of deferred tax assets as well as those used in the determination
of liabilities related to litigation,  product liability, and taxation.  Various
assumptions and other factors underlie the  determination  of these  significant
estimates. The process of determining significant estimates is fact specific and
takes into account factors such as historical  experience,  current and expected
economic conditions and product mix. We constantly re-evaluate these significant
factors   and  make   adjustments   where  facts  and   circumstances   dictate.
Historically,   actual  results  have  not  significantly  deviated  from  those
determined using the estimates described above.

As  discussed  in the Notes to the  Financial  Statements,  we are  involved  in
litigation  incidental to our business,  the disposition of which is expected to
have no material effect on our financial  position or results of operations.  It
is possible,  however,  that future  results of  operations  for any  particular
quarterly  or annual  period  could be  materially  affected  by  changes in our
assumptions  related to these  proceedings.  We accrue our best estimates of the
probable cost for the  resolution of legal claims.  Such estimates are developed
in consultation with outside counsel handling these matters and are based upon a
combination of litigation and settlement  strategies.  To the extent  additional
information  arises  or our  strategies  change,  it is  possible  that our best
estimates of our probable liability in these matters may change.

                                                                              27
<PAGE>

Results of Operations
Percentage of Total Revenues
<TABLE>
<CAPTION>
                                                  Fiscal Year Ended January 31,
                                            2004                2003               2002
                                       (Fiscal 2003)       (Fiscal 2002)      (Fiscal 2001)
                                       -------------       --------------     -------------
<S>                                          <C>                 <C>               <C>
Revenues:
Net store sales                               58.6%               57.2%             59.3%
Net catalog sales                             19.9                23.0              21.9
Net Internet sales                            14.7                13.5              12.7
Net wholesale sales                            4.2                 3.4               2.8
Delivery                                       2.6                 2.7               3.1
List rental and licensing                      0.0                 0.2               0.2
                                       ----------------------------------------------------
Total Revenues                               100.0               100.0             100.0

Costs and Expenses:
Cost of products                              42.8                42.9              46.9
Buying and occupancy                           9.0                 9.4              10.2
Advertising                                   19.0                19.0              17.6
General, selling and administrative           22.6                23.5              24.8
                                       ----------------------------------------------------

Operating income                               6.6                 5.2               0.5
Other income                                   0.0                 0.0               0.0
                                       ----------------------------------------------------
Earnings before income tax expense             6.6                 5.2               0.5
Income tax expense                             2.7                 2.1               0.2
                                       ----------------------------------------------------
Net Earnings                                   3.9%                3.1%              0.3%
                                       ====================================================
</TABLE>

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended January 31,
                                   ----------------------------------------------------------------
                                         2004                  2003                   2002
                                     (Fiscal 2003)        (Fiscal 2002)          (Fiscal 2001)
                                   ------------------   -------------------   ---------------------
<S>                                     <C>                   <C>                   <C>
Revenues:
Dollars in thousands
Net store sales                         $379,349              $293,795              $230,799
Net catalog and direct marketing
sales                                    128,652               118,192                85,087
Net Internet sales                        95,086                69,208                49,349
Net wholesale sales                       26,997                17,507                10,893
                                   ----------------------------------------------------------------
Total net sales                          630,084               498,702               376,128
List rental and licensing                    377                   977                   985
Delivery                                  17,050                14,090                11,992
                                   ----------------------------------------------------------------
Total revenues                          $647,511              $513,769              $389,105
                                   ================================================================
</TABLE>


                                                                              28
<PAGE>

Year ended  January 31, 2004 (fiscal  2003),  compared to year ended January 31,
2003 (fiscal 2002)

Revenues.  Net sales for fiscal 2003 increased $131.4 million or 26.3%, from the
prior fiscal year.  Returns and  allowances for fiscal 2003 were 10.7% of sales,
as compared to 12.0% for fiscal 2002. The increase in net sales was attributable
primarily to increases in net sales from stores of $85.6  million;  from catalog
and  direct  marketing  of $10.5  million;  from  Internet  operations  of $25.9
million; and from wholesale of $9.5 million.

The increase in total  revenue for fiscal  2003,  as compared to fiscal 2002 was
due  primarily to the  popularity  of our Sharper Image Design and Sharper Image
branded  products,  which  continues to be a key factor in the  increases in net
sales in all selling  channels.  Sales of Sharper Image Design and Sharper Image
branded products decreased to approximately 73% of total revenues in fiscal 2003
from  approximately  76% for fiscal 2002.  The popularity of third party branded
products  such  as  digital  cameras  and  massage  chairs  during  fiscal  2003
contributed  to the lower  percentage  of sales coming from Sharper Image Design
and Sharper Image branded  products.  We believe that the continued  development
and  introduction of new and popular  products is a key strategic  objective and
important to our future success. Contributing to the increase in net sales was a
comparable  store sales increase of 15.3% over fiscal 2002 and the opening of 22
net new stores during fiscal 2003. We also believe that the increased investment
in our  advertising  initiatives  in fiscal  2003 and 2002,  which  include  the
significant  increase in television  infomercial  advertising and single product
mailers,  highlighting primarily selected Sharper Image Design and Sharper Image
branded  products and the  9.6% increase in catalogs  circulated  contributed to
the higher revenues in all selling channels.

Net store  sales for  fiscal  2003  increased  $85.6  million,  or 29.1%,  while
comparable  store sales increased by 15.3% from fiscal 2002. The increase in net
store sales was  attributable  primarily to the opening of 25 new stores  during
fiscal 2003,  the  increased  sales of Sharper  Image  Design and Sharper  Image
branded  products,  the  15.3%  increase  in  comparable  store  sales,  and the
increased   television   infomercial  and  single  product  mailer  advertising,
partially  offset by the closing of three  stores at their lease  maturity.  The
opening of 25 new  stores,  offset by the three store  closures in fiscal  2003,
resulted in an incremental increase to net store sales of $26.3 million from the
prior fiscal year.

The increase in comparable store sales primarily  resulted from a 17.9% increase
in total store transactions for fiscal 2003 and an 11.1% increase in the average
revenue per  transaction,  compared  with fiscal  2002.  The increase in average
revenue per  transaction was  attributable  primarily to the overall product mix
offered,   and  multimedia   advertising   strategies,   including   infomercial
advertising.   Also   contributing  to  the  increase  in  average  revenue  per
transaction  are the  increased  sales of Sharper Image Design and Sharper Image
branded products,  particularly our air purification products. Average net sales
per square  foot for fiscal 2003 for all stores  increased  to $676 from $627 in
fiscal 2002. Average net sales per square foot for our comparable store base for
fiscal  2003 was $710.  Average  net  sales per  square  foot is  calculated  by
averaging  over all stores the amount of each store's net sales  divided by that
store's total square  footage under lease.  Average  revenue per  transaction is
calculated by dividing the amount of gross sales,  exclusive of delivery revenue
and sales  taxes,  per  channel  by the gross  number  of  transactions  in that
channel.

Comparable  store sales is not a measure that has been defined  under  generally
accepted accounting  principles.  We define comparable store sales as sales from
stores where selling square feet did not change by more than 15% in the previous
12 months and which have been open for at least 12 months.  A store opened on or
prior to the 15th of a month is  treated as open for the  entire  month.  Stores
generally become comparable once they have 24 months of comparable sales for our
annual  calculation.  We believe that

                                                                              29
<PAGE>

comparable  store sales,  which excludes the effect of a change in the number of
stores  open,  provides a more useful  measure of the  performance  of our store
sales channel than does the absolute change in aggregate net store sales.

Net catalog and direct  marketing  sales,  which includes direct sales generated
from catalog mailings,  single product mailers, print advertising and television
infomercials, for fiscal 2003 increased $10.5 million or 8.8%, from fiscal 2002.
This  increase was due primarily to a 24.7%  increase in television  infomercial
advertising expense, a 26.1% increase in single product mailers circulated,  and
a 23.1% increase in The Sharper Image catalog pages circulated, which includes a
9.6%  increase in The Sharper  Image  catalogs  circulated.  The increase in net
catalog and direct  marketing sales for fiscal 2003 reflects a 10.4% increase in
transactions and a decrease of 0.2% in average revenue per transaction, compared
to fiscal 2002.

For  fiscal  2003 and  2002,  29.4%  and  29.9% of the net  catalog  and  direct
marketing  sales were generated from  television  infomercial  direct sales.  We
intend to continue our aggressive multimedia  advertising programs during fiscal
2004 to attract new customers, while achieving a favorable return on advertising
investment.  Our goal is to achieve  direct  response  sales  resulting  in near
breakeven  results  on  all  direct  marketing   advertising   initiatives.   We
continually review our advertising  initiatives,  including the pages and number
of catalogs and single product mailers circulated,  and the amount of and return
on investment from television infomercial advertising, in our efforts to improve
revenues from catalog and direct marketing advertising.

Net  Internet  sales from our  sharperimage.com  Web site,  which  includes  The
Sharper Image and eBay auction sites, in fiscal 2003 increased $25.9 million, or
37.4%,  from fiscal 2002. This increase was  attributable  primarily to a 120.3%
increase in Internet  advertising which includes paid for search engine key word
placement  and revenue  share costs  incurred for  affiliate  programs,  a 34.4%
increase in Internet  transactions  and a 1.9%  increase in average  revenue per
transaction.

During fiscal 2003, our Web site enhancements  included the launch of our online
gift registry, customer service site contents and navigation bar enhancements to
highlight our online outlet store.  We have also  continued to improve the speed
and efficiency of the processing and hardware capabilities.

Net  wholesale  sales for fiscal year 2003  increased  $9.5  million,  or 54.2%,
compared  to  fiscal  2002.  The  increase  is  attributable  primarily  due  to
increasing Sharper Image Design product sales to our existing wholesale customer
base and to test  programs  with new  wholesale  customers.  We believe that the
wholesale  business,  pursued with select partners,  will continue to strengthen
our brand name and broaden our customer base.

Cost of Products.  Cost of products for fiscal 2003 increased $56.5 million,  or
25.6%,  from fiscal  2002.  This  increase is due  primarily to the higher sales
volume,  partially offset by the lower relative cost of products for our Sharper
Image  Design and Sharper  Image  branded  products.  The gross  margin rate for
fiscal 2003 was 57.2%,  or 0.1 percentage  points  higher,  than the fiscal 2002
rate of 57.1%. The gross margin rate was adversely  affected by delivery expense
of $20.6  million in excess of delivery  income  collected of $17.1  million due
primarily to the increase in single product  mailers which offered free shipping
when an order is placed and free  shipping  given on  infomercial  orders when a
customer elects a single payment plan.

Our gross margin rate fluctuates with changes in our merchandise mix,  primarily
Sharper  Image Design and Sharper Image  branded  products,  which changes as we
make new items  available in various  categories  or introduce  new  proprietary
products.  The variation in merchandise  mix from category to category from year
to year is  characteristic  of our sales  results  being  driven  by  individual
products rather than by general product lines.  Additionally,  the auction sites
and other selected  promotional  activities,  such as free

                                                                              30
<PAGE>

shipping  offers,  in part,  tend to offset  the rate of  increase  in our gross
margin  rate.  Our  gross  margins  may not be  comparable  to  those  of  other
retailers,  since some retailers include the costs related to their distribution
network in cost of products  while we, and other  retailers,  exclude  them from
gross  margin and include them  instead in general,  selling and  administrative
expenses.  We cannot accurately predict future gross margin rates,  although our
goal is to continue to increase  sales of Sharper Image Design and Sharper Image
branded products to capitalize on the higher margins realized on these products.

