SHARPER IMAGE CORP, S-2, 1999-05-25

SHARPER IMAGE CORP
S-2, 1999-05-25
MISCELLANEOUS SHOPPING GOODS STORES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 25, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

SHARPER IMAGE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 94-2493558
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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650 DAVIS STREET
SAN FRANCISCO, CALIFORNIA 94111
(415) 445-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

JEFFREY P. FORGAN
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SHARPER IMAGE CORPORATION
650 DAVIS STREET
SAN FRANCISCO, CALIFORNIA 94111
(415) 445-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
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COPIES TO:

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SCOTT D. LESTER BRUCE K. DALLAS
BROBECK, PHLEGER & HARRISON LLP DAVIS POLK & WARDWELL
SPEAR TOWER, ONE MARKET 450 LEXINGTON AVENUE
SAN FRANCISCO, CALIFORNIA 94105 NEW YORK, NEW YORK 10017
(415) 442-0900 (212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If the registrant elects to deliver its latest annual report to security holders
or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this
form, check the following box. [ ]

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE (1)(2) REGISTRATION FEE
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Common stock, $0.01 par
value....................... 3,450,000 shares $9.8125 $33,853,125 $9,412
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(1) Includes 450,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.

(2) The price of $9.8125 per share, which was the average of the high and low
prices of the Registrant's common stock on The Nasdaq National Market on May
21, 1999, is set forth solely for the purposes of calculating the
registration fee in accordance with Rule 457(c) of the Securities Act of
1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.

SUBJECT TO COMPLETION

DATED MAY 25, 1999
PROSPECTUS

THE SHARPER IMAGE(R)

3,000,000 Shares

Common Stock
(Par value $0.01 per share)

The Sharper Image is offering 3,000,000 shares of its common stock.

The Sharper Image common stock is traded on the Nasdaq National Market under the
symbol "SHRP." On May 24, 1999, the reported last sale price of our common stock
was $9.25 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE SHARPER IMAGE
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Per Share $ $ $
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Total $ $ $
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The Sharper Image has granted the underwriters the right to purchase up to an
additional 450,000 shares of common stock to cover over-allotments. If the
over-allotment option is exercised in full, The Sharper Image will receive
proceeds of $ .

It is expected that delivery of the shares will be made to investors on or about
, 1999.

J.P. MORGAN & CO. U.S. BANCORP PIPER JAFFRAY

, 1999
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[PHOTOGRAPH OF SHARPER IMAGE DESIGN PRODUCT]
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[PHOTOGRAPHS OF EXTERIOR OF STORE, CATALOG AND WEBSITE]
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[PHOTOGRAPH OF INDIVIDUALS USING PRODUCTS]
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TABLE OF CONTENTS

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Prospectus Summary........................ 1
Risk Factors.............................. 5
Use of Proceeds........................... 12
Price Range of Common Stock............... 12
Dividend Policy........................... 12
Capitalization............................ 13
Selected Financial Information............ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 15
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Business.................................. 23
Management................................ 32
Principal Stockholders.................... 34
Description of Capital Stock.............. 36
Underwriting.............................. 38
Legal Matters............................. 40
Experts................................... 40
Where You Can Find More Information....... 40
Index to Financial Statements............. F-1
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-------------------------

You should rely only on the information contained or incorporated by reference
in this prospectus. To understand this offering fully, you should read this
entire prospectus carefully including the financial statements and notes. We
have included a brief overview of the most significant aspects of the offering
itself in the prospectus summary. However, individual sections of the prospectus
are not complete and do not contain all of the information that you should
consider before investing in The Sharper Image's common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference in this prospectus. This prospectus is an offer to
sell, or a solicitation of offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common stock.

-------------------------

We own or have rights to various copyrights, trademarks and trade names used in
our business. These include The Sharper Image(R), Wee-Bot(TM) Electronic Pet,
Personal Cooling System(TM), Turbo-Groomer(TM), Ionic Breeze(TM) Silent Air
Purifier, Steam Wizard(R), Power Tower(TM) 100 Motorized CD Rack, Shower
Companion(TM) Plus CD Player, Quiet Power(TM) Tie Rack, Voice Activated
Auto-Dialer(TM), Dreamlight(TM) Sound-Activated Light Show, Telephone with
TruthQuest(TM) Function, Ultra-Heart and Sound Soother(R), PowerFlow(TM) Height
Enhancing Insoles, AM/FM Companion(TM) with Smoke Alarm and the Ionic Hair Wand
II(TM). We also have registered Internet domain names as follows: sharperimage,
sharperimagehome, auctiongalleria, thesharperimage, sharperimagewoman,
sharperimagebest, sharperimageauction, tsimail, sharperimageawards,
sharperimagekids, sharperimagedesign. This prospectus also includes trademarks,
service marks and trade names of other companies.

EXCEPT AS OTHERWISE NOTED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

Except as otherwise noted, we present all financial and operational data on a
fiscal year and fiscal quarter basis. Our fiscal year ends on January 31. For
example, we refer to the year ended January 31, 1999 as "fiscal 1998" or "1998."
Our fiscal quarters end April 30, July 31 and October 31.

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PROSPECTUS SUMMARY

This is a summary, and, therefore, it may not contain all of the information
that may be important to you. For a more complete understanding of this
offering, we encourage you to read this entire document and the documents we
refer you to. You should read the following summary together with the more
detailed information and consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus. The words "Sharper
Image," "we," "ours," and "us" refer to Sharper Image Corporation, but not to
any of the underwriters.

THE SHARPER IMAGE

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, gift and other
categories. Our merchandising philosophy focuses on new and creative proprietary
Sharper Image Design products, Sharper Image private label products and branded
products, a portion of which we offer on an exclusive basis. Our products are
marketed and sold through three primary sales channels: The Sharper Image
stores, The Sharper Image catalog, and the Internet, primarily through our
sharperimage.com website. 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.

As of April 30, 1999, we operated 89 The Sharper Image stores in 27 states and
the District of Columbia, which generated 67% of our total revenues in 1998.
During 1998, we mailed approximately 41 million The Sharper Image catalogs to
over 6.5 million individuals. In addition to generating 29% of our total
revenues in 1998, The Sharper Image catalog serves as the primary advertising
vehicle for our stores. Our Internet revenues grew significantly in 1998 to $4.9
million from $1.6 million in 1997. Our total revenues for 1998 were $243.1
million, representing a 12% increase from $216.8 million in 1997.

COMPETITIVE ADVANTAGES

We believe that the following competitive advantages have contributed
significantly to our past success, and we intend to continue to capitalize on
these advantages in executing our growth strategy:

- - Strong brand name. We believe our unique merchandising and creative marketing
have made The Sharper Image one of the most widely recognized retail brands in
the United States. We continue to leverage our Sharper Image brand name by
increasing our proprietary product offerings, growing our online and catalog
businesses and opening new stores.

- - Proprietary Sharper Image Design products. In recent years, we have focused
significant resources on the design, development and marketing of our Sharper
Image Design products, which grew to 18% of total revenues in 1998 from 8% in
1997. We have developed and introduced over 35 new-to-market products in the
last three years, with 16 new-to-market products in the last year. Of our ten
best selling products during the 1998 Holiday shopping season, five were
Sharper Image Design products.

- - Unique product offering. The Sharper Image offers a unique assortment of new
and creative products in a variety of categories. Many of our products are
difficult to find elsewhere and are not easily replicated. Our merchandising
philosophy focuses on Sharper Image Design products, Sharper Image private
label products and branded products, a portion of which we offer on an
exclusive basis. We believe our merchandising strategy limits price shopping
and enhances our ability to achieve attractive margins.

- - Three synergistic retail sales channels. We offer our products through three
main sales channels: The Sharper Image stores, The Sharper Image catalog and
the Internet, primarily through our sharperimage.com website. We believe that
our three sales channels allow us to increase the visibility of our brand
name, leverage our existing infrastructure and experience in marketing, order
fulfillment and customer service and provide customers with increased shopping
flexibility and service.

- - Loyal customer base with attractive demographics. A cornerstone of our
business strength has been our attractive customer base of loyal, repeat
customers. These customers are typically high net worth men and women between
the ages of 35 and 55, with an average yearly income in excess of $100,000. We
have

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developed an internal database of over 10 million customer names. Our Internet
presence is broadening our customer base to include a younger audience that
shares our core customer demographics.

GROWTH STRATEGY

We believe that substantial opportunities exist to enhance our revenues and
profitability by implementing the following growth strategy:

- - Increase Sharper Image Design product offerings. A key element of our growth
strategy is to continue to increase our efforts to design, develop and market
innovative Sharper Image Design products that offer new features, are designed
to appeal to a broad customer base, and are sold at popular price points. Our
high quality proprietary products generally are unique and exclusive to the
Sharper Image, which limits price shopping. Sharper Image Design products
typically generate higher margins than our other products because they have
broad consumer appeal and are manufactured directly for The Sharper Image.

- - Increase Internet retail operations. Our goal is to offer our online
customers an interactive and entertaining experience similar to our Sharper
Image stores. We plan to substantially increase our Internet advertising and
marketing in an effort to increase our Internet sales. The success of our
online retail operations has been achieved to date with minimal incremental
investment in advertising and marketing. We believe our success has been a
result of our strong brand name, unique product offerings, demographically
attractive customer base and established order fulfillment and customer
service capabilities. We recently launched our Internet auction site as a key
component of our Internet strategy. We currently have marketing partnerships
with America Online, @Home, Catalog City, DoubleClick, Linkshare, Microsoft
Plaza, PC World Shopping and Yahoo! Shopping.

- - Broaden customer base. We believe that significant opportunities exist to
attract a broader customer base by:

c developing proprietary products at popular price points with broad
market appeal,

c offering products with wider functional appeal,

c developing more products that appeal to women, and

c expanding the demographic mix of our customers by reaching a younger
and broader audience.

- - Open new stores. We plan to continue to selectively open new stores in
premium locations in the United States. We currently intend to open four
stores during 1999, two of which have been opened to date. Each new store will
be configured in our new format, which we believe appeals to a broader
customer base and highlights our proprietary products.

Our principal executive offices are located at 650 Davis Street, San Francisco,
California 94111. Our telephone number is (415) 445-6000.

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THE OFFERING

COMMON STOCK OFFERED BY
THE SHARPER IMAGE.............. 3,000,000 shares

OVER-ALLOTMENT OPTION............... 450,000 shares

SHARES TO BE OUTSTANDING AFTER THE
OFFERING............................ 11,964,048 shares

USE OF PROCEEDS..................... For working capital and general corporate
purposes, including investments in our
Internet business and for expansion of our
distribution and fulfillment capacity.

NASDAQ NATIONAL MARKET SYMBOL....... "SHRP"

The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of April 30, 1999 and does not
include 339,460 shares of common stock issuable upon exercise of outstanding
stock options under our employee and non-employee director stock option plans at
a weighted average exercise price of $3.98 per share.

3
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SUMMARY FINANCIAL DATA AND OPERATING STATISTICS

The statements of operations data for the fiscal years ended January 31, 1999,
1998 and 1997 and balance sheet data as of January 31, 1999 have been derived
from the financial statements, which have been audited by Deloitte & Touche LLP,
independent auditors, included elsewhere in this prospectus. The statements of
operations data for the years ended January 31, 1996 and 1995 are derived from
audited financial statements not included in this prospectus.

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YEAR ENDED JANUARY 31,
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1999 1998 1997 1996 1995
Dollars in thousands, except per share data (FISCAL 1998) (FISCAL 1997) (FISCAL 1996) (FISCAL 1995) (FISCAL 1994)
STATEMENTS OF OPERATIONS DATA: ------------- ------------- ------------- ------------- -------------
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Revenues................................ $243,114 $216,815 $210,245 $204,184 $188,535
Gross margin(1)......................... 118,376 99,658 98,971 99,672 90,264
Provision for loss on the closure of the
SPA Collection division............... -- -- (8,000) -- --
Operating income (loss)................. 7,428 1,507 (6,928) 360 6,490
Earnings (loss) before income taxes..... 7,670 988 (7,241) 739 6,139
Net earnings (loss)..................... 4,602 593 (4,345) 444 3,683
Net earnings (loss) per share:
Basic................................. $ 0.54 $ 0.07 $ (0.53) $ 0.05 $ 0.44
Diluted............................... $ 0.51 $ 0.07 $ (0.53) $ 0.05 $ 0.41
Weighted average number of shares outstanding:
Basic................................. 8,532,588 8,303,425 8,260,208 8,249,259 8,294,378
Diluted............................... 9,072,832 8,537,032 8,260,208 8,682,078 8,899,289
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AS OF JANUARY 31, 1999
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Dollars in thousands ACTUAL AS ADJUSTED(2)
BALANCE SHEET DATA: ------------- --------------
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Cash and cash equivalents............................................................ $ 8,389
Working capital...................................................................... 16,003
Total assets......................................................................... 82,045
Long term notes payable.............................................................. 2,513
Stockholders' equity................................................................. 36,649
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YEAR ENDED JANUARY 31,
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1999 1998 1997 1996 1995
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996) (FISCAL 1995) (FISCAL 1994)
OPERATING STATISTICS: ------------- ------------- ------------- ------------- -------------
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Number of stores at year end.......... 87 85 82(3) 78(3) 74
Comparable store sales increase
(decrease).......................... 5.3% 1.1% (2.1)% 3.3% 17.8%
Annualized net sales per square
foot................................ $484 $465 $458 $473 $468
Number of catalogs mailed(4).......... 41,338,000 38,261,000 34,795,000 32,780,000 31,522,000
Number of catalog orders(4)(5)........ 547,000 408,000 465,000 536,000 426,000
Average revenue per transaction:
Stores.............................. $102 $104 $ 97 $106 $102
Catalog(4)(5)....................... $141 $158 $134 $122 $116
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(1) Gross margin represents net sales less cost of products.

(2) As adjusted gives effect to the sale of 3,000,000 shares of common stock
being sold by The Sharper Image in this offering.

(3) Excludes six and four SPA Collection stores at January 31, 1997 and 1996.

(4) This information pertains solely to The Sharper Image catalogs and excludes
specialty catalogs.

(5) Includes Internet transactions. Our Internet sales were $4,922,000,
$1,633,000 and $800,000 for the years ended January 31, 1999, 1998 and 1997,
respectively. Internet sales prior to February 1, 1996 were not material.

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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. This could cause a
decline in the trading price of our common stock, and you may lose all or part
of your investment.

This prospectus also contains "forward-looking" statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks described below and in the documents incorporated by
reference in this prospectus.

RISKS SPECIFIC TO THE SHARPER IMAGE

IF WE FAIL TO OFFER MERCHANDISE THAT OUR CUSTOMERS FIND ATTRACTIVE, OUR BUSINESS
AND OPERATING RESULTS WILL BE HARMED

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

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.

In addition, 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 peak selling seasons. Our future results would 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. 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 result in a negative effect on our business.

OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND
SEASONALITY

Our business is highly seasonal, reflecting the general pattern of peak sales
and earnings for the retail industry during the Holiday shopping season. A
substantial portion of our total revenues and all or most of our net earnings
occur during our fourth quarter ending January 31. During our 1998 and 1997
fiscal years, our total revenues for the fourth quarter ending January 31
accounted for more than 40% of total revenues for the full fiscal year. 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 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.

Our operating results during the other quarters of the year are generally lower
and we have historically experienced losses in these periods. It is likely that
we will experience similar losses in the future in these periods. 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.

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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 SUCCESS DEPENDS IN PART ON OUR ABILITY TO DESIGN, DEVELOP, OBTAIN AND TIMELY
DELIVER OUR PROPRIETARY PRODUCTS

We are increasingly dependent on the success of the proprietary products that we
design and develop for our customers. We must design and develop products that
meet the demands of our customers and manufacture these products
cost-effectively. We rely solely on our contract manufacturers, most of whom are
located in Asia, 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, currency fluctuations, work stoppages, and economic
uncertainties including inflation and foreign government regulations. If we are
unable to successfully design and develop or to obtain and timely deliver
sufficient quantities of these products, our operating results may be adversely
affected.

OUR INTERNET STRATEGY MAY NOT SUCCEED

Our growth strategy depends in substantial part on our ability to significantly
increase sales of our products over the Internet. We believe that, in order to
continue to grow our business and to achieve our goals, we need to market and
sell our products to our current customers and new customers through channels
other than store and catalog operations. We are pursuing opportunities to sell
our products over the Internet through our website sharperimage.com as well as
through Internet marketing partnerships with America Online, @Home, Catalog
City, DoubleClick, LinkShare, Microsoft Plaza, PC World Shopping and Yahoo!
Shopping. This is a new business and marketing strategy for us and involves
risks and uncertainties. We may not succeed in marketing our products over the
Internet. In addition, our Internet strategy will require us to significantly
increase our online advertising and marketing expenditures. If these
expenditures do not result in significant sales, our results of operations will
be adversely affected.

WE FACE RISKS ASSOCIATED WITH EXPANSION OF OUR STORE OPERATIONS

We plan to continue to increase the number of The Sharper Image stores in the
future in order to grow our revenues. Our ability to expand will depend in part
on the following factors:

- the availability of attractive store locations;

- our ability to negotiate favorable lease terms;

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

- general economic conditions; and

- the availability of sufficient funds for expansion.

As we continue to expand, we have started to and may continue to become
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, including 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, 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 additional financing
in excess of our current credit facility to be used for new store openings.
Furthermore, our current credit facility has various loan covenants we must
comply with in

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order to maintain the credit facility. We cannot predict with certainty that we
will be successful in obtaining additional funds or new credit facilities on
favorable terms or at all.

WE ARE DEPENDENT ON THE SUCCESS OF OUR ADVERTISING AND MARKETING EFFORTS

Our revenues depend in part on our ability to effectively market and advertise
our products through The Sharper Image catalog and other advertising vehicles.
Increases in advertising, paper costs or postage may limit our ability to
advertise without reducing our profitability. If we decrease our advertising
efforts due to increased advertising costs or for any other reason, our future
operating results may be materially adversely affected. We are also testing
other advertising media, such as television (infomercials) and are planning to
significantly increase advertising and marketing over the Internet. Expenditures
on these and other media are expected to increase, but may not produce a
sufficient level of sales to cover such expenditures, which would reduce our
profitability.

WE RELY ON OUR CATALOG OPERATIONS

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:

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

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

- our ability to cost-effectively add new customers; and

- our ability to cost-effectively design and produce appealing catalogs.

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. 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 and changes in our
merchandise mix, several 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.

OUR NEW BUSINESS LINES MAY NOT SUCCEED

In the past we have tested new lines of business that have not always proven
profitable. We continually examine and evaluate all sales channels for
profitability. We may decide to develop new business lines or to acquire
additional businesses in the future, and we cannot predict whether such efforts
will be successful. During 1998, we discontinued our test mailing of catalogs
for The Sharper Image Home Collection concept which we initiated in January
1996. Additionally, during 1997 we closed our SPA Collection division and
eliminated our SPA Collection catalog after critical evaluation of its operating
results and prospects. The failure of new business lines or acquisitions could
adversely affect our future results.

OUR CATALOG AND MERCHANDISE DELIVERY COSTS ARE UNPREDICTABLE

Historically, a significant portion of our revenues have been from purchases
made by customers from The Sharper Image catalog. Increases in the costs of
producing and distributing the catalog may reduce the profitability of our
catalog sales. Specifically, we may experience increases in postage, paper or
shipping costs due to factors beyond our control. As a result, our future
results may be adversely affected.

We maintain an annual contract that expires July 15, 1999 with a major package
carrier for the delivery of merchandise ordered through our catalog and the
Internet. Although we have no reason to believe that we will not be able to
renegotiate the contract, there can be no assurance that, once this contract
expires or is

7
<PAGE> 14

terminated, we will be able to negotiate similar or better terms with this major
carrier or another shipping company or that the resulting contract(s) will be on
terms favorable to us. Our inability to secure suitable or commercially
favorable contracts for the delivery of our merchandise could have an adverse
effect on our future results.

WE DEPEND ON OUR VENDORS' ABILITY TO TIMELY DELIVER SUFFICIENT QUANTITIES OF
PRODUCTS

Our performance depends on our ability to purchase our products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, 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 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. All products we purchase from 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 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.

Additionally, our relationships with our vendors are also subject to the risks
of relying on products manufactured outside the United States, including
political unrest and trade restrictions, work stoppages, economic uncertainties
including inflation, foreign government regulation and currency fluctuations.
Because 75% of our products were manufactured in various countries in Asia,
primarily China, during 1998, any significant disruption in any of these
countries may impair our ability to obtain sufficient quantities of products in
a timely manner.

WE FACE RISKS RELATING TO CUSTOMER SERVICE

Our ability to provide customer service depends, to a large degree, on the
efficient and uninterrupted operation of our two call centers, our contracting
services with third party call centers and our sharperimage.com website. Any
material disruption or slowdown in our order processing systems resulting from
labor disputes, telephone or Internet down times, electrical outages, mechanical
problems, human error or accidents, fire, earthquakes, natural disasters, or
comparable events could cause delays in our ability to receive orders by
telephone or over the Internet and distribute orders, and may cause orders to be
lost or to be shipped or delivered late. As a result, customers may be unable to
place orders, cancel orders or refuse to receive goods on account of late
shipments, which would result in a reduction of net sales and could mean
increased administrative and shipping costs. We cannot assure you that telephone
call volumes will not exceed our present telephone system capacity. If this
occurs, we could experience telephone answer delays and delays in placing
orders. Because our strategies depend in part on maintaining our reputation for
superior levels of customer service, any impairment of our customer service
reputation could have an adverse effect on our business.

WE FACE RISKS ASSOCIATED WITH OUR DISTRIBUTION AND FULFILLMENT OPERATIONS

We conduct all of our distribution operations and all of our catalog and
Internet order processing fulfillment functions from a single facility in Little
Rock, Arkansas. We also use contract warehouse facilities for additional
seasonal requirements. Any disruption in the operations at the distribution
center, particularly during the Holiday shopping season, could have a negative
effect on our business. 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 facility, 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.

8
<PAGE> 15

RESULTS FOR OUR COMPARABLE STORE SALES MAY FLUCTUATE

Our comparable store sales are affected by a variety of factors, including,
among others:

- customer demand in different geographic regions;

- our ability to efficiently source and distribute products;

- changes in our product mix;

- effects of competition; and

- general economic conditions.

Our comparable store sales have fluctuated significantly in the past and we
believe that such fluctuations may continue.

Our results are not necessarily indicative of future results, and we cannot
assure you that our comparable store sales results will not decrease in the
future. Any changes in our comparable store sales results could affect our
future operating performance and cause the price of our common stock to
fluctuate.

WE EXPERIENCE INTENSE COMPETITION IN THE RAPIDLY CHANGING RETAIL MARKETS

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 a greater inventory availability. If we experience
increased competition, our business and operating results could be adversely
affected.

The United States retail industry, and the specialty retail industry in
particular, is dynamic in nature and has undergone significant changes over the
past several years. Our ability to anticipate and successfully respond to
continuing challenges is critical to our long term growth.

WE MAY BE SUBJECT TO REGULATIONS REGARDING STATE SALES AND USE TAX ON CATALOG
AND INTERNET SALES AND OTHER INTERNET REGULATION

Our business may be affected by the adoption of regulations or rules governing
the sale of our products, with regard to state sales and use taxes and the
regulation of the Internet. Because we have broad store presence, we are
currently required to collect taxes for the majority of our catalog and Internet
transactions. However, any unfavorable change in the state sales and use taxes
which affects our catalog and Internet sales could adversely affect our business
and results of operations. In addition, the Internet at present is largely
unregulated and we are unable to predict whether significant regulations or
taxes will be imposed on Internet commerce in the near future. We are unable to
predict how such regulations could affect the further development of our
Internet business.

POOR ECONOMIC CONDITIONS MAY HURT OUR BUSINESS

Certain economic conditions that affect the level of consumer spending on our
products include the following:

- general business conditions;

- interest rates;

- taxation; and

- consumer confidence in future economic conditions.

Our business could be negatively affected by a recession or poor economic
conditions and any related decline in consumer demand for discretionary items
such as our products. Because we purchase merchandise from foreign entities and
use foreign manufacturers on a contract basis for Sharper Image Design products
and other private label products, we are subject to risks resulting from
fluctuations in the economic conditions in foreign countries. The majority of
our vendors and manufacturers are located in various countries in Asia, and as a
result, our business may be particularly impacted by changes in the political,
social, legal, and economic

9
<PAGE> 16

conditions in these countries. Additionally, weather and product transportation
problems could affect our ability to maintain adequate inventory levels and
adversely affect our future results.

WE DEPEND ON OUR KEY PERSONNEL

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. We maintain key man life insurance on Mr. Thalheimer in
the amount of $15 million. In addition, our performance will depend upon our
ability to attract and retain qualified management, merchandising and sales
personnel. There can be no assurance that Mr. Thalheimer and the other 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.

EXCESSIVE MERCHANDISE RETURNS COULD HARM OUR BUSINESS

As part of our customer service commitment, we maintain a liberal merchandise
return policy which allows customers to return most merchandise. We make
allowances for returns of 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 the
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 adversely affect 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. Although we maintain limited products liability
insurance, if any successful products liability claim is not covered by or
exceeds our insurance, our business, results of operation 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 and to incur
significant litigation costs and expenses.

FAILURE OF OUR COMPUTER SYSTEMS OR OUR BUSINESS PARTNERS' COMPUTER SYSTEMS TO
RECOGNIZE THE YEAR 2000 COULD NEGATIVELY AFFECT OUR BUSINESS

We recognize that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. We have assessed our computer and business
processes and we are reprogramming our computer applications to provide for
their continued functionality. We are currently assessing the readiness of our
vendors and other third parties with which we interface.

We are presently unable to assess the likelihood that we will experience
operational problems due to unresolved Year 2000 problems of third parties with
whom we do business. We cannot assure you that other entities will achieve
timely Year 2000 compliance; and if they do not, Year 2000 problems could have
an adverse effect on our operations. Where commercially reasonable to do so, we
intend to assess our risks with respect to failure by third parties to be Year
2000 compliant and to seek to mitigate those risks. If we cannot achieve such
mitigation, Year 2000 problems could have an adverse effect on our operations.

Our estimated remediation cost for this project is between $400,000 and
$600,000, and is being funded through operating cash flows. We will incur
operating costs related to Year 2000 compliance projects over several quarters
and we will expense such costs as incurred. Through January 31, 1999, we have
incurred expenses totaling approximately $300,000 on work related to Year 2000
compliance.

10
<PAGE> 17

However, we cannot assure you that these estimates will be achieved, and actual
results could differ materially from these estimates. Specific factors that
might cause such material differences include, but are not limited to the
following:

- the availability and cost of personnel trained in Year 2000 remediation
work;

- the ability to locate and correct all computer codes;

- our vendors and suppliers success in reaching Year 2000 readiness; and

- the timely availability of necessary replacement items.

We presently believe that the most reasonably likely worst-case scenarios that
we might confront with respect to Year 2000 issues have to do with third parties
not being Year 2000 compliant. We are presently evaluating vendor and customer
compliance and will develop contingency plans, such as alternate vendor
opportunities, after obtaining compliance evaluations. We intend to develop
contingency plans by September 1999.

RISKS SPECIFIC TO THE OFFERING

WE ARE CONTROLLED BY A SINGLE STOCKHOLDER

As of April 15, 1999, Richard Thalheimer beneficially owned approximately 55.1%
(41.5% upon completion of the offering) of all of the outstanding shares of the
common stock of our company. As a result, Mr. Thalheimer will continue to exert
substantial influence over the election of directors and over our corporate
actions.