Buying and Occupancy.  Buying and occupancy costs for fiscal 2003 increased $9.7
million,  or 20.2%,  from fiscal  2002.  This  increase  reflects a full year of
occupancy costs for the 20 new stores opened in fiscal 2002, the occupancy costs
associated  with the 25 new stores opened in fiscal 2003 and rent  increases for
some existing store  locations,  partially offset by five stores closed at lease
maturity during fiscal 2003 and 2002. Buying and occupancy costs as a percentage
of total revenues decreased to 9.0% in fiscal 2003 from 9.4% for fiscal 2002. In
fiscal 2003, we opened a total of 25 new stores, exceeding our goal of a 15%-20%
increase  in the  number of stores  opened  on an annual  basis.  Our goal is to
continue to increase new store  openings by 15%-20% in fiscal 2004 but we cannot
assure you we will achieve this goal.

Advertising.  Advertising  expenses for fiscal 2003 increased $26.0 million,  or
26.7%,  from fiscal 2002. The increase in advertising  expense was  attributable
primarily to a 24.7% increase in television infomercial  advertising expense and
a 120.3% increase in Internet advertising, which includes search engine key word
placement  and  revenue  share  costs  incurred  for  affiliate  programs.  Also
contributing to the increase in advertising is a 26.1% increase in the number of
single product mailers  circulated and a 23.1% increase in the number of Sharper
Image catalog pages circulated,  which includes a 9.6% increase in the number of
Sharper Image  catalogs  circulated.  During fiscal 2003, we continued our other
multimedia advertising  initiatives,  which included radio, television and print
advertising,  among others. Although we believe these initiatives contributed to
the increase in sales in the stores,  catalog and direct  marketing and Internet
channels,  there  can  be  no  assurance  of  the  continued  success  of  these
advertising initiatives.

During fiscal 2003, we increased the  circulation of our single product  mailer,
which highlights our most popular Sharper Image Design products. We believe that
the single  product mailer will continue to extend our brand name by prospecting
to future Sharper Image customers,  at a reduced cost in comparison to mailing a
Sharper Image  catalog.  We also  increased  our  television  media  spending on
infomercials  highlighting  selected  Sharper  Image  Design and  Sharper  Image
branded products and expanded our multimedia advertising  initiatives of various
print ads and radio.

Advertising  expenses as a percentage  of total  revenues  remained  constant at
19.0% for fiscal 2003 and fiscal 2002.  Although  there is a declining  marginal
benefit  obtained  by  increasing  advertising  expenditures,   we  monitor  the
effectiveness of our advertising in order to achieve a reasonable overall return
on our investment in advertising.

We believe that expansion of all our advertising  initiatives contributed to the
sales increases for fiscal 2003 and increased brand  awareness.  Our advertising
strategy will continue to be an important  factor in our future  revenue  growth
and as a result, we expect advertising costs to be higher in fiscal 2004 than in
fiscal 2003.

General,  Selling and Administrative.  General,  selling and administrative,  or
GS&A,  expenses for fiscal 2003 increased $25.9 million,  or 21.5%,  from fiscal
2002.  Contributing  to this  increase  was an  increase  of $12.5  million  due
primarily to variable  expenses from  increased net sales,  which  includes $9.5
million due to variable  expenses from  increased  sales from all sales channels
and $3.0  million  due to variable  expenses  from  increased  sales and selling
expenses  related to the 25 new stores opened in fiscal 2003. Also  contributing
to the increase  were  increases of $1.6 million for health care and  insurance,
$3.0  million  for

                                                                              31
<PAGE>

distribution  center shipping costs incurred for product delivery to our stores,
and $1.1 million related to professional fees.

GS&A  expenses for fiscal 2003  decreased as a percentage  of total  revenues to
22.6%  from 23.5% in fiscal  2002 due to better  leverage  of fixed  costs on an
expanding  sales base.  GS&A costs were  controlled as a result of our continual
review of GS&A expenses and infrastructure.

Other income  (expense)-  The  increase in other income is primarily  due to the
interest income earned on higher investment balances generated from the proceeds
from our public stock  offering and improved  operating  results,  offset by the
write-off of fixed assets for store locations  remodeled prior to the expiration
of their existing lease.

Income taxes.  The  effective tax rate was 41% for fiscal 2003 and 2002.  Income
taxes are accounted for using an asset and liability  approach that requires the
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences of events that have been recognized in our financial  statements or
tax returns.  In estimating future tax consequences,  all expected future events
then known to us are considered, other than changes in the tax law or rates.

Year ended  January 31, 2003 (fiscal  2002),  compared to year ended January 31,
2002 (fiscal 2001)

Revenues.  Net sales for fiscal 2002 increased $122.6 million or 32.6%, from the
prior fiscal year.  Returns and  allowances for fiscal 2002 were 12.0% of sales,
as compared to 12.1% for fiscal 2001. The increase in net sales was attributable
primarily to increases in net sales from stores of $63.0  million;  from catalog
and  direct  marketing  of $33.1  million;  from  Internet  operations  of $19.9
million; and from wholesale of $6.6 million.

The increase in total  revenue for fiscal  2002,  as compared to fiscal 2001 was
due  primarily to the  popularity  of our Sharper Image Design and Sharper Image
branded  products,  which  continues to be a key factor in the  increases in net
sales in all selling  channels.  Sharper  Image Design and Sharper Image branded
products  increased to  approximately  76% of total revenues in fiscal 2002 from
approximately 70% for fiscal 2001. We believe that the continued development and
introduction  of new and  popular  products  is a key  strategic  objective  and
important to our future success. Contributing to the increase in net sales was a
comparable  store sales increase of 13.6% over fiscal 2001 and the opening of 18
net new stores during fiscal 2002. We also believe that the increased investment
in  our  advertising   initiatives  in  fiscal  2002  and  2001,  including  the
significant  increase in television  infomercial  advertising and single product
mailers,  highlighting primarily selected Sharper Image Design and Sharper Image
branded products, contributed to the higher revenues in all selling channels. We
believe that fiscal 2001  revenues were  adversely  affected by the onset of the
economic  recession,  the events of September  11, 2001 and  subsequent  anthrax
scare,  and a  faster-than-expected  end to the Razor  Scooter  fad which  drove
exceptional sales volumes in fiscal 2000.

Net store  sales for  fiscal  2002  increased  $63.0  million,  or 27.3%,  while
comparable  store sales increased by 13.6% from fiscal 2001. The increase in net
store  sales was  attributable  primarily  to the  opening  of 20 new new stores
during  fiscal 2002,  the  increased  sales of Sharper  Image Design and Sharper
Image branded  products,  the 13.6% increase in comparable  store sales, and the
increased   television   infomercial  and  single  product  mailer  advertising,
partially offset by the closing of two stores at lease maturity.  The opening of
18 net new stores  resulted  in an  incremental  increase  to net store sales of
$22.9 million from the prior fiscal year.

Total store transactions for fiscal 2002 increased 16.0% and average revenue per
transaction  increased 8.5%,  compared with fiscal 2001. The increase in average
revenue per  transaction was  attributable

                                                                              32
<PAGE>

primarily to the overall product mix offered, multimedia advertising strategies,
including infomercial  advertising which highlighted products with retail prices
which are higher than our average in the prior year, and the increased  sales of
Sharper Image Design and Sharper Image branded  products,  particularly  our air
purification  products.  Average  net  sales per  square  foot for  fiscal  2002
increased to $627 from $578 in fiscal 2001. Average net sales per square foot is
calculated  by  averaging  over all stores the amount of each  store's net sales
divided  by that  store's  square  footage  under  lease.  Average  revenue  per
transaction  is calculated  by dividing the amount of gross sales,  exclusive of
delivery   revenue  and  sales  taxes,  per  channel  by  the  gross  number  of
transactions in that channel.

Net catalog and direct  marketing  sales,  which includes  sales  generated from
catalog  mailings,  single product  mailers,  print  advertising  and television
infomercials,  for fiscal 2002  increased  $33.1  million or 38.9%,  from fiscal
2001.  This  increase  was due  primarily  to a  44.4%  increase  in  television
infomercial  advertising  expense,  a 264.6%  increase in single product mailers
circulated,  and a 20.8% increase in The Sharper Image catalog pages circulated,
which includes a 10.9% increase in The Sharper Image  catalogs  circulated.  The
increase in net catalog and direct  marketing  sales for fiscal 2002  reflects a
21.8% increase in  transactions  and an increase of 14.5% in average revenue per
transaction, compared to fiscal 2001.

Net  Internet  sales from our  sharperimage.com  Web site,  which  includes  The
Sharper Image auction site, in fiscal 2002 increased  $19.9  million,  or 40.2%,
from fiscal 2001. This increase was  attributable  primarily to a 47.0% increase
in Internet  advertising,  a 24.4% increase in Internet transactions and a 14.2%
increase in average revenue per transaction.  Excluding  auction sales for these
periods,  net Internet sales increased 53.4%,  transactions  increased 34.4% and
average  revenue per  transaction  increased  15.8%.  We believe the decrease in
auction sales for fiscal 2002 compared to fiscal 2001 was attributable primarily
to our  decision  to raise bid prices  during late fiscal 2001 and to reduce the
number of products  offered on our auction site,  which  resulted in an improved
gross margin rate and gross margin dollars from auctions. We continue to utilize
the auction site to increase our Internet  business,  broaden our customer  base
and manage inventories, including closeouts, repackaged and reconditioned items.

Net  wholesale  sales for fiscal year 2002  increased  $6.6  million,  or 60.7%,
compared to fiscal 2001. The increase is  attributable  primarily to a strategic
wholesale  marketing  arrangement  we  tested  with  Circuit  City  Stores.  The
arrangement  with  Circuit  City Stores  initially  allowed for the showcase and
testing of a select assortment of Sharper Image Design and Sharper Image branded
products on large dedicated  fixtures in over 600 Circuit City  Superstores.  We
will continue to evaluate this wholesale marketing arrangement in fiscal 2003.

Cost of Products.  Cost of products for fiscal 2002 increased $38.1 million,  or
20.9%,  from fiscal  2001.  This  increase is due  primarily to the higher sales
volume,  partially offset by the lower relative cost of products for our Sharper
Image  Design and Sharper  Image  branded  products.  The gross  margin rate for
fiscal 2002 was 57.1%,  or 4.0 percentage  points  higher,  than the fiscal 2001
rate of 53.1%.  This  increase was due  primarily to increased  sales of Sharper
Image Design and Sharper Image branded  products,  which  generally carry higher
margins  than third party  branded  products.  Sharper  Image Design and Sharper
Image  branded  products as a  percentage  of total  revenues,  exclusive of net
wholesale sales,  increased to approximately 76% for fiscal 2002, as compared to
approximately 70% for fiscal 2001.

We believe that our gross margin for fiscal 2002 was negatively  affected by the
labor  dispute  between  the  Pacific  Maritime  Association,  or  PMA,  and the
International  Longshore  and  Warehouse  Union,  or  ILWU,  whose  members  are
primarily  responsible  for the removal of cargo from container  loaded shipping
vessels in West Coast U.S.  ports.  In response to the 10-day lockout by the PMA
in October  2002 and drop in  productivity  during  the  subsequent  months,  we
increased usage of airfreight transportation, which

                                                                              33
<PAGE>

adversely  affected our gross margins for the third and to a greater  extent the
fourth quarters of fiscal 2002.