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. Additionally, as our Internet business
grows, we may become increasingly subject to stock price fluctuations associated
with companies operating in the Internet sector. We believe that among other
factors, any of the following factors could cause the price of the common stock
to fluctuate substantially:

- quarterly fluctuations in our comparable store sales;

- announcements by other accessory and gift item retailers;

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

- general economic conditions; and

- financial market conditions.

OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE A TAKEOVER 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 contain certain provisions that 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.

11
<PAGE> 18

USE OF PROCEEDS

The net proceeds to The Sharper Image from the sale of 3,000,000 shares of the
common stock offered by The Sharper Image, after deducting underwriting
discounts and commissions and estimated expenses payable by us, are estimated to
be approximately $ million, or ($ million if the underwriter's over-allotment
option is exercised in full). The Sharper Image intends to use the net proceeds
of the offering for working capital and for general corporate purposes,
including investments in our Internet business and for expansion of our
distribution and fulfillment capacity. Pending use of the net proceeds, we will
invest the net proceeds in short-term investment grade securities.

PRICE RANGE OF COMMON STOCK

Our shares of common stock are traded on the Nasdaq National Market System under
the symbol "SHRP." The prices set forth below represent reported last sale
prices of our common stock.

<TABLE>
<CAPTION>
----------------
HIGH LOW
----------------
<S> <C> <C>
FISCAL 1997
First Quarter............................................... $ 4 1/2 $ 3 1/8
Second Quarter.............................................. 4 2 7/8
Third Quarter............................................... 3 13/16 2 13/
Fourth Quarter.............................................. 4 1/4 3
FISCAL 1998
First Quarter............................................... $ 8 1/4 $ 4 1/16
Second Quarter.............................................. 7 15/16 4 7/8
Third Quarter............................................... 5 3/8 2 21/
Fourth Quarter.............................................. 21 3/16 3 13/
FISCAL 1999
First Quarter............................................... $17 $ 9 15/16
Second Quarter through May 24, 1999......................... 11 9 1/4
</TABLE>

On May 24, 1999, the reported last sale price of our common stock was $9.25. As
of April 30, 1999, there were approximately 447 holders of record of our common
stock.

DIVIDEND POLICY

We have not paid any dividends since our inception. We currently intend to
retain any earnings for use in developing and growing our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Additionally, our revolving secured credit facility with our current
lender contains limitations on dividend payments.

12
<PAGE> 19

CAPITALIZATION

The following table sets forth our capitalization and certain other information
as of January 31, 1999 (a) on an actual basis and (b) on an as adjusted basis to
give effect to the issuance of the common stock offered by The Sharper Image
(assuming no exercise of the underwriters' over-allotment option), as described
under "Use of Proceeds." This table should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
----------------------
AS OF JANUARY 31, 1999
----------------------
ACTUAL AS ADJUSTED
Dollars in thousands ------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $ 8,389 $
======= =======

Long-term obligations....................................... $ 2,513 $ 2,513
------- -------

Stockholders' equity:
Preferred Stock, $.01 par value; authorized 3,000,000
shares; no shares issued and outstanding.................. -- --
Common Stock, $.01 par value; authorized 25,000,000 shares;
issued and outstanding, 8,916,995 shares (actual) and
11,916,995 shares (as adjusted)(1)........................ 89 119
Additional paid in capital.................................. 12,589
Retained earnings........................................... 23,971 23,971
------- -------
Total stockholders' equity................................ 36,649
------- -------
Total capitalization...................................... $39,162 $
======= =======
</TABLE>

- -------------------------
(1) As of April 30, 1999, excludes 339,460 shares of common stock issuable
pursuant to outstanding employee stock options under our employee and
non-employee director stock option plans at a weighted average exercise price of
$3.98 per share. See Note G of Notes to Financial Statements.

13
<PAGE> 20

SELECTED FINANCIAL DATA

The following selected financial data is qualified by reference to and should be
read in conjunction with the financial statements and related notes thereto
appearing elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected statements of
operations data for the fiscal years ended January 31, 1999, 1998 and 1997 and
balance sheet data as of January 31, 1999 and 1998 are derived from financial
statements, which have been audited by Deloitte & Touche LLP, independent
auditors, included elsewhere in this prospectus. The statements of operations
data for the years ended January 31, 1996 and 1995 and the balance sheet data as
of January 31, 1997, 1996 and 1995 are derived from audited financial statements
not included in this prospectus.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA (FISCAL 1998) (FISCAL 1997) (FISCAL 1996) (FISCAL 1995) (FISCAL 1994)
STATEMENTS OF OPERATIONS DATA ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues................................. $243,114 $216,815 $210,245 $204,184 $188,535
Gross margin(1).......................... 118,376 99,658 98,971 99,672 90,264
Provision for loss on the closure of the
SPA Collection division................ -- -- (8,000) -- --
Operating income (loss).................. 7,428 1,507 (6,928) 360 6,490
Earnings (loss) before income taxes...... 7,670 988 (7,241) 739 6,139
Net earnings (loss)...................... 4,602 593 (4,345) 444 3,683
Net earnings (loss) per share --
Basic.................................. $ 0.54 $ 0.07 $ (0.53) $ 0.05 $ 0.44
Diluted................................ $ 0.51 $ 0.07 $ (0.53) $ 0.05 $ 0.41
Weighted average number of shares
outstanding:
Basic.................................. 8,532,588 8,303,425 8,260,208 8,249,259 8,294,378
Diluted................................ 9,072,832 8,537,032 8,260,208 8,682,078 8,899,289
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------------
AS OF JANUARY 31,
--------------------------------------------------------------
Dollars in thousands 1999 1998 1997 1996 1995
BALANCE SHEET DATA ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 8,389 $ 3,501 $10,873 $12,476 $18,193
Working capital........................ 16,003 11,633 9,429 17,233 23,011
Total assets........................... 82,045 78,662 78,804 70,456 64,036
Long term notes payable................ 2,513 3,299 4,245 3,355 838
Stockholders' equity................... 36,649 29,156 28,449 32,758 32,792
</TABLE>

- ---------------

(1) Gross margin represents net sales less cost of products.

14
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and our Financial Statements and the related Notes
thereto which are included elsewhere in this prospectus.

OVERVIEW

During fiscal 1998, our total revenues increased to $243.1 million from $216.8
million for fiscal 1997 and $210.2 million for fiscal 1996. Gross margins
increased to 49.0% for fiscal 1998 from 46.3% for fiscal 1997. The Sharper Image
stores generated approximately 67% of our total revenues in fiscal 1998. In
fiscal 1998, our catalog operations contributed approximately 29% of our total
revenues, and we mailed approximately 41 million Sharper Image catalogs during
fiscal 1998. The newest sales and marketing channel for The Sharper Image is our
Internet retail operations, which generated approximately $4.9 million, or 2.0%,
of our total revenues for fiscal 1998, as compared to $1.6 million for fiscal
1997. Net earnings for fiscal 1998 increased to $4.6 million from $0.6 million
during fiscal 1997. Comparable store sales increased 5.3% and catalog sales
increased 20.4% for fiscal 1998.

In recent years, we have focused significant resources on the development and
marketing of our Sharper Image Design products and Sharper Image private label
products, which are exclusive to The Sharper Image. Sharper Image Design
products typically generate higher sale margins than our other products and, we
believe, broaden our customer reach. During the last three years, we have
developed and introduced over 35 new-to-market Sharper Image Design products, 16
of which were introduced in fiscal 1998. Of our ten best selling products during
the fiscal 1998 Holiday shopping season, five products were Sharper Image Design
products. We have increased the percentage of our sales attributable to Sharper
Image Design products to 18% in fiscal 1998 from 8% in fiscal 1997. This
increase contributed significantly to the 2.7 percentage point improvement in
our gross margin during fiscal 1998 over fiscal 1997. One of our key strategic
goals is to continue to increase the proportion of our sales derived from
Sharper Image Design products.

As of January 31, 1999, we operated 87 The Sharper Image stores in 27 states and
the District of Columbia, and our licensees operated six stores internationally
and two airport stores in the United States. During the past three fiscal years,
we have opened an average of four to six The Sharper Image stores each year.
During fiscal 1998, we opened four new stores, and closed two stores at the
maturity of their leases. In January 1997, we closed the SPA Collection
division, including several SPA stores, and incurred a one-time charge of $8.0
million related to the closing. We are currently planning to open four new The
Sharper Image stores during fiscal 1999, two of which were opened as of April
30, 1999.

In addition to our store and catalog operations, we market and sell our products
over the Internet, primarily through our sharperimage.com website, which was
established in 1995. Internet sales were $4.9 million for fiscal 1998, a 201%
increase from $1.6 million during fiscal 1997. We believe that the Internet will
continue to provide The Sharper Image with a significant marketing and sales
opportunity. We plan to devote an increasing amount of resources to the
continued development of our Internet operations, including advertising and
marketing and enhancing the technical capabilities of our website and entering
into strategic relationships with major Internet companies.

15
<PAGE> 22

RESULTS OF OPERATIONS

The following table sets forth the results of operations expressed as a
percentage of total revenues for the periods indicated.

COSTS AND EXPENSES:
Cost of products.................................. 50.6 53.3 51.8
Buying and occupancy.............................. 10.8 11.0 11.4
Advertising and promotion......................... 11.2 10.5 12.2
General, selling, and administrative.............. 24.3 24.5 24.1
Provision for loss due to closure of SPA
Collection division............................ -- -- 3.8
----- ----- -----

OPERATING INCOME (LOSS)............................. 3.1 0.7 (3.3)
Other income (expense).............................. 0.1 (0.2) (0.2)
----- ----- -----
EARNINGS (LOSS) BEFORE
INCOME TAX (BENEFIT).............................. 3.2 0.5 (3.5)
Income tax (benefit)................................ 1.3 0.2 (1.4)
----- ----- -----
NET EARNINGS (LOSS)................................. 1.9% 0.3% (2.1)%
===== ===== =====
</TABLE>

The following table sets forth the components of total revenues for the periods
indicated.

16
<PAGE> 23

Comparison of years ended January 31, 1999, 1998 and 1997.

Net Sales. Net sales of $241,507,000 for 1998 increased $26,314,000, or 12.2%,
from the prior fiscal year. Returns and allowances as a percentage of sales were
11.4% for 1998, compared to 12.2% for 1997. Net store sales increased
$10,782,000, or 7.1%, net catalog sales increased $11,978,000, or 20.4%, net
Internet sales increased $3,289,000, or 201%, and net wholesale sales increased
$265,000, or 8.3%, as compared to 1997. Management believes that the
introduction of new Sharper Image Design products was key to the achievement of
the growth in total net sales.

The increase in net store sales for 1998 was primarily attributable to a
comparable store sale increase of 5.3% over the prior year consisting of an 8.7%
increase in total store transactions, partially offset by a 1.3% decrease in
average revenue per transaction. Also contributing to the increase was the 1998
opening of four new stores and annualized sales of six stores opened in 1997,
partially offset by the 1998 closing of two stores at the maturity of the store
leases. Net sales per average square foot increased to $484 for 1998, compared
to $465 in 1997 and $458 in 1996.

Net catalog sales were positively affected by an increase of 34.7% in total
catalog orders partially offset by a 10.6% decrease in average revenue per
order. The increase in catalog orders was partially attributable to advertising
campaigns in major consumer magazines and newspapers. We believe that the 8.0%
increase in the number of catalogs and catalog pages circulated for The Sharper
Image catalog during 1998 also contributed to increases in net store sales and
comparable store sales.

Our Internet sales increased to $4.9 million in 1998 from $1.6 million in 1997.
1998 experienced a 139.1% increase in Internet orders and a 26.1% increase in
average revenue per transaction from 1997. The threefold increase in sales
reflects the increase in the number of online shoppers and our commitment to
grow our online retailing business. Our website at sharperimage.com regularly
undergoes design and technology enhancements to provide shoppers with easy and
fun shopping experiences. Although we were at the forefront of electronic
shopping and activated our website in late 1995, Internet sales in 1996 were
minimal due to the newness of the online retailing industry. Internet sales
increased 94% to $1.6 million in 1997, primarily due to Internet industry
growth, continual improvements to our website and increased marketing emphasis.

Net wholesale sales increased $264,000, or 8.3% for 1998, primarily due to the
increased sales of our Sharper Image Design products.

Net sales of $215,193,000 for 1997 increased $7,423,000, or 3.6%, from 1996.
Returns and allowances as a percentage of sales were 12.2% for 1997, compared to
12.3% for 1996. Net store sales increased $2,268,000, or 1.5%, comparable store
sales increased 1.1%, net catalog sales increased $5,195,000, or 9.7%, and net
wholesale sales decreased $830,000, or 20.6% as compared to 1996.

The increase in net store sales for 1997 was primarily attributable to the
addition of six stores opened during the year. The increase in net store sales
also reflected a 7.2% increase in average revenue per transaction, to $104 from
$97, and a 4.6% decrease in total store transactions. Management believes the
increase in net sales partially resulted from new product introductions,
including an increased selection of Sharper Image Design products and improved
inventory management during the second half of the year.

Net catalog sales in 1997 were positively affected by an increase in Sharper
Image catalog average revenue per order to $183 from $140, advertising campaigns
in major consumer magazines and newspapers, a 10.0% increase in the number of
Sharper Image catalogs circulated, and a twofold increase in the number of
catalogs circulated for the test concept Sharper Image Home Collection. We
believe that the increase in the number of catalogs and catalog pages circulated
for The Sharper Image catalog during 1997 also contributed to the increases in
net store sales and comparable store sales.

Net wholesale sales decreased $830,000, or 20.6% for 1997, primarily due to a
decrease in the number of products offered to wholesale customers both in the
U.S. and internationally.

For the purpose of determining comparable store sales, comparable stores are
defined as those stores which were open during the entire comparable month of
the previous year and are compared monthly for purposes of this analysis.
Inflationary effects are not considered significant to the growth of sales.

Cost of Products. Cost of products increased $7,596,600, or 6.6%, in 1998 from
1997. The increase was primarily related to increase in net sales. The increase
in cost of sales was lower than the increase in sales,

17
<PAGE> 24

reflecting the beneficial impact of the higher gross margin rate produced during
1998. The gross margin rate for 1998 was 49.0%, compared to 46.3% for 1997. The
higher gross margin rate reflected an increase in the sales of Sharper Image
Design products to 18% of total revenue from 8% for the prior fiscal year. These
propriety products generally carry higher margins.

Cost of products increased $6,736,000, or 6.2%, in 1997 from 1996. The increase
was primarily related to increases in net sales and the higher cost of products;
related to the merchandise mix. The gross margin rate for 1997 was 46.3%,
compared to 47.6% for 1996. The lower gross margin rate reflected an increase in
sales of lower margin products, such as certain state-of-the-art electronic
items and games, partially offset by an increase in The Sharper Image Design
products.

Our gross margin rate fluctuates with the changes in our merchandise mix, which
is affected by new items available in various categories. The variation in
merchandise mix from category to category and from year to year reflects the
characteristic that Sharper Image is driven by individual products, as opposed
to general lines of merchandise. It is impossible to predict future gross margin
rates although our goal is to continue to increase the sales of Sharper Image
Design products and other exclusive private label products, as these products
generally carry higher margins. The popularity of these proprietary products
contributed to the 2.7 percentage point increase in the gross margin rate for
1998, and is expected to continue to have a positive impact on our gross margin
rate.

Buying and Occupancy. Buying and occupancy expenses increased $2,249,000, or
9.4%, in 1998 from 1997. The increase primarily reflects a full year of
occupancy cost of six new stores opened during 1997 and the cost of four new
stores opened in 1998, partially offset by the 1998 closure of two stores at
their lease maturity.

Buying and occupancy expenses decreased $63,000, or 0.3%, in 1997 from 1996. The
decrease primarily reflected lower buying costs and lower occupancy costs
associated with the closure of the SPA Collection division and the elimination
of the cost of two closed Sharper Image stores, partially offset by a full year
of occupancy cost of eight new stores opened during 1996 and the cost of six new
stores opened in 1997.

Advertising and Promotion. Advertising and promotion expenses for 1998 increased
$4,601,000, or 20.2%, from 1997. The increase was primarily due to an 8.0%
increase in the number of Sharper Image catalogs mailed and an 11.6% increase in
the number of pages circulated, as compared with 1997. Other costs, such as
advertising campaigns in major consumer magazines and newspapers, infomercials
and development of Internet marketing also contributed to the increased expenses
in 1998. The increase was partially offset by the 51.3% decrease in mailings of
the test concept Sharper Image Home Collection catalog. The test mailings of the
Home Collection catalog were discontinued in 1998. We are currently evaluating a
test of Home Collection products on the Internet.

Advertising and promotion expenses for 1997 decreased $2,941,000, or 11.4%, from
1996. The decrease was primarily due to lower consumer magazine and newspaper
advertising and the elimination of the SPA Collection catalog, partially offset
by a 10% increase in the number of Sharper Image catalogs mailed and a 3%
increase in the number of pages circulated, along with the twofold increase in
mailings of the test concept Sharper Image Home Collection catalog.

While The Sharper Image catalog serves as the primary source of advertising for
our retail stores and mail order business, we continually evaluate our
advertising strategies to maximize the effectiveness of our advertising
programs. We plan to expand our advertising for our online business as well as
our use of infomercials.

General, Selling, and Administrative. General, selling, and administrative
(GS&A) expenses for 1998 increased $5,932,000, or 11.2%, from 1997, primarily
due to increases in overall selling expenses related to the increase in net
sales and related additional administrative support costs. The increase was
partially offset by the improvement in net delivery income related to mail order
shipments.

GS&A expenses for 1997 increased $2,403,000, or 4.7%, from 1996, primarily due
to increases in overall selling expenses related to the increase in net sales
and higher net delivery expense related to mail-order shipments and certain
additional administrative support costs, which were partially offset by the
elimination of costs related to the closure of the SPA Collection division.

Other Income (Expense). Other income, net, for 1998 increased $761,000 from
1997, reflecting the gain on sale of certain equipment.

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<PAGE> 25

Net other expense for 1997 increased $206,000 from 1996. The increase in other
expense is primarily due to an increase in interest expense related to
borrowings on our credit facility, and a decrease in interest income from
available cash.

Income Taxes. The effective tax rate for 1998, 1997, and 1996 was 40.0%. 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 consolidated 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.

QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY

The following sets forth quarterly financial information for the periods
indicated.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
QUARTER ENDED
---------------------------------------------------------------------------------------------------
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, JANUARY 31, OCTOBER 31, JULY 31, APRIL 30,
Dollars in thousands except 1999 1998 1998 1998 1998 1997 1997 1997
per share amounts ----------- ----------- -------- --------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $110,876 $42,955 $49,532 $39,751 $96,096 $41,106 $43,340 $36,273
Expenses
Cost of products......... 54,204 22,404 25,780 20,743 50,385 22,115 23,472 19,563
Buying and occupancy..... 7,158 6,397 6,261 6,337 6,468 5,946 5,783 5,707
Advertising and
promotion.............. 11,074 4,906 6,904 4,512 10,498 4,036 4,715 3,546
General, selling and
administrative....... 22,692 12,285 12,383 11,646 18,885 11,429 11,739 11,021
Other income (expense)..... (22) 603 (176) (163) (158) (198) (118) (45)
Earnings (loss) before
income tax (benefit)..... 15,726 (2,434) (1,972) (3,650) 9,702 (2,618) (2,487) (3,609)
Income tax (benefit)....... 6,291 (974) (789) (1,460) 3,880 (1,047) (995) (1,443)
Net earnings (loss)........ $ 9,435 $(1,460) $(1,183) $(2,190) $ 5,822 $(1,571) $(1,492) $(2,166)
Net earnings (loss) per
share --
Basic(1)................. $ 1.08 $ (0.17) $ (0.14) $ (0.26) $ 0.70 $ (0.19) $ (0.18) $ (0.26)
Diluted(2)............... $ 0.98 $ (0.17) $ (0.14) $ (0.26) $ 0.67 $ (0.19) $ (0.18) $ (0.26)
</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 equal the earnings per share for the full fiscal year.

Our business is highly seasonal, reflecting the general pattern associated with
the retail industry of peak sales and earnings during the Holiday shopping
season. The secondary peak period for us is June, reflecting the gifting for
Father's Day and graduations. A substantial portion of our total revenues and
all or most of our net earnings occur in the fourth quarter ending January 31.
We generally experience lower revenues and earnings during the other quarters
and, as is typical in the retail industry, have incurred and may continue to
incur losses in these quarters. The results of operations for these interim
periods are not necessarily indicative of the results for the full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 1999, we had cash and equivalents of $8,389,000, an increase of
$4,888,000, as compared to $3,501,000 at January 31, 1998. During 1998, we met
our short-term liquidity needs and our capital requirements with available cash,
cash flow provided by operations, trade credit, and the revolving and term
loans. The increase in cash reflected the highest fourth quarter revenues and
earnings in our history. At January 31, 1999, we had no amounts outstanding on
our revolving loan credit facility. The highest amount of

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<PAGE> 26

direct borrowings under the revolving loan credit facility during 1998 was
$14,288,000, compared with $14,672,000 in 1997. Letter of credit commitments
outstanding at January 31, 1999 and 1998 were $4,108,000 and $2,321,000,
respectively.

We have a revolving secured credit facility with The CIT Group/Business Credit,
Inc. which expires in September 2003. The credit facility has been amended on
several occasions and, as of January 31, 1999, the agreement allows borrowings
and letters of credit up to a maximum of $30 million for the period from October
1, 1999 through December 31, 1999, and up to $20 million at other times of the
year based on inventory levels. The credit facility is secured by our inventory,
accounts receivable, general intangibles and certain other assets. Borrowings
under this facility bear interest at either prime plus 0.25% per year or at
LIBOR plus 2.25% per year, but may change based on our financial performance.
The credit facility contains certain financial covenants pertaining to interest
coverage ratio and net worth and contains limitations on operating leases, other
borrowings, dividend payments and stock repurchases. For the fiscal year ended
January 31, 1999, we were in compliance with all covenants. The credit facility
allows for seasonal borrowings of up to $30 million for the period October 1
through December 31, 1999 increasing by $1 million for this period in each of
the three subsequent years.

In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans currently bear interest at a variable rate of either prime
plus 0.50% per year or at LIBOR plus 2.50% per year, but may change based on our
financial performance. Each Term Loan is to be repaid in 36 equal monthly
principal installments. At January 31, 1999, notes payable included a $500,000
Term Loan which bears interest at a variable rate of prime plus 0.50%, provides
for monthly principal payments of $55,555 plus the related interest payment, and
matures in October 1999.

At January 31, 1999, notes payable included a $2,648,000 mortgage loan
collateralized by our distribution center. This note bears interest at a fixed
rate of 8.40%, provides for monthly payments of principal and interest in the
amount of $29,367, and matures in January 2011.

Our merchandise inventory at January 31, 1999 was approximately 5.6% lower than
the prior fiscal year. The decrease in inventory reflected our higher than
planned increase of 15.4% in total net sales for the quarter ended January 31,
1999 as compared with the same quarter in 1998.

We lease all of our offices, stores, and seasonal warehouse space. During the
fiscal year ended January 31, 1999, we opened four Sharper Image stores located
in Orlando, Florida; King of Prussia, Pennsylvania; West Nyack, New York; and
Towson, Maryland. We closed two Sharper Image stores located in Escondido,
California and Gurnee Mills, Illinois.

We are currently planning to open four new Sharper Image stores during 1999, two
of which have been opened as of April 30, 1999. Total capital expenditures
estimated for new and existing stores, corporate headquarters and the existing
distribution center for 1999 are between $7 million and $8 million. We believe
that we will be able to fund our cash needs for at least the next 12 months
through internally generated cash, trade credit, the credit facility and the
proceeds of this offering.

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 rose 0.8% (10% from the bank's reference rate) as of
January 31, 1999, our results from operations and cash flows would not be
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 to manage market risks.

We enter into a significant amount of purchase obligations outside of the U.S.
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.

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<PAGE> 27

YEAR 2000 COMPLIANCE

We recognize that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of many systems to recognize the date change from
December 31, 1999 to January 1, 2000. The Year 2000 issue could result, at The
Sharper Image and elsewhere, in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in other normal business activities. We
have assessed our computer and business processes and are reprogramming our
computer applications to provide for their continued functionality. An
assessment of the readiness of the external entities with which we interface is
ongoing.

In 1996, we developed a detailed Year 2000 Conversion Project Plan (Plan) to
address the methods to correct possible disruptions of operations due to the
Year 2000 issue. The Plan took into consideration the following items: (1)
identification and inventorying of hardware, application software, and equipment
utilizing programmable logic chips to control aspects of their operation, with
potential Year 2000 problems; (2) assessment of scope of Year 2000 issues for,
and assigning priorities to, each item based on its importance to our
operations; (3) remediation of Year 2000 issues in accordance with assigned
priorities, by correction, upgrade, replacement or retirement; (4) testing for
and validation of Year 2000 compliance; and, (5) determination of key vendors
and customers and their Year 2000 compliance. Because we use a variety of
information technology systems, internally-developed and third-party provided
software and embedded chip equipment, depending on business function and
location, various aspects of our Year 2000 efforts are in different phases and
are proceeding in parallel. At this time, the difficult and time consuming task
of identifying and inventorying hardware and application software with Year 2000
issues and developing specific strategies for compliance has been completed. The
assessment process of internal operating systems is complete, with critical
applications being determined, planned for, and outlined. Our main operating
system and hardware have been upgraded for Year 2000 compliance, with all
application conversion work nearing completion. Non-critical system conversions
have been identified and scheduled for completion by June 1999. This conversion
process encompasses all areas of our operations, from verification of the Year
2000 compliance of the software accounting packages, to e-mail systems, to
telephone systems. Based upon a detailed review and update of the Plan performed
in January 1999, conversion of all our programs is expected to be completed with
full implementation by June 1999. In addition, a systemwide test will be
completed by September 1999 to simulate the rollover to January 1, 2000, to
ensure all critical systems supporting the business will remain operational.

Our operations are also dependent on the Year 2000 readiness of third parties
that do business with us. In particular, our information technology systems
interact with commercial electronic transaction processing systems to handle
customer credit card purchases and other point of sale transactions, and we are
dependent on third-party suppliers of such infrastructure elements as telephone
services, electric power, water, and banking facilities. We do not depend to any
significant degree on any single merchandise vendor or upon electronic
transaction processing with individual vendors for merchandise purchases. The
Plan includes identifying and initiating formal communications with key third
parties and suppliers and with significant merchandise vendors to determine the
extent to which we will be vulnerable to such parties' failure to resolve their
own Year 2000 issues. Although we have not been put on notice that any known
third party problem will not be resolved, we have limited information and no
assurance of additional information concerning the Year 2000 readiness of third
parties. The resulting risks to our business are very difficult to assess.

Through January 31, 1999 we have incurred expenses totaling approximately
$300,000 on work related to Year 2000 compliance. The estimated cost for this
project is between $400,000 and $600,000, and is being funded through operating
cash flows. The total estimated cost for this project includes a provision for
the potential costs associated with third party vendor or supplier failures.
Operating costs related to Year 2000 compliance projects will be incurred over
several quarters and will be expensed as incurred.

Based upon the planning and conversions completed to date, we believe that, with
modifications to existing software, conversions to new software, and appropriate
remediation of embedded chip equipment, the Year 2000 issue is not reasonably
likely to pose significant operational problems for our information technology
systems and embedded chip equipment as so modified and converted.