Buying and Occupancy.  Buying and occupancy costs for fiscal 2002 increased $8.3
million,  or 20.8%,  from fiscal  2001.  This  increase  reflects a full year of
occupancy costs for the 14 new stores opened in fiscal 2001, the occupancy costs
associated  with the 20 new stores and one temporary store opened in fiscal 2002
and rent increases for some existing store  locations,  partially  offset by two
stores closed at lease maturity  during fiscal 2002.  Buying and occupancy costs
as a percentage  of total  revenues  decreased to 9.4% in fiscal 2002 from 10.2%
for fiscal 2001. In fiscal 2002,  we opened a total of 20 new stores,  exceeding
our goal of a 10%-15%  increase  in the  number  of  stores  opened on an annual
basis.

Advertising.  Advertising  expenses for fiscal 2002 increased $28.9 million,  or
42.2%,  from fiscal 2001. The increase in advertising  expense was  attributable
primarily to a 44.4% increase in television  infomercial  advertising expense, a
264.6% increase in the number of single product mailers circulated,  and a 20.8%
increase in the number of Sharper Image catalog pages circulated, which included
a 10.9% increase in the number of The Sharper Image catalogs circulated.  During
fiscal 2002, we continued our other multimedia  advertising  initiatives,  which
included radio, television and print advertising,  among others. The higher cost
of postage on various direct marketing mailers, including the catalog and single
product  mailers,  contributed  to  advertising  cost  increases  although these
increases  were  partially  offset by the savings  from lower paper costs during
fiscal 2002. Advertising expenses as a percentage of total revenues increased to
19.0% in fiscal 2002 from 17.6% in fiscal 2001.

General,  Selling and Administrative.  General,  selling and administrative,  or
GS&A,  expenses for fiscal 2002 increased $24.1 million,  or 25.0%,  from fiscal
2001.  Contributing  to  this  increase  was an  increase  of $5.4  million  due
primarily to variable  expenses from  increased  net sales and selling  expenses
related to the 20 new stores  opened  during  fiscal  2002,  and the  annualized
selling  expenses  related  to the 14 stores  opened in fiscal  2001,  partially
offset by the reduced  selling  expenses of two stores closed at lease  maturity
during fiscal 2002.  Also  contributing  to the increase were  increases of $3.3
million for  distribution  shipping costs  incurred for product  delivery to our
stores  (which  primarily  reflects  additional  airfreight  costs  incurred  in
connection   with  the  West  Coast  Port  Strike),   $2.5  million  related  to
technological system enhancements made in our operational areas and $1.1 million
due to increases in health benefits and company-wide insurance premiums.

GS&A  expenses for fiscal 2002  decreased as a percentage  of total  revenues to
23.5% from 24.8% in fiscal  2001.  The  decline  in the GS&A  percentage  is the
result of our continual review of GS&A expenses and infrastructure combined with
better leverage of fixed costs on an expanding sales base.

Other  income  (expense)-  The decrease in other income is due to a reduction in
the interest rate earned on invested  balances,  an increase in interest expense
incurred  on the  early  payoff  of our  mortgage  loan,  partially  offset by a
reduction in losses on the disposal of assets.

Liquidity and capital resources

We met our short-term liquidity needs and our capital requirements during fiscal
2003 with cash generated from operations,  trade credits, existing cash balances
and proceeds from a public offering of our common stock.

Net cash provided by operating activities totaled $21.1 million for fiscal 2003,
as compared to $37.0 million for fiscal 2002.  The fiscal 2003 net cash provided
by operating  activities decreased $15.9 million compared to fiscal 2002, is due
primarily to the increased  merchandise inventory levels required as a result of
the 25 new stores  opened  during  fiscal  2003,  the  timing of the  receipt of
imported  products due to Chinese New

                                                                              34
<PAGE>

Years  when  many  factories  overseas  close  for up to  three  weeks,  and the
inventory we believe  necessary to sustain our current sales growth trends.  The
comparable decrease was also due to the increase in accounts receivable balances
and decreases in accounts payable.  Partially offsetting the comparable decrease
in net cash  provided by operating  activities  was the increase in net earnings
from fiscal 2003 over 2002.

Net cash used in investing  activities,  primarily capital  expenditures for new
and  remodeled  stores,  technological  enhancements,  tooling costs for Sharper
Image Design products and the expansion of our distribution  facilities  totaled
$35.2 million in fiscal 2003 compared to $23.2 million in fiscal 2002. In fiscal
2003,  we opened 25 new stores and  remodeled  six stores.  In fiscal  2002,  we
opened 20 new stores and remodeled six stores.

Net cash provided by financing  activities  totaled $41.9 million  during fiscal
2003,  which was the  result of $38.5  million in net  proceeds  from the public
offering of our common stock in May 2003, and, $4.2 million in proceeds from the
issuance  of common  stock in  connection  with our stock  option  plan,  offset
partially by $0.8 million in financing fees.

On October 31, 2003, we terminated our secured credit  facility and entered into
a new  revolving  secured  credit  facility  with  Wells  Fargo  Bank,  National
Association.  The new credit  facility has a maturity  date of October 31, 2006,
and will allow  borrowings  and letters of credit up to a maximum of $50 million
at all times during the year,  with a "borrowing  base"  determined by inventory
levels and specified accounts receivable.  The new credit facility is secured by
our  inventory,  accounts  receivable,  accounts  and  specified  other  assets.
Borrowings  under the new credit  facility  bear interest at either the adjusted
LIBOR rate plus 1.50% or at Wells Fargo's prime rate less 0.25%.  The new credit
facility contains financial covenants that only apply during an event of default
or when the  borrowing  base falls  below a  specified  level.  These  financial
covenants  require us to maintain a minimum  EBITDA (as  defined) of $35 million
and to  maintain  capital  expenditures  below a  specified  level  based on our
projections.   The  new  credit  facility  contains   limitations  on  incurring
additional  indebtedness,  making additional investments and permitting a change
of control.  As of January 31, 2004,  letter of credit  commitments  outstanding
under the new credit  facility were $4.2 million,  which includes a $2.9 million
backstop letter of credit to cover credit commitments  outstanding under our old
secured credit facility.

The table below presents our significant  commercial credit facilities and their
associated expiration dates.

($ in millions)
Maximum Amount of Commitment expiration Per Period
------------------------------------------------------------------------------
Maximum Commercial Commitments  Less than 1 Year     1-3 Years    Total Amount
                                                                  Committed
--------------------------------------------------   ----------   ------------
Revolving Credit Facility                    $0.0        $50.0          $50.0

                                ------------------   ----------   ------------
Total Commercial Commitment                  $0.0        $50.0          $50.0
                                ==================   ==========   ============

*This represents the maximum commitment under the revolving credit facility.  It
includes limits of $35 million for letters of credit.

                                                                              35
<PAGE>

As of January 31, 2003,  we paid off the  mortgage  loan  collateralized  by our
Little Rock, Arkansas  distribution center. This note reflected a fixed interest
rate of 8.40%,  provided for monthly  payments of principal  and interest in the
amount of $29,367 and was scheduled to mature in January 2011.

The table below presents our significant  contractual obligations at January 31,
2004.

<TABLE>
<CAPTION>
$ in millions                          Less            1-3            4-5          After 5           Total
Contractual Obligations               than 1          Years          Years          Years
                                       Year
------------------------------------ ----------    -----------    -----------    -----------    ------------
<S>                                      <C>            <C>            <C>            <C>            <C>
Revolving Credit Facility                 $4.2           -              -              -               $4.2
  Letters of Credit
Operating Leases (1)                      30.4          $52.9          $44.2          $75.4           202.9
Purchase Obligations (2)                  59.0           -              -              -               59.0
                                     ----------    -----------    -----------    -----------    ------------
Total Contractual Cash Obligations       $93.6          $52.9          $44.2          $75.4          $266.1
                                     ==========    ===========    ===========    ===========    ============
</TABLE>

     (1)  The Company's operating leases are described in Note F of the Notes to
          the Financial Statements.

     (2)  As of January 31,  2004,  the  Company had $59 million of  outstanding
          purchase  orders,  which were primarily  related to orders for general
          merchandise inventories. Such purchase orders are generally cancelable
          at the discretion of the Company until the order has been shipped. The
          table above excludes certain  immaterial  executory contract for goods
          and serves that tend to be  recurring  in nature and similar in amount
          year after year.

For fiscal 2004, we plan to continue our  accelerated new store unit growth goal
with a 15% to 20% increase target in the number of stores on an annual basis and
to remodel five to 10 of our existing store  locations.  We plan to continue our
capital  investment  in tooling  costs for  proprietary  products and to further
expand our  infrastructure  through exercising our lease options to increase our
distribution   center   capabilities   and  continue  our   enhancement  of  our
technological systems. We believe that our total capital expenditures for fiscal
2004 will be approximately $35 million to $40 million.

Absent unfavorable  economic  conditions or deviations from projected demand for
our  products,  particularly  during  the fourth  quarter,  we expect to achieve
positive cash flow from  operations on an annual basis,  although we likely will
need to finance  holiday and new-store  increases in  inventories  through trade
credits and our credit facility.  We believe we will be able to fund our capital
expenditures  for new  and  remodeled  stores,  technological  enhancements  and
tooling costs for Sharper Image Design products  through existing cash balances,
cash generated from  operations,  trade credits,  and, as necessary,  our credit
facility.

New accounting pronouncements

In December 2003, the Financial  Accounting Standards Board ("FASB") issued FASB
Interpretation  ("FIN") No. 46(R) "Consolidation of Variable Interest Entities."
FIN 46(R) replaces FIN 46 and addresses consolidation by business enterprises of
variable  interest  entities.  The provisions of FIN 46(R) are effective for the
first reporting period that ends after December 15, 2003 for variable  interests
in those entities commonly referred to as special-purpose entities.  Application
of the provisions of FIN 46(R) for all other entities is effective for the first
reporting period ending after March 15, 2004. The Company has no interest in any
entity considered a special purpose entity. The Company believes the adoption of
the  provisions of FIN 46(R) in the first quarter of 2004 will have no impact on
net earnings, cash flows or financial position.

                                                                              36
<PAGE>

Uncertainties and risks

This  discussion and analysis  should be read in conjunction  with our financial
statements  and  notes  thereto.   This  discussion   contains   forward-looking
statements that are subject to risks and  uncertainties  that could cause actual
results  to differ  materially  from  those  set forth in these  forward-looking
statements.  These risks and uncertainties include, without limitation, risks of
changing  market  conditions  in the overall  economy  and the retail  industry,
consumer demand, the opening of new stores,  actual advertising  expenditures by
us, the success of our advertising and merchandising  strategy,  availability of
products,  and other factors  detailed from time to time in our annual and other
reports filed with the Securities and Exchange Commission. Readers are cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of the date of this  report.  We undertake  no  obligations  to publicly
release any revisions to these  forward-looking  statements or reflect events or
circumstances after the date of this report.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk

We are exposed to market risks,  which include changes in interest rates and, to
a  lesser  extent,  foreign  exchange  rates.  We do  not  engage  in  financial
transactions for trading or speculative purposes.

The interest payable on our credit facility is based on variable  interest rates
and therefore affected by changes in market interest rates. If interest rates on
existing  variable rate debt increased .4% (10% from the bank's  reference rate)
as of January 31, 2004 our results from operations and cash flows would not have
been  materially  affected.  In  addition,  we have  fixed and  variable  income
investments consisting of cash equivalents and short-term investments, which are
also  affected by changes in market  interest  rates.  We do not use  derivative
financial instruments in our investment portfolio.

We enter into a significant amount of purchase obligations outside of the United
States,  which are settled in U.S.  dollars  and,  therefore,  have only minimal
exposure to foreign  currency  exchange  risks.  We do not hedge against foreign
currency risks and believe that foreign currency exchange risk is immaterial.

                                                                              37
<PAGE>

Item 8.  Financial Statements and Supplementary Data

Board of Directors and Stockholders
Sharper Image Corporation
San Francisco, California

We have audited the accompanying  balance sheets of Sharper Image Corporation as
of  January  31,  2004 and  2003,  and the  related  statements  of  operations,
stockholders'  equity and cash flows for each of the three  fiscal  years in the
period ended January 31, 2004. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the financial position of Sharper Image Corporation as of January 31,
2004 and 2003,  and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 2004 in  conformity  with
accounting principles generally accepted in the United States of America.


/s/ Deloitte & Touche LLP

San Francisco, California
April 12, 2004

                                                                              38
<PAGE>

                            Sharper Image Corporation
                                 Balance Sheets
<TABLE>
<CAPTION>
                                                                            January 31,         January 31,
(Dollars in thousands, except per share amounts)                                2004               2003
                                                                              --------           --------

<S>                                                                           <C>                <C>
Assets
Current assets:
         Cash and equivalents                                                 $ 83,471           $ 55,633
         Accounts receivable, net of allowance for doubtful accounts
             of $1,266 and $967                                                 21,196             12,597
         Merchandise inventories                                               110,058             74,756
         Prepaid expenses, deferred taxes and other                             20,303             15,527
                                                                              --------           --------
Total current assets                                                           235,028            158,513
Property and equipment, net                                                     70,190             52,165
Deferred catalog costs and other assets                                          4,337              3,749
                                                                              --------           --------
         Total assets                                                         $309,555           $214,427
                                                                              ========           ========

Liabilities and stockholders' equity
Current liabilities:
         Accounts payable                                                     $ 23,434           $ 26,597
         Accrued expenses                                                       16,126             14,996
         Accrued compensation                                                   11,793              8,614
         Reserve for refunds                                                    17,161             12,498
         Deferred revenue                                                       25,781             19,113
         Income taxes payable                                                    9,399              6,472
                                                                              --------           --------
Total current liabilities                                                      103,694             88,290
Deferred taxes and other liabilities                                            15,935              8,753
Commitments and contingencies                                                     --                 --
                                                                              --------           --------
Total liabilities                                                              119,629             97,043

Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized, 3,000,000 shares: Issued and outstanding, none                        --                 --
Common stock, $0.01 par value:
Authorized, 25,000,000 shares: Issued and outstanding, 15,322,635, and
    12,638,952 shares                                                              153                126
Additional paid-in capital                                                      97,211             49,950
Retained earnings                                                               92,562             67,308
                                                                              --------           --------
Total stockholders' equity                                                     189,926            117,384
                                                                              --------           --------
         Total liabilities and stockholders' equity                           $309,555           $214,427
                                                                              ========           ========
</TABLE>
                       See notes to financial statements.

                                                                              39
<PAGE>

                            Sharper Image Corporation
                            Statements of Operations

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended January 31,
                                                                       -----------------------------
                                                              2004                  2003                  2002
(Dollars in thousands, except per share amounts)          (Fiscal 2003)        (Fiscal 2002)         (Fiscal 2001)
                                                          ------------          ------------          ------------

<S>                                                       <C>                   <C>                   <C>
Revenues:
Net sales                                                 $    630,084          $    498,702          $    376,128
Delivery                                                        17,050                14,090                11,992
List rental and licensing                                          377                   977                   985
                                                          ------------          ------------          ------------
                                                               647,511               513,769               389,105
                                                          ------------          ------------          ------------
Costs and expenses:
Cost of products                                               277,043               220,519               182,436
Buying and occupancy                                            57,918                48,185                39,901
Advertising                                                    123,339                97,360                68,479
General, selling, and administrative                           146,465               120,556                96,464
                                                          ------------          ------------          ------------
                                                               604,765               486,620               387,280
                                                          ------------          ------------          ------------
Other income (expense):
Interest income                                                    785                   367                   702
Interest expense                                                  (291)                 (465)                 (355)
Other income                                                      --                       1                    99
Other expense                                                     (437)                  (96)                 (393)
                                                          ------------          ------------          ------------
                                                                    57                  (193)                   53
                                                          ------------          ------------          ------------
Earnings before income tax expense                              42,803                26,956                 1,878
Income tax expense                                              17,549                11,049                   751
                                                          ------------          ------------          ------------
Net earnings                                              $     25,254          $     15,907          $      1,127
                                                          ============          ============          ============

Earnings per common equivalent share:
   Basic                                                  $       1.75          $       1.29          $       0.09
                                                          ============          ============          ============
  Diluted                                                 $       1.65          $       1.21          $       0.09
                                                          ============          ============          ============
Weighted average shares used in the computation
   of earnings per common equivalent share:
   Basic                                                    14,446,128            12,327,157            11,904,562
   Diluted                                                  15,333,235            13,182,050            12,302,852
</TABLE>

                       See notes to financial statements.

                                                                              40
<PAGE>

                            Sharper Image Corporation
                       Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                                                         Additional
                                                              Common         Stock        Paid-in        Retained
(Dollars in thousands)                                        Shares         Amount       Capital        Earnings         Total
                                                           -----------    -----------    -----------    -----------    -----------

<S>                                                         <C>           <C>            <C>            <C>            <C>
Balance at February 1, 2001                                 11,961,911    $       120    $    42,697    $    50,274    $    93,091
Issuance of common stock for stock options
  exercised (including income tax benefit)                     108,773              1            872                           873
Repurchase of common stock                                    (100,000)            (1)          (987)                         (988)
Net earnings                                                                                                  1,127          1,127
                                                           -----------    -----------    -----------    -----------    -----------
Balance at January 31, 2002                                 11,970,684            120         42,582         51,401         94,103

Issuance of common stock for stock options
  exercised (including income tax benefit)                     668,268              6          7,368                         7,374
Net earnings                                                                                                 15,907         15,907
                                                           -----------    -----------    -----------    -----------    -----------
Balance at January 31, 2003                                 12,638,952            126         49,950         67,308        117,384

Issuance of common stock for stock options
  exercised (including income tax benefit)                     546,259              6          8,767                         8,773
Issuance of common stock due to stock  follow-on
  offering (net of expenses)                                 2,137,424             21         38,494                        38,515
Net earnings                                                                                                 25,254         25,254
                                                           -----------    -----------    -----------    -----------    -----------
Balance at January 31, 2004                                 15,322,635    $       153    $    97,211    $    92,562    $   189,926
                                                           ===========    ===========    ===========    ===========    ===========
</TABLE>

                       See notes to financial statements.

                                                                              41
<PAGE>

                            Sharper Image Corporation
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                    Fiscal Year Ended January 31,
                                                                                    -----------------------------
                                                                                2004             2003            2002
(Dollars in thousands)                                                     (Fiscal 2003)    (Fiscal 2002)    (Fiscal 2001)
                                                                              --------         --------         --------

<S>                                                                           <C>              <C>              <C>
Cash provided by (used for) operating activities:
Net earnings                                                                  $ 25,254         $ 15,907         $  1,127
         Adjustments to reconcile net earnings to net cash provided
         by operating activities:
         Depreciation and amortization                                          16,426           15,456           11,560
         Tax benefit from stock option exercises                                 4,622            3,733              209
         Deferred rent expenses and landlord allowances                            361              279              332
         Deferred income taxes                                                     399           (2,331)            (123)
         Loss on disposal of equipment                                             744               94              395
         Change in operating assets and liabilities:
           Accounts receivable                                                  (8,599)          (4,499)           1,624
           Merchandise inventories                                             (35,302)         (24,075)          11,905
           Prepaid catalog costs, prepaid expenses and other                    (2,575)           2,577              (24)
           Accounts payable, reserve for refunds and
            accrued expenses                                                     5,809           20,932          (13,242)
           Deferred revenue, taxes payable and other liabilities                13,998            8,908           (4,609)
                                                                              --------         --------         --------
Cash provided by operating activities                                           21,137           36,981            9,154
                                                                              --------         --------         --------
Cash provided by (used for) investing activities:
         Property and equipment expenditures                                   (35,195)         (23,199)         (20,284)
         Proceeds from sale of equipment                                          --               --                 11
                                                                              --------         --------         --------
Cash used for investing activities                                             (35,195)         (23,199)         (20,273)
                                                                              --------         --------         --------
Cash provided by (used for) financing activities:
         Proceeds from issuance of common stock upon exercise of
           stock options                                                         4,151            3,641              664
         Repurchase of common stock                                               --               --               (988)
         Payments made for financing fees                                         (770)            --               --
         Proceeds from notes payable and revolving credit facility                --             19,000           15,625
         Principal payments on notes payable and revolving credit
             facility                                                             --            (21,207)         (15,784)
         Proceeds from issuance of common stock due to follow-on
             stock offering, net of expenses                                    38,515             --               --
                                                                              --------         --------         --------
Cash provided by (used for) financing activities                                41,896            1,434             (483)
                                                                              --------         --------         --------
Net increase (decrease) in cash and equivalents                                 27,838           15,216          (11,602)
Cash and equivalents at beginning of period                                     55,633           40,417           52,019
                                                                              --------         --------         --------
Cash and equivalents at end of period                                         $ 83,471         $ 55,633         $ 40,417
                                                                              ========         ========         ========
Supplemental disclosure of cash paid for:

         Interest expense                                                     $    131         $    456         $    349
         Income taxes                                                         $  9,615         $    743         $  8,991
</TABLE>

                       See notes to financial statements.

                                                                              42
<PAGE>

Sharper Image Corporation Notes to financial statements

Note A--Summary of significant accounting policies

         Sharper  Image  Corporation  (the  "Company")  is a  leading  specialty
retailer  that  introduces  and  sells  quality,   innovative  and  entertaining
products.  These  products are sold through its retail stores,  catalogs  (which
includes  other  sources of direct  marketing  such as single  product  mailers,
television  infomercials,  radio and  newspapers),  and over the  Internet.  The
Company  also  markets  to other  businesses  through  its  corporate  sales and
wholesale operations.

         Accounting  Estimates:  The  preparation  of  financial  statements  in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make estimates and assumptions  that affect the
reported  amounts of assets and liabilities and disclosure of contingent  assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses  during the  reporting  period.  Actual  results  could
differ from those estimates.  The Company's significant accounting judgments and
estimates  include  depreciable  lives of long-lived  assets,  long-lived  asset
impairment, reserves on inventory and sales return reserve.

         Revenue  Recognition:  The Company  recognizes  revenue at the point of
sale at its retail  stores and at the time of  customer  receipt for its catalog
and direct  marketing  sales,  including  the Internet.  The Company  recognizes
revenue  for sales to  resellers  of sales  made on a  wholesale  basis when the
products  are  shipped,  which is the time title  passes to the  purchaser.  The
Company records estimated  reductions to revenue for customer returns based upon
historical  return rates.  Revenues are recorded net of sale discounts and other
rebates  and  incentives  offered  to  customers.  Deferred  revenue  represents
merchandise   certificates   gift  cards  and  rewards  cards   outstanding  and
merchandise  that is  still in the  delivery  process  at the end of the  fiscal
period.  Delivery  revenue is  recognized  at the  commencement  of  delivery to
customers.