We are presently unable to assess the likelihood that we will experience
operational problems due to unresolved Year 2000 problems of third parties with
whom we do business. There can be no assurance that other entities will achieve
timely Year 2000 compliance; if they do not, Year 2000 problems could have a
material impact on

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<PAGE> 28

our operations. Where commercially reasonable to do so, we intend to assess our
risks with respect to failure by third parties to be Year 2000 compliant and to
seek to mitigate those risks. If such mitigation is not achievable, Year 2000
problems could have a material impact on our operations.

Our estimates of the costs of achieving Year 2000 compliance and the date by
which Year 2000 compliance will be achieved are based on management's best
estimates, which were derived using numerous assumptions about future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 remediation work, the ability to locate and
correct all computer codes, the success achieved by our suppliers in reaching
Year 2000 readiness, the timely availability of necessary replacement items and
similar uncertainties.

We presently believe that the most reasonably likely worst-case scenarios that
we might confront with respect to Year 2000 issues have to do with third parties
not being Year 2000 compliant. We are presently evaluating vendor and customer
compliance and will develop contingency plans, such as alternative vendor
opportunities, after obtaining compliance evaluations. We intend to develop
contingency plans by September 1999.

UNCERTAINTIES AND RISKS

This discussion and analysis should be read in conjunction with our financial
statements and notes included with this prospectus. 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 prospectus. We undertake no
obligations to publicly release any revisions to these forward-looking
statements or reflect events or circumstances after the date of this prospectus.

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<PAGE> 29

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 on new and
creative proprietary Sharper Image Design products, Sharper Image private label
products and branded products, a portion of which we offer on a exclusive basis.
Our products are marketed and sold through three primary sales channels: The
Sharper Image stores, The Sharper Image catalog, and the Internet, primarily
through our sharperimage.com website. 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.

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 products and our Sharper
Image private label products, which are exclusive to The Sharper Image. Sharper
Image Design products typically generate higher sales margins than our other
products and, we believe, broaden our customer reach. During the last three
years, we have developed and introduced over 35 new-to-market Sharper Image
Design products with 16 new-to-market products in the last year alone. In
addition, in the last three years we introduced improved versions of more than
30 Sharper Image Design products. Recently introduced Sharper Image Design
products include our Ionic Breeze(TM) Silent Air Purifier, Wee-Bot(TM)
Electronic Pet, CD Radio/Alarm Clock with Sound Soother(R), Ionic Hair Wand
II(TM), Personal Cooling System(TM), Shower Companion(TM) Plus CD Player, Ultra
Heart and Sound Soother(R), and the newest versions of our Quiet Power(TM) Tie
Rack and Turbo-Groomer(TM). Of our ten best selling products during the 1998
Holiday shopping season, five products were Sharper Image Design products. We
have increased the percentage of our sales attributable to Sharper Image Design
products to 18% in 1998 from 8% in 1997. One of our key strategic goals is to
continue to increase the proportion of sales derived from our Sharper Image
Design products.

We market and sell our merchandise through a variety of sales channels,
including The Sharper Image stores, The Sharper Image catalog and the Internet,
primarily through our sharperimage.com website. We believe that this
multi-channel approach provides us with significant marketing, sales and
operational synergies, and provides our customers with enhanced shopping
flexibility and superior customer service. Our store operations generate the
highest proportion of our sales, representing approximately 67% of total
revenues in 1998. As of April 30, 1999, we operated 89 The Sharper Image stores
in 27 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 products and allows the customer to truly experience
the product while shopping. Our average store sales per square foot are
consistently above industry averages, and during 1998 we generated average sales
of $484 per square foot.

We also offer our products through our award-winning The Sharper Image catalog,
a full-color monthly catalog that uses dramatic visuals and creative product
descriptions designed and produced by our in-house staff of writers and
production artists. The Sharper Image catalog, which generally features between
180 and 250 products in each monthly catalog, increasing to over 300 products
during the Holiday shopping season, also currently serves as the primary
advertising vehicle for our stores. During 1998, we mailed approximately 41
million The Sharper Image catalogs to over 6.5 million individuals.
Approximately 29% of our total revenues were generated by catalog sales in 1998.

Sharper Image products are also marketed through our Internet retail operations,
including our own website, which we have maintained at sharperimage.com since
1995. The Sharper Image was one of the early entrants into Internet retailing,
and has participated in online shopping since 1994. Our Sharper Image Internet
retail operations grew significantly in 1998 to $4.9 million, or approximately
2.0% of our total revenues, from $1.6 million in 1997. In addition to our own
website, we have offered our products through Internet marketing partnerships
with America Online Shopping Channel, @Home, Catalog City, DoubleClick,
Linkshare, Microsoft Plaza, PC World Shopping and Yahoo! Shopping. We believe
that online retailing over the Internet presents The Sharper Image with a
significant opportunity for the marketing and sale of our products and will
enable us to significantly expand and diversify our existing customer base. We
believe that our Sharper Image Design products are particularly well-positioned
to be marketed and sold over the Internet. We plan to significantly

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<PAGE> 30

expand the resources dedicated to our Internet retail operations by increasing
the level of online advertising, establishing additional strategic relationships
with major online retail partners and continuing to enhance the technical
capabilities and presentation of our website.

The Sharper Image was founded in 1977 by Richard Thalheimer, who currently
serves as our Chairman and Chief Executive Officer. The Sharper Image mailed its
first catalog in 1981, began the expansion into store operations in 1984, and
commenced Internet online retail operations in 1994.

COMPETITIVE ADVANTAGES

We believe that the following competitive advantages have contributed
significantly to our past success and intend to continue to capitalize on these
advantages in executing our growth strategy:

STRONG BRAND NAME. We believe our unique merchandising and creative marketing
have made The Sharper Image one of the most widely recognized retail brands in
the United States. The Sharper Image is recognized as a leading source of new,
innovative, high-quality products designed to make life easier and more
enjoyable. Because of our strong brand name, we are frequently sought after by
manufacturers and inventors to introduce technologically innovative products. We
continue to leverage our Sharper Image brand name by increasing our proprietary
product offerings, growing our online retail and catalog businesses and opening
new stores.

PROPRIETARY SHARPER IMAGE DESIGN PRODUCTS. In recent years, we have focused
significant resources on the design, development and marketing of our Sharper
Image Design products, which are exclusive to The Sharper Image. The proprietary
nature of Sharper Image Design products provides us with higher margins than our
other products. We have developed and introduced over 35 new-to-market products
in the last three years, with 16 new-to-market products in the last year alone.
In addition, we have introduced improved versions of more than 30 products in
the last three years. Of our ten best selling products during the 1998 Holiday
shopping season, five were from our Sharper Image Design product line. We have
formed a nine person in-house product development team and established a broad
network of engineers and creative professionals, allowing us to bring to market
unique, proprietary products. We are devoting significant resources to develop
new products in 1999, and we currently have a significant pipeline of product
ideas under development.

UNIQUE PRODUCT OFFERING. The Sharper Image offers a unique assortment of
high-quality, innovative products, many of which are difficult to find elsewhere
and are not easily replicated. Our merchandising philosophy focuses on Sharper
Image Design products, Sharper Image private label products and branded
products, a portion of which we offer on an exclusive basis. We offer a wide
variety of products in numerous product categories, including electronics,
recreation and fitness, personal care, houseware, travel, toy and gift. We offer
a variety of branded products, including products manufactured by Panasonic,
JVC, Olympus and 3Com. We also benefit from numerous exclusive product
offerings, in which manufacturers grant us the right to offer certain latest
generation and new-to-market products on an exclusive basis for a limited period
of time. For example, we currently offer Interactive Health's Get-A-Way
Chair(R), a reclining electronic massage chair, on an exclusive basis. In
product lines where we compete directly with other retailers, we generally
choose to sell the most advanced, full featured version of the product. We
believe our merchandising strategy limits price shopping and enhances our
ability to achieve attractive margins on our products.

THREE SYNERGISTIC RETAIL SALES CHANNELS. We offer our products through three
main sales channels: The Sharper Image Stores, our catalog and the Internet,
primarily through our sharperimage.com website. We believe this combination
gives us the following competitive advantages:

- our catalog and Internet operations, which include our auction site,
increase the visibility and exposure of our brand name, generate store
traffic and provide effective product marketing and advertising for The
Sharper Image stores;

- our existing catalog infrastructure and experience in areas such as order
fulfillment and customer service provide us with an advantage over many
other Internet retailers; and

- our operations allow a customer to identify and purchase a product over
the Internet or in our catalog with the confidence of being able to
return it to a nearby store for a refund or credit if desired, and
provide our customers with increased shopping flexibility and superior
customer service.

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<PAGE> 31

LOYAL CUSTOMER BASE WITH ATTRACTIVE DEMOGRAPHICS. A cornerstone of our business
strength has been our ability to develop, cultivate and satisfy an attractive
customer base of loyal, repeat customers. These customers are typically high net
worth men and women between the ages of 35 and 55, with an average yearly income
in excess of $100,000. We have developed an internal database of over 10 million
customer names. Approximately two million of these customers have made purchases
from us in the past 24 months, and of the two million, 50% have made multiple
purchases. In addition, we believe the demographics of our customer base are
characteristic of online shoppers, representing an opportunity to expand our
customer base. During the 1998 Holiday shopping season, approximately 70% of our
Internet customers were first time Sharper Image buyers. Ten percent of these
new customers subsequently purchased additional products from us through our
catalog or stores.

GROWTH STRATEGY

We believe that substantial opportunities exist to enhance our revenues and
profitability by implementing the following strategies.

INCREASE PROPRIETARY PRODUCT OFFERINGS. A key element of our business strategy
is to design, develop and market our proprietary products. We believe that in
general our proprietary products generate higher margins than other products
because they are less susceptible to price shopping. The percentage of our sales
attributable to Sharper Image Design proprietary products increased to 18% in
1998 from 8% in 1997 and contributed significantly to the 2.7 percentage point
increase in our gross margin in 1998 over 1997. It is our goal to continue to
increase the percentage of proprietary product sales and enhance our gross
margins.

INCREASE INTERNET RETAIL OPERATIONS. Our goal is to provide a website that
offers our online customers an interactive and entertaining experience similar
to The Sharper Image stores. We intend to increase our online retail operations
by leveraging our strong brand name, unique product offerings, demographically
attractive customer base and established order fulfillment capability. The
Sharper Image website is capable of displaying our most popular products using
interactive, 3D enriched product presentations with sound. We recently launched
our Internet auction site as a key component of Internet strategy. To date, we
have Internet marketing partnerships with America Online, @Home, Catalog City,
DoubleClick, Linkshare, Microsoft Plaza, PC World Shopping and Yahoo! Shopping.
Our Internet-based revenues increased to $4.9 million in 1998 from $1.6 million
in 1997. Our goal is to expand our Internet operations as follows:

- create and effectively implement an online advertising strategy;

- maintain sharperimage.com's leading edge technological capabilities;

- enter into additional relationships with strategic Internet marketing
partners; and

- expand sharperimage.com's auction website activity.

BROADEN CUSTOMER BASE. We believe that significant opportunities exist to
attract a broader customer base by pursuing the following key strategies:

- developing proprietary products at popular price points with broader
market appeal, such as the $39.95 Wee-Bot(TM), a mobile electronic space
pet, the $49.95 Personal Cooling System(TM), a miniature wearable
evaporative cooling system, and the $39.95 Turbo-Groomer(TM), a battery
powered personal hair trimmer;

- offering products with wider functional appeal, such as the Ionic
Breeze(TM), a silent air purifier, the Steam Wizard(R), a steamer and
wet/dry vacuum, and the Power Tower(TM), a motorized, rotating CD holder;

- developing more products that appeal to women, such as the Ionic Hair
Wand II(TM), a conditioning hairbrush, the CD Shower Companion(TM) and
the Women's Personal Care Kit; and

- expanding the demographic mix of our customers by reaching a younger and
broader audience through our Internet operations, including our auction
site.

OPEN NEW STORES. We plan to continue to selectively open new stores in premium
locations in the United States. We currently intend to open four additional
stores during 1999, two of which have been opened to date. Each new store will
be configured in our new format which we believe is appealing to a broader
customer base and highlights our proprietary products. During 1998 we remodeled
four stores and opened four new stores utilizing the new format.

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<PAGE> 32

THE SHARPER IMAGE STORES

As of April 30, 1999, we operated 89 The Sharper Image stores in the United
States across 27 states and the District of Columbia. The Sharper Image stores
accounted for approximately 67% of our revenues in 1998. The Sharper Image
stores are located in densely populated, downtown financial districts and
business centers, upscale shopping malls and drive-up suburban locations.

[MAP SHOWING NATIONAL STORE LOCATIONS]

Each store is generally staffed with approximately six to eight employees,
including a manager, an assistant manager, a senior sales associate, sales
associates, and other support staff. Our store managers have an average tenure
of over six 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.

Our stores are operated according to standardized procedures for customer
service, merchandise display and pricing, product demonstration, inventory
maintenance, personnel training, administration and security. Our original The
Sharper Image stores typically have 2,200 to 2,500 square feet of selling space
and approximately 1,300 to 2,200 square feet of storage and administrative
space. In 1996, 1997 and 1998 we opened an aggregate of 17 new stores. During
that period, the cost of leasehold improvements, net of landlord contributions,
but including fixtures and pre-opening expenses, averaged $325,000 per store.
Initial inventory averaged approximately $250,000 per store. In 1998, stores
operating at least one full year generated average sales and cash contributions
of approximately $1,878,000 and $383,000, respectively.

In addition to our Sharper Image stores, our products are sold through two
outlet stores and eight Sharper Image Design stores, which are approximately
half the size of the original stores and feature higher margin proprietary
products and other top selling merchandise.

In 1997 we decided to update the look and appeal of our new retail stores and
select existing stores. The new format presents an open, fresh and inviting
environment that appeals to both men and women and highlights our proprietary
products. The average cost of remodeling a store is $350,000, subject to
leasehold allowances. During 1998 we opened four new stores and remodeled four
stores utilizing the new format. We currently plan to open four new stores in
1999, two of which have been opened to date.