         Cost of  Products:  Cost of  products  includes  total cost of products
sold, inventory shrink,  letter of credit fees, inventory  write-downs,  inbound
freight costs, costs to refurbish products for resale, inspection costs, cost of
customer   accommodations  and  promotions  and  costs  to  deliver  product  to
customers.

         Buying  and  Occupancy:  Buying and  occupancy  includes  salaries  for
merchandise  buyers,  occupancy costs for all store  locations and  distribution
facilities   including  rent,   utilities,   real  estate  taxes,   common  area
maintenance, repairs and maintenance, depreciation on leasehold improvements and
fixtures, janitorial services and waste removal.

         General,    Selling   and   Administrative:    General,   selling   and
administrative includes all costs related to sales associates, including payroll
and benefits,  all corporate  personnel  cost,  including  payroll and benefits,
supplies,   store  signs,   credit  card  fees,   third  party  fees   including
telemarketing  expenses,  Internet  hosting  charges,  telephone-related  to the
corporate  offices,  toll free  phone  numbers  for  catalog  and  other  direct
marketing   orders,   freight  charges  related  to  delivery  of  product  from
distribution centers to stores and between distribution centers,  purchasing and
receiving costs, warehouse costs, corporate insurance, depreciation on corporate
assets such as computers and distribution  center facilities,  bad debt expense,
check guarantee fees and professional fees.

         Start-up Activities: All start-up and pre-opening costs are expensed as
incurred.

         Deferred Catalog and Advertising  Costs:  Direct costs incurred for the
production and distribution of catalogs are capitalized and amortized,  once the
catalog is mailed,  over the expected sales period,  which does not exceed three
months.  Other  advertising costs are expensed as incurred and amounted to $80.7

                                                                              43
<PAGE>

million,  $60.0 million and $35.3 million for the fiscal years ended January 31,
2004, 2003, and 2002, respectively.

         Fair  Value  of  Financial  Instruments:  The  carrying  value of cash,
accounts  receivable,  accounts  payable and notes  payable  approximates  their
estimated fair value.

         Cash  and  Equivalents:   Cash  and  equivalents   represent  cash  and
short-term,  highly liquid investments with original  maturities of three months
or less.  Receivables  from banks related to debit and credit cards are shown in
accounts  receivable  and totaled  $5.8  million and $2.8 million at January 31,
2004 and 2003, respectively.

         Merchandise Inventories: Merchandise inventories are stated at lower of
cost (first-in,  first-out  method) or market.  The Company reduces the carrying
value of its inventory  for estimated  obsolescence  or  unmarketable  inventory
equal to the difference  between the cost of inventory and the estimated  market
value based upon assumptions about future demand and market conditions.

         Property and  Equipment:  Property and equipment are stated at cost net
of accumulated  depreciation.  Depreciation is computed using the  straight-line
method over the  estimated  useful lives of the various  assets which range from
three  to 10  years  for  office  furniture  and  equipment  and  transportation
equipment,  and 40 years for  buildings.  Leasehold  improvements  are amortized
using the  straight-line  method over the lesser of their estimated useful lives
or the term of the applicable leases, which range from seven to 18 years.

         The Company designs and produces its own proprietary products for sale.
External  costs  incurred  for  tooling,   dies,   patents  and  trademarks  are
capitalized  and amortized over the estimated life of these  products,  which is
generally two years. At January 31, 2004, and 2003,  capitalized  costs included
in property and equipment,  net of related  amortization,  were $3.4 million and
$2.8 million, respectively.

         Costs  incurred  in  the  development  of the  Internet  Web  site  and
enhancements to the Company's  information  infrastructure  are capitalized once
the preliminary project stage is completed and management authorizes and commits
to funding a computer  software project and it is probable that the project will
be  completed  and the software  will be used to perform the function  intended.
Costs incurred for training and ongoing maintenance are expensed as incurred.

         The  Company  reviews its  long-lived  assets,  including  identifiable
intangible  assets,  whenever events or changes  indicate the carrying amount of
such  assets  may not be  recoverable.  The  Company's  policy is to review  the
recoverability  of all assets,  at a minimum,  on an annual basis.  Based on the
Company's review at January 31, 2004 and 2003, no material adjustments were made
to long-lived assets.

         Income  Taxes:  Income  taxes  are  accounted  for  using an asset  and
liability  approach  that  requires the  recognition  of deferred tax assets and
liabilities  for the expected  future tax  consequences  of events then known to
management  that have been recognized in the Company's  financial  statements or
tax returns.  In estimating future tax consequences,  all expected future events
then known to  management  are  considered  other than changes in the tax law or
rates.

         Store Closure Reserves - Prior to January 1, 2003, the Company recorded
the estimated  costs  associated with closing a store during the period in which
the store was identified and approved by management under a plan of termination,
which  included the method of  disposition  and the expected date of completion.
These costs include direct costs to terminate a lease, lease rental payments net
of expected sublease income,  and the difference between the carrying values and
estimated  recoverable  values of  long-lived  tangible and  intangible  assets.
Severance and other  employee-related costs were recorded in the

                                                                              44
<PAGE>

period in which the closure and related severance  packages were communicated to
the affected employees. No such reserves were provided for the reporting periods
presented.

         Effective  with the  adoption  of SFAS No.  146,  Accounting  for Costs
Associated  with Exit or Disposal  Activities,  on January 1, 2003,  the Company
recognizes  a  liability  for costs  associated  with  closing a store  when the
liability  is  incurred.  The present  value of expected  future lease costs and
other closure  costs is recorded  when the store is closed.  Severance and other
employee-related  costs are  recorded  in the  period in which the  closure  and
related severance packages are communicated to the affected employees. Accretion
of the  discounted  present  value  of  expected  future  costs is  recorded  in
operations.  Store closure reserves are reviewed and adjusted periodically based
on changes in  estimates.  No such reserves are recorded at January 31, 2004 and
2003.

         Accounts  Payable:  Accounts payable  represents  amounts owed to third
parties at the end of the period.

         Deferred Rent.  When a lease requires fixed  escalations of the minimum
lease  payments,  rental  expense is recorded on a  straight-line  basis and the
difference  between the average  rental amount charged to expense and the amount
payable  under the lease is recorded as deferred  rent.  At January 31, 2004 and
2003,  the  balance  of  deferred  rent  was  $4.4  million  and  $3.6  million,
respectively,  and is  included in  long-term  liabilities  on the  accompanying
balance sheet.

         Derivative   Instruments   and  Hedging   Activities.   SFAS  No.  133,
"Accounting  for Derivative  Instruments  and Hedging  Activities,"  as amended,
requires the Company to record all  derivatives  as either assets or liabilities
on the balance sheet and to measure those instruments at fair value. The Company
did not hold or trade any derivative instruments in 2003, 2002 or 2001.

         Stock-Based  Compensation  - The Company has one  stock-based  employee
compensation  plan, as described in Note G. The Company accounts for stock-based
employee  compensation  using the intrinsic  value method in accordance with the
provisions of APB Opinion No. 25,  Accounting for Stock Issued to Employees.  No
compensation expense is recognized for employee stock options, because it is the
Company's  practice to grant stock  options with an exercise  price equal to the
market price of the underlying  common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value  recognition  provisions of SFAS No. 123,  Accounting
for Stock-Based Compensation, to all stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                        Fiscal year ended January 31,
                                                       --------------------------------------------------------------------
  Dollars in thousands, except per share amounts               2004                 2003                     2002
                                                          (Fiscal 2003)         (Fiscal 2002)           (Fiscal 2001)
                                                       --------------------- --------------------   -----------------------

<S>                                                           <C>                  <C>                      <C>
Net income, as reported                                       $25,254              $15,907                  $1,127
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects                        (2,006)              (1,539)                 (1,098)
                                                              -------              -------                  ------
Pro forma net income                                          $23,248              $14,368                     $29
                                                              =======              =======                  ======

Basic earnings per share:
   As reported                                                  $1.75                $1.29                   $0.09
   Pro forma                                                    $1.61                $1.17                   $0.00
Diluted earnings per share:
   As reported                                                  $1.65                $1.21                   $0.09
   Pro forma                                                    $1.52                $1.09                   $0.00
</TABLE>

                                                                              45
<PAGE>

The  Company  estimates  the  fair  value  of  stock  option  grants  using  the
Black-Scholes   option  pricing  model,  with  the  following  weighted  average
assumptions:

                                      Fiscal year ended January 31,
                          ------------------------------------------------------
                               2004               2003                2002
                          (Fiscal 2003)       (Fiscal 2002)       (Fiscal 2001)
                          -------------       -------------       -------------
Dividend yield                  --                 --                 --
Expected volatility             52%                59%                37%
Risk-free interest rate       3.12%              1.81%              4.09%
Expected life (years)            5                  5                  5

         Earnings Per Share - Basic  earnings per share are computed by dividing
net income by the weighted  average number of common shares  outstanding  during
the period.  Diluted  earnings  per share are computed by dividing net income by
the weighted  average  number of common  shares and dilutive  common  equivalent
shares  (stock  options)  outstanding  during the  period.  The  following  is a
reconciliation  of the number of shares used in the Company's  basic and diluted
earnings per share computations:

<TABLE>
<CAPTION>
                                                                  Fiscal year ended January 31,
                                                      -----------------------------------------------------
                                                         2004                 2003                  2002
                                                     (Fiscal 2003)       (Fiscal 2002)          (Fiscal 2001)
                                                       ----------          ----------            ----------

<S>                                                    <C>                 <C>                   <C>
Basic weighted average number of shares
outstanding                                            14,446,128          12,327,157            11,904,562
Application of treasury stock method on stock
options outstanding:
    Assumed options exercised due to exercise
price being less than average market price, net
of assumed stock repurchases                              887,107             854,893               398,290
                                                       ----------          ----------            ----------
Diluted weighted average number of shares
outstanding                                            15,333,235          13,182,050            12,302,852
                                                       ==========          ==========            ==========
</TABLE>

    The computations of diluted earnings per share in fiscal 2003, 2002 and 2001
exclude 31,100,  51,850 and 303,500 stock options,  respectively,  because their
exercise price exceeded the average market price for the period and thus,  their
effect would have been anti-dilutive.

         Comprehensive Income:  Comprehensive income consists of net earnings or
loss for the current period and other  comprehensive  income (income,  expenses,
gains and losses that  currently  bypass the income  statement  and are reported
directly  as a separate  component  of  equity).  Comprehensive  income does not
differ from net earnings  for the Company for the years ended  January 31, 2004,
2003 and 2002.

         New  Accounting   Pronouncements:   In  December  2003,  the  Financial
Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46(R)
"Consolidation  of Variable  Interest  Entities."  FIN 46(R) replaces FIN 46 and
addresses

                                                                              46
<PAGE>

consolidation  by  business  enterprises  of  variable  interest  entities.  The
provisions of FIN 46(R) are effective for the first  reporting  period that ends
after  December  15, 2003 for  variable  interests  in those  entities  commonly
referred to as  special-purpose  entities.  Application of the provisions of FIN
46(R) for all other entities is effective for the first reporting  period ending
after March 15,  2004.  The Company has no interest in any entity  considered  a
special purpose entity.  The Company  believes the adoption of the provisions of
FIN 46(R) in the first quarter of 2004 will have no impact on net earnings, cash
flows or financial position.

         Reclassification:  Certain  reclassifications were made to prior years'
financial  statements in order to conform to the  classifications of the January
31, 2004 financials statements.