See Note K to our financial statements for further financial information.

THE SHARPER IMAGE CATALOG

The Sharper Image catalog is a full-color catalog that is mailed to an average
of approximately three million individuals each month. The Sharper Image catalog
generated approximately 29% of our total revenues in 1998 and is recognized for
creative excellence by the Direct Marketing Association, a leading catalog
industry trade group. The catalog is currently the primary advertising vehicle
for our retail stores and our on-line store. During 1998, we mailed
approximately 41 million of The Sharper Image catalogs to over 6.5 million
different individuals. 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 for Father's Day and the
Holiday shopping season reflecting the seasonal nature of our business.

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<PAGE> 33

The Sharper Image catalog design uses dramatic visuals and benefit-oriented
product descriptions. The catalog design features the most important products
prominently. The number of items featured each month ranges between 180 and 250
products during the first three quarters of the year, increasing to more than
300 products during 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 1998, The Sharper Image
catalog contained from 52 to 76 pages for non-peak months and between 76 and 124
pages for the peak seasons of Father's Day and the Holiday shopping season.

We have developed a proprietary customer database of over 10 million names which
we use regularly and periodically rent to third parties. We collect customer
names through our catalog and online website 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 our customer data base, our in-house staff utilizes 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 treatment, including
invitations for special sales events and enhanced customer service.

See Note K to our financial statements for further financial information.

SHARPERIMAGE.COM OPERATIONS

The Sharper Image was an early entrant into Internet retailing. We have
participated in online shopping since 1994, and have maintained our own website
since 1995. In April 1999, we had approximately 1.6 million page views and
116,000 unique visitors. During the past two years, revenues from our Internet
operations increased to $4.9 million in 1998 from $1.6 million in 1997. We
achieved these results without significant incremental investment in
infrastructure or advertising. Our online retailing operations benefit from our
brand name, customer base and unique product offering. In addition, we are able
to leverage our catalog infrastructure and fulfilment and customer service
experience, providing us with a significant advantage over Internet retailers
who have not developed such capabilities.

Our goal is to make sharperimage.com a website that provides our online
customers with an interactive experience similar to our Sharper Image stores. We
are aggressively updating our site by incorporating advanced technologies to
improve our product presentations and making our site increasingly customer
friendly. In March 1999 we implemented technology which allows us to display our
products using interactive 3D enriched presentations and sound. We believe that
these presentation features are a valuable tool for further increasing our brand
recognition and advertising our products, and will prove particularly useful in
reaching our goal of attracting younger consumers to our website.

In February 1999, we also established our online auction site. Our auction site
allows customers to bid on and acquire a broad range of new, returned and
refurbished Sharper Image products for less than list price. All products
purchased on the auction site have the same warranty and return benefits that
accompany full price products. We believe that bidders have an enhanced level of
confidence in our operations since, unlike other retailers with auction sites,
we are an established retailer with an inventory of well-known products under
warranty and an established return policy.

We are pursuing additional steps to achieve continued growth of our Internet
operations. These steps included hiring a Director of Global Internet Marketing,
developing and implementing an Internet advertising strategy and seeking to
establish strategic Internet marketing partnerships. We have established key
relationships with America Online, @Home, Catalog City, DoubleClick, Linkshare,
Microsoft Plaza, PC World Shopping and Yahoo! Shopping.

OTHER OPERATIONS

In addition to our store, catalog and Internet operations, we also have a
corporate marketing program, wholesale sales group, list rental program and
licensed operations.

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<PAGE> 34

We sell incentive and gift merchandise certificates to client companies who in
turn distribute them under their programs to increase their sales, or to
motivate and reward their high achievers and best customers. The Sharper Image
stores and catalog are the primary means of offering and conveniently delivering
the incentives and gifts. Our certificates are redeemable for Sharper Image
merchandise through our retail stores, by mail, or over the telephone through
the catalog telemarketing group. We are also developing the Internet channel for
this area of our business. We record revenues and expenses for our corporate
marketing program through our catalog and retail channels.

We sell our proprietary products on a limited basis to department stores in the
United States and to selected retailers outside the United States. In addition,
we rent our customer list to third parties for a fee or in exchange for their
customer lists. List exchanges are not included in our receivables.

There are currently six Sharper Image retail stores operated by foreign
licensees; two are in Switzerland, three are in Saudi Arabia and one is in
Dubai. In addition, we have a catalog license agreement in Japan as well as two
licenses for non-duty free airport locations in the United States. Under the
license agreements, we receive royalties on sales by the licensees and the
licensees are granted the right to use the trademarked name, "The Sharper
Image."

MERCHANDISING, SOURCING AND DEVELOPMENT

Merchandising

Our merchandise mix emphasizes innovative products that are unique and
new-to-market, and that are proprietary, private label or available exclusively
through The Sharper Image, or branded products not available in broad
distribution. Currently, our product offerings include approximately 1,700
stock-keeping units (SKUs) with approximately 1,200 active SKUs representing
products in the electronics, recreation and fitness, personal care, houseware,
travel, toys and gifts categories.

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 more category or product classification oriented. 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.

MERCHANDISE MIX

<TABLE>
<CAPTION>
PERCENTAGE OF
NET SALES
--------------
TYPE OF PRODUCT 1998 1997
--------------- ----- -----
<S> <C> <C>
Sharper Image Design........................................ 18.1% 8.2%
Sharper Image private label................................. 11.3% 9.0%
Branded (including exclusive products)...................... 70.6% 82.8%
</TABLE>

Our merchandise strategy is to offer an assortment of products with emphasis on
Sharper Image Design proprietary and private label products. We intend to focus
on offering products in the $50 to $300 price range to appeal to a wide customer
base. We also intend to increase our proprietary product offerings.

We generate information on merchandise orders and inventory, which is reviewed
daily by our buyers, our senior merchandising staff and top management. We
generally replace approximately 10% to 25% of our product offerings each month.
We carefully consider which products will 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.

Sourcing

The process of finding new products involves our buyers reviewing voluminous
product literature, traveling throughout North America and Asia to attend trade
shows and exhibitions, and meeting with manufacturers. We

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<PAGE> 35

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 approximately 630 foreign and domestic
manufacturers and importers. Of the products we offered in 1998, approximately
75% were manufactured in Asia, approximately 20% were manufactured within the
United States, approximately 3% were manufactured in Europe, and approximately
2% were manufactured in Mexico and Canada. In 1998, none of our vendors
accounted for greater than 10% of net merchandise purchases of approximately
$122,000,000.

Development

In addition to finding new product ideas from outside sources, our product
development group conceives, designs and produces Sharper Image Design products.
The product development group meets regularly with the merchandising staff to
review new 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 two years include
the Ionic Breeze(TM) Silent Air Purifier, CD Radio/Alarm Clock with Sound
Soother(R), Wee-Bot(TM) Electronic Pet, Personal Cooling System(TM),
Turbo-Groomer(TM), Truth Quest(TM), Ionic Hair Wand II(TM), Stereo Sound
Soother(TM), Shower Companion(TM) Plus, and the portable Sound Soother(R).

We believe that the Sharper Image Design group will continue to design and
develop a variety of unique products that enhance sales and maintain or increase
margins. We believe that the appeal of these proprietary products also serves as
a key driver in broadening our customer base and enhancing our brand appeal. Our
goal is to increase sales of these proprietary products.

Sharper Image Design products are produced for us on a contract basis by
manufacturers located primarily in Asia. We provide all product specifications
to the contract manufacturers. Product development cycles vary, but generally
range from 12 to 18 months.

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 and at the Little Rock distribution center provide personal
attention to customers who call toll free 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 to provide
twenty-four hour coverage for catalog sales.

We seek to hire, train and retain qualified sales and customer service
representatives in both our mail-order catalog and store operations. Each new
store manager undergoes an intensive 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. Training
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 that are designed to keep
each salesperson up to date on each new product offered.

ORDER FULFILLMENT AND DISTRIBUTION

We have an order fulfillment and distribution facility in Little Rock, Arkansas
of approximately 110,000 square feet, and use contract warehouse facilities for
additional seasonal requirements. Our merchandise generally is delivered to
catalog and Internet customers and is distributed to The Sharper Image stores
directly from our distribution facility. A number of 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. During 1998, approximately 90% of our catalog and
Internet orders were shipped within 48 hours after the order is received. We are
currently evaluating various alternatives to expand the capacity of our
distribution facilities to provide for projected business growth.

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<PAGE> 36

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 corporate headquarters,
transmitting sales, inventory and customer data as well as receiving data from
our headquarters. The sales, inventory, and customer data enables sales and
corporate personnel to monitor sales by item on a daily basis, provides the
information utilized by the automatic replenishment system (ARS) for inventory
allocations, provides management with current inventory and merchandise
information, and enables our in-house mailing list to be updated regularly with
customer names and activity.

We have developed a proprietary ARS which is used to maximize sales with minimal
inventory investment. Under our ARS, information on merchandise inventory and
sales by each store location is generated and reviewed daily. Sales information
by product and location is systematically compared daily to each 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 total our 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 our group of store distributors and merchandising managers
who are responsible for allocating inventory to stores.

ADVERTISING

While the catalog remained our primary advertising vehicle during 1998, we also
utilized newspaper, leading consumer magazine and airline magazine inserts to
advertise specific products. Major news publications where we advertised our
proprietary products and website include USA Today, The Wall Street Journal and
The New York Times. We plan to continue these efforts in 1999. We also tested
televised "infomercials" in 1998 and plan to increase the number of infomercials
in 1999. In addition, in 1999 we plan to expand our advertising for our Internet
operations. We believe these advertisements generate store sales as well as
mail-order sales.

MANAGEMENT INFORMATION SYSTEMS

We maintain an integrated management information system for order fulfillment,
distribution and financial reporting. We believe our system increases our
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. In 1998 and 1999, technology development
and enhancement initiative for our Internet website was and will be part of the
key objectives of our Information Systems Team.

We recognize that the arrival of the Year 2000 poses a unique worldwide
challenge to the ability of all systems to recognize the date change from
December 31, 1999 to January 1, 2000. We have reviewed our computer and business
processes, and are reprogramming our computer applications to provide for
continued functionality. An assessment of the readiness of the external entities
with which we interface is ongoing.

COMPETITION

We operate in a highly competitive environment. We principally compete 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 offered by us. Many of our competitors
are larger companies with greater financial resources, a wider selection of
merchandise and a greater inventory availability. Although we attempt to market
products not generally available elsewhere and have emphasized exclusive
products in our merchandising strategy, many of our products or similar products
can also be found in other retail stores or through other catalogs or on-line.
We offer competitive pricing where other retailers market certain products
identical to ours 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 proprietary designed products. We compete principally on the
basis of product exclusivity, selection, quality and price of our products,
merchandise presentation in the catalog, stores, and on the Internet, our
customer list, name recognition, and the quality of our customer service. We are
committing additional resources to our internal product development group to
create and produce proprietary products exclusively available from us. We
believe that these proprietary products provide a competitive advantage for us
in our merchandising offering.

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<PAGE> 37

TRADEMARK AND LICENSES

We believe our registered service mark and trademark, "The Sharper Image," and
the brand name recognition that it has 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 currently license the use of our trademarked name in connection
with the production and circulation of foreign language editions of The Sharper
Image catalog in Japan and Switzerland and in connection with The Sharper Image
stores in Switzerland, Saudi Arabia and Dubai in consideration for royalties and
other fees. In addition to these international licensees, we have also entered
into a license for the right to operate Sharper Image stores in domestic
non-duty free airport locations as well as various product license agreements
which grant the right to licensees to manufacture and sell products bearing our
trademark.

LEGAL PROCEEDINGS

We are 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 our financial position or results of
operations.

EMPLOYEES

As of April 30, 1999, we employed approximately 1,300 associates, approximately
60% of whom were full-time. We consider our employee relations to be good.

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<PAGE> 38

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is a list of the executive officers and directors of The Sharper
Image, together with brief biographical descriptions.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard Thalheimer........ 51 Founder, Chairman of the Board, and Chief Executive
Officer
Barry Gilbert............. 48 Vice Chairman and Chief Operating Officer
Tracy Wan................. 39 President and Corporate Secretary
Shannon King.............. 43 Executive Vice President, Merchandising
Jeffrey Forgan............ 41 Senior Vice President and Chief Financial Officer
Anthony Farrell........... 49 Senior Vice President, Creative Services
Joe Williams.............. 49 Senior Vice President, Loss Prevention
Greg Alexander............ 37 Senior Vice President, Management Information
Systems
Davia Kimmey.............. 45 Senior Vice President, Marketing
Alan Thalheimer........... 73 Director
Gerald Napier............. 72 Director
Morton David.............. 62 Director
Maurice Gregg............. 67 Director
George James.............. 61 Nominee Director
</TABLE>

RICHARD THALHEIMER is the founder of The Sharper Image and has served as the
Chief Executive Officer and as 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.

BARRY GILBERT has been our Vice Chairman and Chief Operating Officer since
December 1996. Prior to joining us, Mr. Gilbert was with Warner Bros. Studio
Stores, where he served as Senior Vice President of International Franchise
Operations from 1994 through 1996, and as Senior Vice President of stores from
1990 to 1994.

TRACY WAN has been our President and Corporate Secretary since April 1999. Ms.
Wan served as Executive Vice President, Chief Financial Officer from August 1998
through April 1999, Senior Vice President and Chief Financial Officer from
February 1995 through August 1998, Vice President, Chief Financial Officer from
September 1994 through February 1995, Vice President, Controller from November
1991 through September 1994, and as Controller from July 1989 through November
1991. Ms. Wan is a certified public accountant.

SHANNON KING has been our Executive Vice President, Merchandising since May
1999. Ms. King served as Senior Vice President, Merchandising, from February
1995 through May 1999. Ms. King served as our Vice President, Merchandising from
March 1993 through February 1995, and as Director of Merchandising from July
1988 through March 1993.

JEFFREY FORGAN has been our Senior Vice President and Chief Financial Officer
since April 1999. 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. 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 a senior vice president, merchandising with
SelfCare Catalog from March 1991 through December 1997.

JOE WILLIAMS has been our Senior Vice President, Loss Prevention, since March
1999. Mr. Williams served as Vice President, Loss Prevention, from March 1993
through March 1999 and served as Director, Loss Prevention from April 1989
through March 1993.

GREG ALEXANDER has been our Senior Vice President, Management Information
Systems since March 1999. Mr. Alexander served as Vice President, Management
Information Systems from February 1995 through March 1999 and as Director,
Management Information Systems from July 1991 through February 1995.

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<PAGE> 39

DAVIA KIMMEY has been our Senior Vice President, Marketing since June 1997.
Prior to joining us, Ms. Kimmey was with Spiegel Inc. where she served as
Corporate Vice President, Advertising from 1995 to 1997 and as Vice President,
Advertising from 1992 to 1995.

ALAN THALHEIMER has been a Director since June 1981 and was President of
Thalheimer, Inc. or its predecessor from May 1981 until retiring in 1993. Mr.
Alan Thalheimer is the father of Mr. Richard Thalheimer.

GERALD NAPIER was appointed by the Board of Directors to serve as a Director in
April 1997. Mr. Napier was the President of I. Magnin and Company from February
1982 until retiring in 1988. Mr. Napier was Senior Vice President of General
Operations at Abraham and Straus from 1977 to 1982.

MORTON DAVID was appointed by the Board of Directors to serve as a Director in
January 1998. Mr. David was Chairman, President and Chief Executive Officer of
Franklin Electronic Publishers, Inc. from May 1984 until his retirement in
February 1998.

MAURICE GREGG was appointed by the Board of Directors to serve as a Director in
October 1987. Mr. Gregg is a certified public accountant and has been a retail
financial consultant since June 1986. Mr. Gregg served as Executive Vice
President, Chief Financial Officer and a director of The Gap, Inc. from April
1980 to June 1986.

GEORGE JAMES was nominated by the Board of Directors to run for election as a
director in April 1999. Mr. James was Senior Vice President, Chief Financial
Officer of Levi Strauss & Co. from 1985 until his retirement in 1998. Mr. James
was Executive Vice President and Group President from 1984 to 1985, and was
Executive Vice President and Chief Financial Officer from 1982 to 1983 at Crown
Zellerbach Corporation. Mr. James was Senior Vice President and Chief Financial
Officer from 1972 to 1982 with Arcata Corporation, a forest products and
printing concern. Mr. James is non-executive Chairman of the Board and a
director of Crown Vantage, Inc., a specialty paper manufacturing company.

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<PAGE> 40

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the common stock as of April 15, 1999, and as adjusted to reflect
the sale of common stock offered hereby by (1) each person who is known by us to
own beneficially more than five percent (5%) of the outstanding shares of common
stock, (2) each of our directors, (3) each of the named executive officers and
(4) all of our directors and executive officers as a group. Unless otherwise
indicated below, to our knowledge, all persons listed below have sole voting and
investing power with respect to their shares of common stock, except to the
extent such power is shared by spouses under applicable law or described in the
footnotes below.

<TABLE>
<CAPTION>
------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED
OFFERING(1) AFTER THE OFFERING(1)
----------------------- ----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Richard Thalheimer(2).................................. 5,060,145 55.1% 5,060,145 41.5%
Dimensional Fund Advisors(3)........................... 478,000 5.3% 478,000 4.0%
Alan Thalheimer(4)..................................... 12,301 * 12,301 *
Gerald Napier(5)....................................... 9,000 * 9,000 *
Morton David(6)........................................ 26,000 * 26,000 *
Maurice Gregg(7)....................................... 5,000 * 5,000 *
Barry Gilbert.......................................... -- * -- *
Tracy Wan(8)........................................... 15,000 * 15,000 *
Shannon King(9)........................................ 5,000 * 5,000 *
Davia Kimmey........................................... -- *
All Directors and executive officers as a group (12
persons)(10)......................................... 5,132,846 55.6 5,132,846 42.0%
</TABLE>

- -------------------------
* Less than one percent of class

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of April 15, 1999 and warrants to
purchase shares of common stock that are exercisable within 60 days of April 15,
1999 are deemed outstanding. Percentage of beneficial ownership is based upon
8,959,648 shares of common stock outstanding prior to the offering and
11,959,648 shares of common stock outstanding after the offering, as of April
15, 1999 and assuming no exercise of the underwriters' over-allotment option. To
our knowledge, except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table has sole
voting and investment power with respect to the shares set forth opposite such
person's name. Except as otherwise indicated, the address of each of the
Directors, Named Executive Officers and 5% stockholders in this table is as
follows: c/o Sharper Image 650 Davis Street, San Francisco, California 94111.

(2) Includes 3,777,617 shares owned by The Richard J. Thalheimer Revocable
Trust, of which Mr. Richard Thalheimer is trustee and sole beneficiary; 203,665
shares owned by The Richard J. Thalheimer and Elyse M. Thalheimer Family Trust,
of which Mr. Richard Thalheimer is a co-beneficiary; 238,000 shares owned by The
Richard J. Thalheimer Children's Trust; 14,363 shares owned by the Richard and
Elyse Thalheimer Irrevocable Trust of 1995; 252,995 shares owned by the Richard
J. Thalheimer 1997 Annuity Trust, of which Mr. Richard Thalheimer is trustee,
353,505 shares owned by the Richard J. Thalheimer 1997 Grantor Annuity Trust, of
which Mr. Richard Thalheimer is trustee and 220,000 shares issuable upon
exercise of options, which are currently exercisable or will become exercisable
within 60 days after April 15, 1999.

(3) Dimensional Fund Advisors Inc., a registered investment advisor, is deemed
to have beneficial ownership of 478,000 shares of our stock as of December 31,
1998, all of which shares are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group Trust and
DFA Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as investment
manager. Dimensional Fund Advisors, Inc. disclaims beneficial ownership of all
such

34
<PAGE> 41

shares. Dimensional Fund Advisors, Inc. has sole voting and disposition power
with respect to 478,000 shares. Dimensional Fund Advisors Inc.'s address is 1299
Ocean Avenue, 11th Floor, Santa Monica, California 90401.

(4) Does not include 74,200 shares owned by Mr. Alan Thalheimer's wife. Includes
2,301 shares owned by the Alan Thalheimer individual retirement account. Does
not include 238,000 shares owned by The Richard J. Thalheimer Children's Trust,
or 14,363 shares owned by the Richard and Elyse Thalheimer Irrevocable Trust of
1995, of which Mr. Alan Thalheimer is Trustee. Includes 10,000 shares issuable
upon exercise of options, which are currently exercisable or will become
exercisable within 60 days after April 15, 1999, of which 4,000 shares are
currently subject to repurchase by us.

(5) Includes 2,000 shares owned by the Napier Family Trust, of which Mr. Gerald
Napier is Trustee. Includes 5,000 shares issuable upon exercise of options,
which are currently exercisable or will become exercisable within 60 days after
April 15, 1999, of which 4,000 shares are currently subject to repurchase by us.

(6) Includes 6,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999, of
which 4,000 shares are currently subject to repurchase by us.

(7) Includes 4,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999, and
are currently subject to repurchase by us.

(8) Includes 15,000 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after April 15,
1999.

(9) Includes 5,000 shares issuable upon exercise of options, which are currently
exercisable or will become exercisable within 60 days after April 15, 1999.

(10) Includes 265,000 shares issuable upon exercise of options, which are
currently exercisable or will become exercisable within 60 days after April 15,
1999.

35
<PAGE> 42

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of The Sharper Image consists of 3,000,000 shares
of Preferred Stock, $.01 par value, issuable in series and 25,000,000 shares of
Common Stock, $.01 par value. The following statements are brief summaries of
certain provisions relating to our capital stock contained in the Certificate of
Incorporation (the "Certificate") and Bylaws and in the laws of Delaware.

COMMON STOCK

Our authorized Common Stock consists of 25,000,000 shares, $.01 par value, of
which 8,964,048 shares were issued and outstanding as of April 30, 1999. The
issued and outstanding shares of common stock are fully paid and non-assessable.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. As of April 30,
1999, there were 447 holders of record of our common stock. Each share of our
common stock is entitled to equal dividend rights and to equal rights in our
assets available for distribution to holders of common stock upon liquidation,
subject to the rights of outstanding series of preferred stock. Our Certificate
and Bylaws do not provide for preemptive rights of the holders of its common
stock. The transfer agent and registrar for the common stock is Chase Mellon,
LLC. Their telephone number is (415) 743-1434.

PREFERRED STOCK

The Board of Directors may, without further action by our stockholders, from
time to time direct the issuance of preferred stock in series and may, at the
time of issuance, determine the rights, preferences and limitations of each
series. Satisfaction of any dividend preferences of outstanding preferred stock
would reduce the amount of funds available for the payment of dividends on
shares of the common stock. Also, holders of preferred stock would normally be
entitled to receive a preference payment in the event of any liquidation,
dissolution or winding-up before any payment is made to the holders of common
stock. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of The Sharper Image without further
action by the stockholders. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting powers of the holders of
common stock, including the loss of voting control to others. No shares of
preferred stock have been issued.

CHANGE OF CONTROL PROVISIONS

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203") regulating corporate takeovers. Section 203
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging, under certain
circumstances, in a "business combination" (which includes a merger or sale of
more than 10% of the corporation's assets) with any "interested stockholder" (a
stockholder who acquired 15% or more the corporation's outstanding voting stock
without the prior approval of the corporation's board of directors) for three
years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of Section 203 with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Sharper Image has not "opted out" of the provisions of
Section 203.

PERSONAL LIABILITY OF DIRECTORS AND OFFICERS

Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. We
believe that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly the Certificate includes a provision
eliminating liability for monetary damages for any breach of fiduciary duty as a
director, except as provided under Delaware law. Pursuant to Delaware law, our
directors are not insulated from liability for breach of their duty of loyalty
(requiring that, in making a business decision, directors act in good faith and
in the honest belief that the action was taken in the best interest of the
corporation), or for certain other claims. The foregoing provisions of the
Certificate may reduce the likelihood of success of derivative litigation
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited The Sharper Image and its
stockholders. Furthermore, we intend to enter into

36
<PAGE> 43

indemnity agreements with present and future officers and directors for the
indemnification of and the advancing of expenses to such persons to the full
extent permitted by law.

AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK

Our Certificate of Incorporation authorizes undesignated preferred stock and
makes it possible for our Board to issue preferred stock and to establish the
rights and preferences of such stock. The issuance of shares of Preferred Stock
pursuant to the Board's authority could decrease the amount of earnings and
assets available for distribution to holders of common stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deferring or preventing a change in control of The
Sharper Image. The Board does not currently intend to seek stockholder approval
prior to any issuance of preferred stock, unless otherwise required by law.

37
<PAGE> 44

UNDERWRITING

The underwriters named below, for whom J.P. Morgan Securities Inc. and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives, have severally agreed,
subject to the terms and conditions set forth in the underwriting agreement
among us and the underwriters, to purchase from us and we have agreed to sell to
the underwriters, the respective number of shares of common stock set forth
opposite their names below:

<TABLE>
<CAPTION>
---------
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
J.P. Morgan Securities Inc..................................
U.S. Bancorp Piper Jaffray Inc..............................

---------
Total....................................................... 3,000,000
=========
</TABLE>

The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.

The representatives of the underwriters have advised us that the several
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and may
offer the common stock to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such dealers may
reallow, a concession to other dealers not to exceed $ per share.

According to the terms of the underwriting agreement, we have granted to the
underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to 450,000 additional shares of common stock, on the same terms and
conditions as set forth on the cover page of this prospectus. If the
underwriters' over-allotment option is exercised in full, the total price to the
public, underwriting discounts and commissions, and proceeds to us will be
$ , $ and $ , respectively. The underwriters may
exercise such option solely to cover over-allotments, if any, made in connection
with the sale of shares of common stock offered by this prospectus.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in connection with those liabilities.

We estimate that the total expenses of this offering, excluding underwriting
discounts, will be approximately $ .

In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot this offering, creating a syndicate
short position. In addition, the underwriters may bid for, and purchase, shares
of common stock in the open market to cover syndicate shorts or to stabilize the
price of the common stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing shares of common stock in this
offering, if the syndicate repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares of
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.

Under the SEC's rules, market makers in the common stock who are also
underwriters or prospective underwriters in this offering may, subject to
certain limitations, make bids for purchases of shares of common stock as a
"passive market maker" until the earlier of the commencement of this offering or
the time at which the underwriters make a stabilizing bid for shares of common
stock. After this point and until the offering is complete:

- - The passive market maker's net daily purchases of the common stock may not
exceed the greater of (a) 30% of its average daily trading volume in the
common stock for the two full consecutive calendar months immediately
preceding the filing date of the registration statement relating to this
offering, which was May 25, 1999, or (b) 200 shares;

38
<PAGE> 45

- - The passive market maker may not effect transactions in, or display bids for,
the common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers; and

- - The passive market maker must identify its bid as a passive market making bid
and the bid must not exceed the amount the passive market maker could buy
under the limitations described above.

The Sharper Image, its officers and directors and certain stockholders have
agreed that during the period beginning on the date of this prospectus and
continuing to and including the date 90 days after the date of this prospectus
they will not (1) offer, pledge, announce the intention to sell, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
or (2) enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of common stock, other than
pursuant to employee stock option plans existing on the date of this prospectus
without the prior written consent of J.P. Morgan Securities Inc.

The common stock is traded on the Nasdaq National Market under the symbol
"SHRP."

39
<PAGE> 46

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for Sharper
Image by Brobeck, Phleger & Harrison LLP, San Francisco, California. Certain
legal matters will be passed upon for the underwriters by Davis Polk & Wardwell,
New York, New York.