Note B--Property and equipment

         Property and equipment is summarized as follows:

                                                                January 31,
                                                           ---------------------
(Dollars in thousands)                                       2004         2003
                                                           --------     --------

Leasehold improvements                                     $ 37,885     $ 33,032
Furniture, fixtures and equipment and
  other capitalized costs                                   110,126       86,240
Land                                                             53           53
Building                                                      2,874        2,874
                                                           --------     --------
                                                            150,938      122,199
Less accumulated depreciation and amortization               80,748       70,034
                                                           --------     --------
                                                           $ 70,190     $ 52,165
                                                           ========     ========

Note C--Other assets

         The Company had an agreement to advance the premiums on a  split-dollar
life insurance  policy for its Founder,  Chairman and Chief  Executive  Officer,
which was  terminated  during  fiscal  2003.  The Company had an interest in the
insurance  benefits  equal to the amount of the  premiums  advanced.  The amount
receivable for premiums  advanced as of January 31, 2003 was $2.1 million.  Upon
termination  of the agreement in fiscal 2003, the Company was reimbursed for all
premiums  paid. As of January 31, 2004, the balance in other assets is comprised
of investments and deferred financing costs.

Note D--Revolving loan and notes payable

         On October 31, 2003, the Company terminated its secured credit facility
and entered into a new revolving  secured credit facility with Wells Fargo Bank,
National Association. The new credit facility has a maturity date of October 31,
2006,  and will allow  borrowings  and  letters of credit up to a maximum of $50
million at all times during the year,  with a  "borrowing  base"  determined  by
inventory levels and specified accounts  receivable.  The new credit facility is
secured by the Company's inventory, accounts receivable,  accounts and specified
other assets.  Borrowings  under the new credit facility bear interest at either
the adjusted  LIBOR rate plus 1.50% or at Wells  Fargo's  prime rate less 0.25%.
The new credit facility contains  financial  covenants that only apply during an
event of default or when the borrowing base falls below a specified level. These
financial  covenants  require  the  Company  to  maintain  a minimum  EBITDA (as
defined) of $35 million and to maintain capital  expenditures  below a specified
level  based on the  Company's  projections.  The new credit  facility  contains
limitations on incurring additional indebtedness,  making additional investments
and  permitting a change of control.  As of January 31,  2004,  letter of credit

                                                                              47
<PAGE>

commitments  outstanding under the new credit facility were $4.2 million,  which
includes a $2.9 million  backstop  letter of credit to cover credit  commitments
outstanding  under the Company's old secured credit facility.  As of January 31,
2003, letter of credit commitments outstanding under the previous secured credit
facility were $2.1  million.  There were no direct  borrowings  under the credit
facilities  during  fiscal 2003 and 2002.  The weighted  average  interest  rate
incurred on the  revolving  credit  facility was 4.10% and 4.75% for fiscal 2003
and 2002, respectively.

    Note E--Income taxes

                                        Fiscal year ended January 31,
                                        -----------------------------
                                    2004             2003             2002
(Dollars in thousands)         (Fiscal 2003)    (Fiscal 2002)     (Fiscal 2001)
                                  --------         --------         --------

Current:
         Federal                  $ 14,640         $ 11,422         $    746
         State                       2,510            1,958              128
                                  --------         --------         --------
                                    17,150           13,380              874
                                  --------         --------         --------
Deferred:
         Federal                       340           (1,990)            (105)
         State                          59             (341)             (18)
                                  --------         --------         --------
                                       399           (2,331)            (123)
                                  --------         --------         --------
                                  $ 17,549         $ 11,049         $    751
                                  ========         ========         ========

         The  difference  between the  effective  income tax rate and the United
States federal income tax rate is summarized as follows:

<TABLE>
<CAPTION>
                                                    Fiscal year ended January 31,
                                                    -----------------------------
                                                2004             2003             2002
                                            (Fiscal 2003)    (Fiscal 2002)    (Fiscal 2001)
                                            -------------    -------------    -------------

<S>                                             <C>              <C>              <C>
Federal tax rate                                35.0%            35.0%            35.0%
State income tax, less federal benefit           6.0              6.0              6.0
Other                                            --               --              (1.0)
                                                ----             ----             ----
Effective tax rate                              41.0%            41.0%            40.0%
                                                ====             ====             ====
</TABLE>

                                                                              48
<PAGE>


         Deferred taxes result from  differences  in the  recognition of expense
for income tax and financial  reporting  purposes.  The principal  components of
deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>

                                                                                      January 31,
                                                                                      -----------
                                                                         2004                              2003
                                                              -------------------------         --------------------------

                                                              Deferred         Deferred          Deferred          Deferred
                                                                Tax               Tax              Tax                Tax
                                                               Assets         Liabilities         Assets          Liabilities
                                                              -------           -------          -------            -------
         Current:
<S>                                                           <C>               <C>              <C>                <C>
         Nondeductible reserves                               $14,654                            $11,973
         Deferred catalog costs                                                 $ 1,384                             $ 1,131
         State taxes                                                              2,674                               2,265
                                                              -------           -------          -------            -------
         Current                                               14,654             4,058           11,973              3,396
                                                              -------           -------          -------            -------


         Noncurrent:
         Deferred rent                                          1,761                              1,432
         Depreciation                                             762                              3,135
         Deductible software costs                                                5,596                               4,314
         Other                                                                       59                                 967
                                                              -------           -------          -------            -------
         Noncurrent                                             2,523             5,655            4,567              5,281
                                                              -------           -------          -------            -------
         Total                                                $17,177           $ 9,713          $16,540            $ 8,677
                                                              =======           =======          =======            =======
</TABLE>

Note F--Leases

         The Company  leases retail  facilities,  offices,  and equipment  under
operating  leases for terms  expiring at various dates  through 2017.  Under the
terms of certain of the leases,  rents are adjusted  annually for changes in the
consumer  price index and increases in property  taxes.  The  aggregate  minimum
annual  lease  payments  under  leases in effect at  January  31,  2004,  are as
follows:

           (Dollars in thousands)

           Fiscal year ending January 31,
           2005                                                 $30,363
           2006                                                  28,627
           2007                                                  24,317
           2008                                                  22,703
           2009                                                  21,471
           Later years                                           75,385
                                                               ---------
           Total minimum lease commitments                     $202,866
                                                               =========


         Many of the Company's leases contain predetermined fixed escalations of
the minimum  rentals during the initial term. For these leases,  the Company has
recognized the related rental expense on a straight-line  basis and has recorded
the difference  between the expense  charged to income and amounts

                                                                              49
<PAGE>


payable under the leases as deferred  rent,  which is included in Deferred Taxes
and Other Liabilities on the accompanying  balance sheet.  Total minimum rent to
be received by the Company from non-cancelable  sublease agreements through 2005
is  approximately  $269,000  as of January 31,  2004,  which has not been netted
against the above amounts.

         Some store leases  contain  renewal  options for periods  ranging up to
five years.  Most leases also  provide for payment of operating  expenses,  real
estate taxes and for additional rent based on a percentage of sales.

         Rental expense for all operating leases was as follows:
<TABLE>
<CAPTION>

                                                                                 Fiscal year ended January 31,
                                                                                 -----------------------------
                                                                        2004                2003                  2002
         (Dollars in thousands)                                     (Fiscal 2003)       (Fiscal 2002)        (Fiscal 2001)
                                                                  ------------------  ------------------   -------------------
<S>                                                                    <C>                <C>                   <C>
         Minimum rentals                                               $30,108            $25,999               $22,941
         Percentage rentals and other charges                           12,286             10,448                 8,436
                                                                       -------            -------               -------
                                                                       $42,394            $36,447               $31,377
                                                                       =======            =======               =======
</TABLE>

Note G--Stockholders' equity

         On May 7, 2003, the Company  completed a public  offering of its common
stock in which it sold 1.9 million shares at a price to the public of $19.50. On
May 13, 2003,  the Company  closed the sale of an additional  237,424  shares of
common stock subject to the  underwriters'  over-allotment  option.  The Company
received   proceeds  from  the  public   offering  of  $38.5  million,   net  of
underwriters' discount and offering expenses.

         During fiscal 2000, the Company  adopted the 2000 Stock Incentive Plan.
The Stock  Incentive  Plan combines the 1985 Stock Option Plan, as amended,  and
the 1994  Non-Employee  Director  Stock Option Plan,  as amended,  into a single
comprehensive  equity  incentive  plan. The 2000 Stock Incentive Plan is divided
into four  separate  equity  incentive  programs  and will allow the issuance of
non-qualified   options  to  key  employees,   non-employee  Board  members  and
consultants  up to an  initial  aggregate  of  3,147,107  shares.  An  automatic
increase of shares available for issuance will occur on the first trading day of
each fiscal year,  beginning  with fiscal 2001,  by an amount equal to 3% of the
total  number of shares of common stock  outstanding  on the last trading day of
the  immediately  preceding  fiscal year.  In no event will the annual  increase
exceed 500,000 shares.

         Options  issued to key employees and  consultants  will  generally vest
over a four- to  six-year  period  from the date of the grant and are  priced at
100% of the fair  market  value  at the date of the  grant.  Options  issued  to
non-employee Board members will be immediately  exercisable,  vest over one year
of board  service  from the date of the grant and are priced at 100% of the fair
market  value at the date of the grant.  Any shares  purchased  under the option
plan will be subject to repurchase by the Company at the exercise price paid per
share, upon the optionee's cessation of Board service prior to vesting.

                                                                              50
<PAGE>

The following table reflects the activity under this plan:
<TABLE>
<CAPTION>

                                                                                                                     Weighted
                                                                                              Number of               average
                                                                                               options             exercise price
                                                                                              ---------            --------------
<S>                                                                                           <C>                    <C>
         Balance at January 31, 2001                                                          2,142,887              $    7.46
         Granted (weighted average fair value of $3.14)                                         800,350                   7.96
         Exercised                                                                              (86,655)                  5.00
         Cancelled                                                                              (82,619)                  8.36
                                                                                              ---------
         Balance at January 31, 2002                                                          2,773,963              $    7.65

         Granted (weighted average fair value of $7.60)                                         687,650                  14.41
         Exercised                                                                             (665,801)                  5.42
         Cancelled                                                                             (100,441)                 10.33
                                                                                              ---------
         Balance at January 31, 2003                                                          2,695,371              $    9.83

         Granted (weighted average fair value of $10.97)                                        580,500                  23.18
         Exercised                                                                             (544,559)                  7.20
         Cancelled                                                                              (43,660)                  9.99
                                                                                              ---------
         Balance at January 31, 2004                                                          2,687,652              $   13.24
                                                                                              =========
         Exercisable at January 31, 2002                                                      1,397,869              $    6.79
                                                                                              =========
         Exercisable at January 31, 2003                                                      1,272,707              $    9.10
                                                                                              =========
         Exercisable at January 31, 2004                                                      1,272,652              $   10.88
                                                                                              =========
</TABLE>

<TABLE>
<CAPTION>
                                       Options outstanding                                 Options exercisable
          --------------------------------------------------------------------       -------------------------------
                                               Weighted
                                                average
                                Number         remaining           Weighted            Number            Weighted
              Range of        of options      contractual          average           of options          average
          Exercise prices     Outstanding     life (years)      exercise price       exercisable      exercise price
          ---------------     -----------     ------------      --------------       -----------      --------------
<S>        <C>     <C>                <C>              <C>           <C>                     <C>           <C>
           $1.16 - $1.99              100              0.1           $    1.88               100           $    1.88
            2.00 -  3.99           14,618              4.5                3.66            14,618                3.66
            4.00 -  7.99          308,860              7.9                6.88           115,940                6.84
            8.00 - 11.99        1,293,904              7.0                9.51           856,424                9.42
           11.99 - 29.70        1,070,170              9.4               19.72           285,570               17.28
                                ---------                                              ---------
          $1.16 - $29.70        2,687,652              8.0           $   13.24         1,272,652           $   10.88
                                =========                                              =========
</TABLE>

Note H--401(k) savings plan

         The Company  maintains a defined  contribution,  401(k)  Savings  Plan,
covering  all  employees  who have  completed  one year of service with at least
1,000  hours and who are at least 21 years of age.  The Company  makes  employer
matching  contributions  at its discretion.  Company  contributions  amounted to
$190,000,  $176,000,  and $172,000 for the fiscal years ended  January 31, 2004,
2003 and 2002, respectively.

                                                                              51
<PAGE>


Note I--Commitments and contingencies

         The Company is party to various legal  proceedings  arising from normal
business  activities.  Management  believes that the resolution of these matters
will not have a material adverse effect on the Company's  financial  position or
results of operations.

Note J--Segment information

         The Company  classifies its business  interests  into three  reportable
segments:  retail stores,  catalog and direct marketing,  and the Internet.  The
accounting  policies  of the  segments  are the same as those  described  in the
summary of  significant  accounting  policies  (Note A). The  Company  evaluates
performance  and  allocates  resources  based on operating  contribution,  which
excludes  unallocated  corporate  general  and  administrative  costs and income
taxes. The Company's reportable segments are strategic business units that offer
the same products and utilize common merchandising,  distribution, and marketing
functions,  as well as common information systems and corporate  administration.
The Company  does not have  intersegment  sales,  but the  segments  are managed
separately because each segment has different channels for selling the products.

         Financial  information  for  the  Company's  business  segments  is  as
follows:
<TABLE>
<CAPTION>
                                                                                      Year ended January 31,
                                                                                      ----------------------
                                                                          2004                 2003                 2002
         (Dollars in thousands)                                       (Fiscal 2003)        (Fiscal 2002)        (Fiscal 2001)
                                                                        ---------            ---------            ---------
         Revenues
<S>                                                                     <C>                  <C>                  <C>
         Stores                                                         $ 379,349            $ 293,795            $ 230,799
         Catalog and direct marketing                                     128,652              118,192               85,087
         Internet                                                          95,086               69,208               49,349
         Other                                                             44,424               32,574               23,870
                                                                        ---------            ---------            ---------
         Total revenues                                                 $ 647,511            $ 513,769            $ 389,105
                                                                        =========            =========            =========
         Operating contributions
         Stores                                                         $  53,457            $  38,923            $  24,056
         Catalog and direct marketing                                      24,164               19,628                7,610
         Internet                                                          16,265               12,031                8,833
         Unallocated                                                      (51,083)             (43,626)             (38,621)
                                                                        ---------            ---------            ---------
         Earnings before income tax expense                             $  42,803            $  29,956            $   1,878
                                                                        =========            =========            =========
         Depreciation and amortization
         Stores                                                         $   7,734            $   6,224            $   4,782
         Catalog and direct marketing                                        --                   --                   --
         Internet                                                           3,071                3,884                1,845
         Unallocated                                                        5,621                5,348                4,933
                                                                        ---------            ---------            ---------
         Total depreciation and amortization                            $  16,426            $  15,456            $  11,560
                                                                        =========            =========            =========
         Capital asset expenditures
         Stores                                                         $  21,774            $  13,983            $  12,296
         Catalog and direct marketing                                        --                   --                   --
         Internet                                                           1,727                2,400                2,134
         Unallocated                                                       11,694                6,816                5,854
                                                                        ---------            ---------            ---------
         Total capital asset expenditures                               $  35,195            $  23,199            $  20,284
                                                                        =========            =========            =========
         Assets
         Stores                                                         $  48,725            $  35,281            $  27,613
         Catalog and direct marketing                                        --                   --                   --
         Internet                                                           1,974                3,330                4,825
         Unallocated                                                      258,856              175,816              130,084
                                                                        ---------            ---------            ---------
         Total assets                                                   $ 309,555            $ 214,427            $ 162,522
                                                                        =========            =========            =========
</TABLE>
                                                                              52
<PAGE>


Note K--Quarterly financial information (unaudited)
<TABLE>
<CAPTION>
         Fiscal Year Ended January 31, 2004
                                                                                        Three months ended
         (Dollars in thousands, except per share                      April 30,       July 31,    October 31,   January 31,
         amounts)                                                        2003           2003          2003          2004
                                                                      ---------      ---------     ---------     ---------
<S>                                                                   <C>            <C>           <C>           <C>
         Revenues                                                     $ 116,309      $ 124,699     $ 128,121     $ 278,382
         Expenses
            Cost of products                                             47,617         53,526        56,417       119,483
            Buying and occupancy                                         13,021         13,174        14,331        17,392
            Advertising                                                  25,565         25,877        24,260        47,637
            General, selling and administrative                          28,900         30,935        31,726        54,904
         Other income (expense)                                             (57)           182           283          (351)
         Earnings before income tax expense                               1,149          1,369         1,670        38,615
         Income tax expense                                                 471            561           685        15,832
                                                                      ---------      ---------     ---------     ---------
         Net earnings                                                 $     678      $     808     $     985     $  22,783
                                                                      =========      =========     =========     =========
         Earnings per common equivalent share
                                                Basic (1)             $    0.05      $    0.05     $    0.07     $    1.50
                                               Diluted(2)             $    0.05      $    0.05     $    0.06     $    1.40
</TABLE>

                                                                              53
<PAGE>


<TABLE>
<CAPTION>
         Fiscal Year Ended January 31, 2003
                                                                                        Three months ended
         (Dollars in thousands, except per share                      April 30,       July 31,    October 31,   January 31,
         amounts)                                                        2002           2002          2002          2003
                                                                      ---------      ---------     ---------     ---------
<S>                                                                   <C>            <C>           <C>           <C>
         Revenues                                                    $  92,221     $ 100,464      $ 104,605      $ 216,479
         Expenses
           Cost of products                                             37,830        43,328         46,714         92,647
            Buying and occupancy                                        10,989        11,408         11,813         13,975
            Advertising                                                 20,193        21,137         20,027         36,003
            General, selling and administrative                         23,040        25,656         26,832         45,028
         Other income (expense)                                             84            19            (73)          (223)
         Earnings (loss) before income tax expense
         (benefit)                                                         253        (1,046)          (854)        28,603
         Income tax expense (benefit)                                      104          (429)          (350)        11,724
                                                                     ---------     ---------      ---------      ---------
         Net earnings (loss)                                         $     149     $    (617)     $    (504)     $  16,879
                                                                     =========     =========      =========      =========
         Earnings (loss) per common equivalent share
                                               Basic (1)             $     .01     $   (0.05)     $   (0.04)     $    1.34
                                              Diluted(2)             $     .01     $   (0.05)     $   (0.04)     $    1.26
</TABLE>

(1)      Basic  earnings per share is calculated for interim  periods  including
         the effect of stock options  exercised in prior interim periods.  Basic
         earnings  per share for the fiscal year is  calculated  using  weighted
         shares  outstanding  based on the date stock  options  were  exercised.
         Therefore,  basic earnings per share for the  cumulative  four quarters
         may not equal fiscal year basic earnings per share.

(2)      Diluted net  earnings  per share for the fiscal  year and for  quarters
         with net earnings are computed based on weighted  average common shares
         outstanding which include common stock equivalents (stock options). Net
         loss per share for quarters with net losses is computed based solely on
         weighted average common shares outstanding. Therefore, the net earnings
         (loss)  per share for each  quarter do not sum up to the  earnings  per
         share for the full fiscal year.

Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure

         Not applicable.

Item 9A  Controls And Procedures.

         Evaluation of Disclosure  Controls and Procedures.  Our chief executive
officer and our chief financial  officer,  after evaluating the effectiveness of
our disclosure  controls and  procedures (as defined in the Securities  Exchange
Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by
this report,  have  concluded,  based on the  evaluation  of these  controls and
procedures  required by  paragraph  (b) of Exchange  Act Rules 13a-15 or 15d-15,
that our disclosure controls and procedures were adequate and designed to ensure
that material  information  relating to us would be made known to them by others
within those entities.

         Changes in internal  control over  financial  reporting.  There were no
changes  in  our  internal  control  over  financial  reporting   identified  in
connection  with the evaluation  required by paragraph (d) of Exchange Act Rules
13a-15  or  15d-15  that  occurred  during  our last  fiscal  quarter  that have
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

                                                                              54
<PAGE>


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

         Information  with respect to our  directors is  incorporated  herein by
reference to our 2004 Proxy Statement to Stockholders.  Information with respect
to our  executive  officers is contained in Part I of this Annual Report on Form
10-K.

Item 11. Executive Compensation

         Information  with respect to  executive  compensation  is  incorporated
herein by reference to our 2004 Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         Except  as set  forth  below,  information  with  respect  to  security
ownership  of  beneficial  owners  and  management  is  incorporated  herein  by
reference to our 2004 Proxy Statement.

                      EQUITY COMPENSATION PLAN INFORMATION

         We have one equity based  compensation  plan, the 2000 Stock  Incentive
Plan which was approved by our security holders.  The following table sets forth
information as of January 31, 2004 of our equity compensation plan.

<TABLE>
<CAPTION>
                                                                                                 Number of  Securities Remaining
                                                                                                 Available for Future  Issuance
                                    Number of Securities to be   Weighted-Average Per Share      Under Equity Compensation Plan
                                    issued Upon Exercise of      Exercise Price of               (Excluding Securities Reflected
   Plan Category                    Outstanding Options          Outstanding Options             in the First Column)
   -----------------------------    --------------------------- ------------------------------   ---------------------------------
   Equity compensation plan
   approved
<S>                                        <C>                             <C>                                <C>
   by security holders..........           2,687,652                       $13.24                             31,192
</TABLE>

Item 13. Certain Relationships and Related Transactions

         Not applicable.

Item 14. Principal Accountant Fees and Services

         Information  with respect to principal  accountant fees and services is
incorporated herein by reference to our 2004 Proxy Statement.

                                                                              55
<PAGE>


                                     PART IV

Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K

(a)1.    List of Financial Statements.

The following Financial Statements and Notes thereto are included herein in PART
V, Item 8:

Independent Auditors' Report

Statements of Operations  for the years ended January 31, 2004,  2003  and 2002

Balance sheets at January 31, 2004 and 2003

Statements of  Stockholders'  Equity  for the years ended January 31, 2004, 2003
and 2002

Statements  of Cash Flows for the years ended  January 31, 2004,  2003 and 2002


Notes to Financial Statements.

(a)2.    List of Financial Statement Schedule.

The following are filed as part of this Report:

Independent Auditors' Report on Schedule.

Schedule II - Valuation and Qualifying Accounts

(a)3.    List of Exhibits.

         Incorporated herein by reference is a list of the Exhibits contained in
the Exhibit Index, which begins on page 41 of this report.

(b)      Reports on Form 8-K.

         None.

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SHARPER IMAGE CORPORATION            SHARPER IMAGE CORPORATION

By:/s/ Richard J. Thalheimer         By:/s/ Jeffrey P. Forgan
   -------------------------            ---------------------
 Richard J. Thalheimer                Jeffrey P. Forgan
 Chief Executive                      Executive Vice President, Chief Financial
 Officer, Chairman                    Officer, Corporate Secretary
 (Principal Executive Officer)        (Principal Financial & Accounting Officer)

                                                                              56
<PAGE>


                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below  constitutes and appoints  Richard  Thalheimer and Jeffrey P. Forgan,  and
each of them,  as such person's  true and lawful  attorneys-in-fact  and agents,
with full power of substitution and resubstitution,  for such person and in such
person's name, place, and stead, in any and all capacities,  to sign any and all
amendments to this report, and to file the same, with all exhibits thereto,  and
other  documents  in  connection  therewith,  with the  Securities  and Exchange
Commission,  granting unto said  attorneys-in-fact and agents, and each of them,
full  power  and  authority  to do and  perform  each and  every  act and  thing
requisite  and  necessary to be done in  connection  therewith,  as fully to all
intents and  purposes as he might or could do in person,  hereby  ratifying  and
confirming all that said  attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes,  may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the Registrant and in the
capacities and on the dates indicated.

Signature                           Title                              Date
---------                           -----                              ----

/s/ Richard J. Thalheimer      Chief Executive                    April 15, 2004
-------------------------      Officer, Chairman
Richard J. Thalheimer          (Principal Executive Officer)


/s/ Jeffrey P. Forgan          Executive Vice President,          April 15, 2004
---------------------          Chief Financial Officer,
Jeffrey P. Forgan              Corporate Secretary
                               (Principal Financial and
                               Accounting Officer)


/s/ Alan Thalheimer            Director                           April 15, 2004
-------------------
Alan Thalheimer


/s/ Gerald Napier              Director                           April 15, 2004
-----------------
Gerald Napier


/s/ Morton David               Director                           April 15, 2004
----------------
Morton David


/s/ George James               Director                           April 15, 2004
----------------
George James

                                                                              57
<PAGE>


                            SHARPER IMAGE CORPORATION
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                 -----------------------------------------------

                                     ($000)
<TABLE>
<CAPTION>

            COLUMN                                 COLUMN             COLUMN                 COLUMN             COLUMN
               A                                      B                  C                      D                  E
------------------------------------------------------------------------------------------------------------------------------------
                                                   Balance at           Additions                                   Balance
                                                   Beginning           Charged to                                  at End of
DESCRIPTION                                        of Period          Costs & Exp.           Deductions              Period
------------------------------------------------------------------------------------------------------------------------------------

ACCOUNTS RECEIVABLE
<S>                                                  <C>                 <C>                   <C>                   <C>
YEAR ENDED JANUARY 31, 2004:
Allowance for doubtful accounts                      $967               $1,426                $1,127                 $1,266

YEAR ENDED JANUARY 31, 2003:
Allowance for doubtful accounts                    $1,082               $1,072                $1,187                   $967

YEAR ENDED JANUARY 31, 2002:
Allowance for doubtful accounts                      $730                 $682                  $330                 $1,082

</TABLE>

                                                                              58
<PAGE>


INDEPENDENT AUDITORS' REPORT ON SCHEDULE

Board of Directors and Stockholders of
  Sharper Image Corporation

We have audited the  financial  statements of Sharper  Image  Corporation  as of
January 31, 2004 and 2003 and for each of the three  fiscal  years in the period
ended January 31, 2004, and have issued our report thereon dated April 12, 2004;
such financial  statements and report are included in your 2003 Annual Report on
Form 10-K. Our audits also included the financial  statement schedule of Sharper
Image Corporation,  listed in Item 15. This financial  statement schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits. In our opinion,  such financial statement schedule,
when considered in relation to the basic financial  statements taken as a whole,
presents fairly in all material respects the information set forth therein.


/s/ Deloitte & Touche LLP


San Francisco, California
April 12, 2004


                                                                              59
<PAGE>


                                  EXHIBIT INDEX

3.1      Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
         to Registration Statement on Form S-1 (Registration No. 33-12755).)

3.2      Amended and Restated Bylaws.

3.3      Form of Certificate  of  Designation  of Series A Junior  participating
         Preferred  Stock.   (Incorporated  by  reference  to  Exhibit  3.01  to
         Amendment No. 2 to the Registration Statement on Form S-2.)

4.1      Form of Rights Certificate.  (Incorporated by reference to Exhibit 4.01
         to Amendment No. 2 to the Registration Statement on Form S-2.)

4.2      Form of Rights Agreement dated June 7, 1999. (Incorporated by reference
         to Exhibit 4.02 to  Amendment  No. 2 to the  Registration  Statement on
         Form S-2.)

10.1     Amended and Restated  Stock Option Plan (as amended  through  September
         25, 1998). (Incorporated by reference to Registration Statement on Form
         S-8 filed on January 19, 1996 (Registration No. 33-3327) and Exhibit to
         Definitive Proxy Statement on Schedule 14A filed April 29, 1999.)

10.2     1994 Non-Employee  Director Stock Option Plan dated October 7, 1994 (as
         amended  through  September  25, 1998).  (Incorporated  by reference to
         Registration   Statement   on  Form  S-8  filed  on  January  19,  1996
         (Registration No. 33-3327) and Exhibit to Definitive Proxy Statement on
         Schedule 14A filed April 29, 1999.)

10.3     Cash or Deferred  Profit  Sharing  Plan, as amended.  (Incorporated  by
         reference  to  Exhibit  10.2 to  Registration  Statement  on  Form  S-1
         (Registration No. 33-12755).)

10.4     Cash or Deferred Profit Sharing Plan Amendment No. 3.  (Incorporated by
         reference to Exhibit  10.15 to Form 10-K for fiscal year ended  January
         31, 1988.)

10.5     Cash or Deferred Profit Sharing Plan Amendment No. 4.  (Incorporated by
         reference to Exhibit  10.16 to Form 10-K for fiscal year ended  January
         31, 1988.)

10.6     Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
         of Common  Stock  purchased  pursuant to  exercise  of  employee  stock
         options.  (Incorporated  by reference  to Exhibit 10.3 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

10.7     Form of Stock  Purchase  Agreement  dated December 13, 1985 relating to
         shares of Common Stock purchase  pursuant to exercise of employee stock
         options.  (Incorporated  by reference  to Exhibit 10.4 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

10.8     Form of Stock  Purchase  Agreement  dated November 10, 1986 relating to
         shares of Common Stock purchased pursuant to exercise of employee stock
         options.  (Incorporated  by reference  to Exhibit 10.5 to  Registration
         Statement on Form S-1 (Registration No. 33-12755).)

                                                                              60
<PAGE>

10.9     Form of Director Indemnification Agreement.  (Incorporated by reference
         to Exhibit 10.42 to  Registration  Statement on Form S-1  (Registration
         No. 33-12755).)

10.10    Financing  Agreement  dated  September 21, 1994 between the Company and
         CIT  Group/Business  Credit Inc.  (Incorporated by reference to Exhibit
         10.12 to Form 10-Q for the quarter ended October 31, 1994.)

10.11    The Sharper Image 401(K)  Savings Plan.  (Incorporated  by reference to
         Exhibit 10.21 to Registration  Statement of Form S-8  (Registration No.
         33-80504) dated June 21, 1994.)

10.12    Split-Dollar  Agreement between the Company and Mr. R. Thalheimer,  its
         Chief Executive Officer dated October 13, 1995, effective as of May 17,
         1995.  (Incorporated by reference to Exhibit 10.17 to Form 10-K for the
         fiscal year ended January 31, 1996.)

10.13    Assignments of Life Insurance Policy as Collateral,  both dated October
         13, 1995, effective May 17, 1995. (Incorporated by reference to Exhibit
         10.18 to Form 10-K for the fiscal year ended January 31, 1996.)

10.14    Amendment  to the  Financing  Agreement  dated May 15, 1996 between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference to Exhibit 10.19 to the Form 10-Q for the quarter ended April
         30, 1996.)

10.15    Amendment to the Financing  Agreement  dated  February 13, 1997 between
         the Company and The CIT  Group/Business  Credit Inc.  (Incorporated  by
         reference  to  Exhibit  10.21 to Form 10-K for the  fiscal  year  ended
         January 31, 1997.)

10.16    Amendment to the Financing  Agreement  dated March 24, 1997 between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference  to  Exhibit  10.23 to Form 10-K for the  fiscal  year  ended
         January 31, 1997.)

10.17    Amendment to the  Financing  Agreement  dated April 6, 1998 between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference  to  Exhibit  10.25 to Form 10-K for the  fiscal  year  ended
         January 31, 1998.)


10.18    Amendment to the Financing  Agreement  dated March 23, 2000 between the
         Company  and  The  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference  to  Exhibit  10.22 to Form 10-K for the  fiscal  year  ended
         January 31, 2000.)

10.19    Amendment to the Corporate  Headquarters  Office Lease  Agreement dated
         February 9, 2000  between the  Company  and its  landlord,  CarrAmerica
         Realty Corporation. (Incorporated by reference to Exhibit 10.23 to Form
         10-K for the fiscal year ended January 31, 2000.)

10.20    Amendment to the  Financing  Agreement  dated July 18, 2000 between the
         Company  and The  CIT  Group/Business  Credit,  Inc.  (Incorporated  by
         reference to Exhibit  10.23 to Form 10-Q for the quarter  ended October
         31, 2000.)
                                                                              61
<PAGE>

10.21    Amendment to the Financing  Agreement  dated September 29, 2000 between
         the Company and The CIT Group/Business  Credit,  Inc.  (Incorporated by
         reference to Exhibit  10.24 to Form 10-Q for the quarter  ended October
         31, 2000.)

10.22    Executive  Bonus Plan.  (Incorporated  by reference  to the  Definitive
         Proxy Statement on Schedule 14A filed May 4, 2001.)

10.23    Amendment to the Split-Dollar Agreement between the Company and Richard
         Thalheimer,  its Chief Executive Officer dated July 12, 2001, effective
         as of March 28, 2001.  (Incorporated  by reference to Exhibit  10.24 to
         Form 10-Q for the quarter ended October 31, 2001.)

10.24    Officer  Non-Qualified  Deferred  Compensation  Plan.  (Incorporated by
         reference to Exhibit  10.27 to Form 10-Q for the quarter  ended October
         31, 2003.)

10.25    Employment  Agreement  dated  October 21, 2002  between the Company and
         Richard Thalheimer. (Incorporated by reference to Exhibit 10.26 to Form
         10-Q for the quarter ended October 31, 2003.)

10.26    Amendment to the  Financing  Agreement  dated March 3, 2003 between the
         Company  and  the  CIT  Group/Business  Credit  Inc.  (Incorporated  by
         reference to Exhibit 10.28 to Form 10-Q for the quarter ended April 30,
         2003).

10.27    Loan and Security  Agreement dated October 31, 2003 between the Company
         and Wells Fargo  Retail  Finance,  LLC.  (Incorporated  by reference to
         Exhibit 10.1 to Form 10-Q for the quarter ended October 31, 2003).

23.1     Independent Auditors' Consent

31.1     Certification by Chief Executive  Officer pursuant to Rule 13a-14(a) or
         15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
         of 2002.

31.2     Certification by Chief Financial  Officer pursuant to Rule 13a-14(a) or
         15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
         of 2002.

32.1     Certification by Chief Executive Officer pursuant to Section 906 of The
         Sarbanes-Oxley Act of 2002.

32.2     Certification by Chief Financial Officer pursuant to Section 906 of The
         Sarbanes-Oxley Act of 2002.

                                                                              62