EXPERTS

The financial statements for The Sharper Image as of January 31, 1999 and 1998
and for each of the three years in the period ended January 31, 1999 included
and incorporated by reference in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are included
and incorporated by reference herein and have been so included and incorporated
by reference in reliance upon the reports.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-2 to register the shares of common stock being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the registration
statement. For further information about us and the shares of common stock
offered in this prospectus, you should refer to the registration statement and
its exhibits and our other SEC filings. You may read and copy any document we
file at the SEC's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's website at http://www.sec.gov.

The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus. We incorporate by reference the documents listed
below.

(a) Annual Report on Form 10-K for the year ended January 31, 1999.

(b) The description of Sharper Image common stock contained in its
registration statement on Form 8-A filed May 6, 1987, including any
amendments or reports filed for the purpose of updating such descriptions.

You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:

Jeffrey P. Forgan
Senior Vice President and Chief Financial Officer
Sharper Image Corporation
650 Davis Street
San Francisco, CA 94111
(415) 445-6000

You should rely only on the information incorporated by reference or provided in
this prospectus or the prospectus supplement. We have authorized no one to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.

40
<PAGE> 47

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Statements of Operations.................................... F-3
Balance Sheets.............................................. F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 48

INDEPENDENT AUDITORS' REPORT

Board of Directors
Sharper Image Corporation
San Francisco, California

We have audited the accompanying balance sheets of Sharper Image Corporation as
of January 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1999. 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 generally accepted auditing
standards. 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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended January 31, 1999 in conformity with
generally accepted accounting principles.

San Francisco, California
March 26, 1999

F-2
<PAGE> 49

SHARPER IMAGE CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
-----------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------------
1999 1998 1997
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS ------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Sales...................................................... $ 272,721 $ 245,095 $ 236,844
Less: returns and allowances............................... 31,214 29,902 29,074
---------- ---------- ----------
Net sales.................................................. 241,507 215,193 207,770
List rental................................................ 1,088 982 1,177
Licensing.................................................. 519 640 1,298
---------- ---------- ----------
243,114 216,815 210,245
---------- ---------- ----------
Cost and Expenses:
Cost of products........................................... 123,131 115,535 108,799
Buying and occupancy....................................... 26,153 23,904 23,967
Advertising and promotion.................................. 27,396 22,795 25,736
General, selling, and administrative....................... 59,006 53,074 50,671
Provision for loss due to closure of SPA Collection
division................................................. -- -- 8,000
---------- ---------- ----------
235,686 215,308 217,173
---------- ---------- ----------
Other Income (Expense):
Interest expense -- net.................................... (645) (564) (391)
Other -- net............................................... 887 45 78
---------- ---------- ----------
242 (519) (313)
---------- ---------- ----------
Earnings (Loss) before Income Tax (Benefit)................ 7,670 988 (7,241)
Income Tax (Benefit)....................................... 3,068 395 (2,896)
---------- ---------- ----------
Net Earnings (Loss)........................................ $ 4,602 $ 593 $ (4,345)
========== ========== ==========
Net Earnings (Loss) Per Share -- Basic..................... $ 0.54 $ 0.07 $ (0.53)
========== ========== ==========
Net Earnings (Loss) Per Share -- Diluted................... $ 0.51 $ 0.07 $ (0.53)
========== ========== ==========
Weighted Average Number Of Shares -- Basic................. 8,532,588 8,303,425 8,260,208
========== ========== ==========
Weighted Average Number Of Shares -- Diluted............... 9,072,832 8,537,032 8,260,208
========== ========== ==========
</TABLE>

See notes to financial statements.

F-3
<PAGE> 50

SHARPER IMAGE CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
------------------------------
FISCAL YEAR ENDED JANUARY 31,
------------------------------
1999 1998
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS (FISCAL 1998) (FISCAL 1997)
--------------------------------------------- ------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents...................................... $ 8,389 $ 3,501
Accounts receivable, net of allowance for doubtful
accounts of $804 and $508.............................. 6,787 8,189
Merchandise inventories................................... 32,598 34,534
Deferred catalog costs.................................... 2,454 4,982
Prepaid expenses and other................................ 5,605 3,429
------- -------
Total Current Assets........................................ 55,833 54,635
Property and Equipment, Net................................. 22,513 20,842
Deferred Taxes and Other Assets............................. 3,699 3,185
------- -------
Total Assets...................................... $82,045 $78,662
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $11,653 $18,439
Accrued expenses.......................................... 16,960 16,832
Deferred revenue.......................................... 7,268 6,784
Income taxes payable...................................... 3,314 --
Current portion of notes payable.......................... 635 947
------- -------
Total Current Liabilities................................... 39,830 43,002
Notes Payable............................................... 2,513 3,299
Other Liabilities........................................... 3,053 3,205
Commitments and Contingencies............................... -- --
------- -------
Total Liabilities........................................... 45,396 49,506
------- -------
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,
8,916,995 and 8,356,280 shares......................... 89 83
Additional paid-in capital................................ 12,589 9,704
Retained earnings......................................... 23,971 19,369
------- -------
Total Stockholders' Equity.................................. 36,649 29,156
------- -------
Total Liabilities and Stockholders' Equity........ $82,045 $78,662
======= =======
</TABLE>

See notes to financial statements.

F-4
<PAGE> 51

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 January 31, 1996..................... 8,250,980 $82 $ 9,555 $23,121 $32,758
Issuance of common stock for stock options
exercised, (net of income tax benefit)........ 15,960 1 35 -- 36
Net loss........................................ -- -- -- (4,345) (4,345)
--------- --- ------- ------- -------
Balance at January 31, 1997..................... 8,266,940 83 9,590 18,776 28,449
Issuance of common stock for stock options
exercised, (net of income tax benefit)........ 124,340 1 237 -- 238
Repurchase of common stock...................... (35,000) (1) (123) -- (124)
Net earnings.................................... -- -- -- 593 593
--------- --- ------- ------- -------
Balance at January 31, 1998..................... 8,356,280 83 9,704 19,369 29,156
Issuance of common stock for stock options and
warrants exercised (net of income tax
benefit)...................................... 560,715 6 2,885 -- 2,891
Net earnings.................................... -- -- -- 4,602 4,602
--------- --- ------- ------- -------
Balance at January 31, 1999..................... 8,916,995 $89 $12,589 $23,971 $36,649
========= === ======= ======= =======
</TABLE>

See notes to financial statements.

F-5
<PAGE> 52

SHARPER IMAGE CORPORATION

STATEMENTS OF CASH FLOWS

Cash was Provided by (Used for) Operating Activities:
Net earnings (loss)....................................... $ 4,602 $ 593 $ (4,345)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization.......................... 5,027 4,334 4,195
Deferred rent expense.................................. 78 151 142
Deferred income taxes.................................. (1,459) 1,614 (3,188)
Gain on sale of equipment.............................. (840) -- --
Change in operating assets and liabilities:
Accounts receivable.................................... 1,402 (2,274) (1,479)
Merchandise inventories................................ 1,936 (7,169) (3,052)
Deferred catalog costs, prepaid expenses and other..... 1,298 (1,571) 54
Accounts payable and accrued expenses.................. (5,822) 838 11,429
Deferred revenue and other liabilities................. 3,568 1,308 (508)
-------- -------- --------
Cash Provided by (Used for) Operating Activities............ 9,790 (2,176) 3,248
-------- -------- --------
Cash Was Provided by (Used for) Investing Activities:
Property and equipment expenditures.................... (8,431) (4,437) (6,579)
Proceeds from sale of equipment........................ 1,736 53 98
-------- -------- --------
Cash Used for Investing Activities.......................... (6,695) (4,384) (6,481)
-------- -------- --------

Cash Was Provided by (Used for) Financing Activities:
Issuance of common stock for warrants and stock options
exercised, (net of stock repurchases)................ 2,891 114 36
Proceeds from notes payable and revolving credit
facility............................................. 46,921 27,761 25,665
Principal payments on notes payable and revolving
credit facility...................................... (48,019) (28,687) (24,071)
-------- -------- --------
Cash Provided by (Used for) Financing Activities:........... 1,793 (812) 1,630
-------- -------- --------
Net Increase (Decrease) in Cash and Equivalents............. 4,888 (7,372) (1,603)
Cash and Equivalents at Beginning of Period................. 3,501 10,873 12,476
-------- -------- --------
Cash and Equivalents at End of Period....................... $ 8,389 $ 3,501 $ 10,873
======== ======== ========
Supplemental Disclosure of Cash Paid for:
Interest.................................................. $ 813 $ 771 $ 700
Income Taxes.............................................. $ -- $ 409 $ 459
</TABLE>

See notes to financial statements.

F-6
<PAGE> 53

SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company is a leading specialty retailer which introduces and sells quality,
innovative, and entertaining products. These products are sold through its
retail stores, catalogs, Internet, and other marketing channels throughout the
United States. The Company also has stores and catalog operations
internationally through licensees. Additional revenue is derived from rental of
the Company's mailing list and from licensing activities relating to the
Company's trade name.

Revenue Recognition: Catalog sales are recorded when merchandise is shipped and
the Company provides for allowance for returns based upon historical returns
rate. Deferred revenue represents merchandise certificates outstanding and
unfilled cash orders at the end of the fiscal period. Mailing list rental
revenue is recognized when the list is fulfilled.

Accounting Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles 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.

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

Merchandise Inventories: Merchandise inventories are stated at lower of cost
(first-in, first-out method) or market.

Cash and Equivalents: Cash and equivalents represent cash and short-term, highly
liquid investments with original maturities of three months or less.

Deferred Catalog and Advertising Costs: Direct costs incurred for the production
and distribution of catalogs are capitalized. Capitalized catalog costs are
amortized, once the catalog is mailed, over the expected sales period which is
generally three months. Other advertising costs are expensed as incurred and
amounted to $4,470,000, $3,580,000, and $5,306,000, for the fiscal years ended
January 31, 1999, 1998, and 1997.

Start-Up Activities: All start-up and preopening costs that are not otherwise
capitalizable as long-lived assets are expensed as incurred by the Company.

Property and Equipment: Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the various assets which range from three to ten years for office furniture and
equipment and transportation equipment, and 40 years for the building. Leasehold
improvements are amortized using the straight-line method over the lesser of
their estimated useful lives or the term of the applicable lease which ranges
from 7 to 18 years.

The Company manufactures its own proprietary products for sale through its
stores and catalogs. Costs incurred for tooling, dies and package design are
deferred and amortized over the estimated life of these products, which is
generally two years. At January 31, 1999 and 1998, capitalized costs included in
property and equipment, net of related amortization, were $2,239,000 and
$1,566,000, respectively.

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, 1999, no material adjustment was 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 consolidated 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.

F-7
<PAGE> 54
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Stock-Based Compensation: The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.

Earnings Per Share: Basic earnings per share is computed as net earnings divided
by the weighted average number of common shares outstanding during each year of
8,532,588, and 8,303,425, and 8,260,208, for the fiscal years ended January 31,
1999, 1998, and 1997. Diluted earnings per share reflects the potential dilution
that could occur from common shares issuable through stock options. Weighted
average number of common shares outstanding was adjusted for 540,244 and 233,607
incremental shares assumed issued on the exercise of common stock during the
fiscal years ended January 31, 1999 and 1998. Stock options were excluded from
the computation of diluted loss per share for the year ended January 31, 1997,
as the effect would be anti-dilutive.

Options for which the exercise price was greater than the average market price
of common stock for the period were not included in the computation of diluted
earnings per share. The number of such options for which the exercise price was
greater than the average market price of $6.66 and $3.56 for the fiscal years
ended January 31, 1999 and 1998, was 14,000 and 97,500.

Comprehensive Income: In 1998, the Company implemented Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting 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 (loss) for the
Company for the years ended January 31, 1999, 1998, and 1997.

New Accounting Standards: In June 1998, the FASB issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value.
This statement is effective for years beginning after June 15, 1999 and is not
applied retroactively to financial statements for prior periods. The Company
believes that this statement will not have a material effect on its financial
statements.

Reclassification: Certain reclassifications have been made to prior years'
financial statements in order to conform with the classifications of the January
31, 1999 financial statements.

NOTE B -- PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
------------------------------
FISCAL YEAR ENDED JANUARY 31,
------------------------------
1999 1998
(FISCAL 1998) (FISCAL 1997)
------------- -------------
<S> <C> <C>
DOLLARS IN THOUSANDS

Leasehold improvements.................................... $25,419 $24,071
Office furniture and equipment............................ 35,466 30,313
Transportation............................................ 16 2,439
Land...................................................... 53 53
Building.................................................. 2,874 2,874
------- -------
63,828 59,750
Less accumulated depreciation and amortization............ 41,315 38,908
------- -------
$22,513 $20,842
======= =======
</TABLE>

NOTE C -- OTHER ASSETS

The Company has an agreement under which it will advance the premiums on a
split-dollar life insurance policy for its Chairman of the Board, Founder, and
Chief Executive Officer. The Company has an interest in the

F-8
<PAGE> 55
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

insurance benefits equal to the amount of the premiums advanced. The amount
receivable for premiums advanced as of January 31, 1999 and 1998 was $766,000
and $590,000, respectively.

NOTE D -- REVOLVING LOAN AND NOTES PAYABLE

The Company has a revolving secured credit facility with The CIT Group/Business
Credit, Inc., which expires September 2003. The credit facility has been amended
on several occasions and, as of January 31, 1999, the agreement allows Company
borrowings and letters of credit up to a maximum of $30 million for the period
from October 1, 1999 through December 31, 1999, and up to $20 million for other
times of the year based on inventory levels. The credit facility is secured by
the Company's inventory, accounts receivable, general intangibles and certain
other assets. Borrowings under this facility bear interest at either prime plus
0.25% per annum or at LIBOR plus 2.25% per annum based on financial performance.
The credit facility contains certain financial covenants pertaining to interest
coverage ratio and net worth and contains limitations on operating leases, other
borrowings, dividend payments and stock repurchases. For the fiscal years ended
January 31, 1999 and 1998, the Company was in compliance with all covenants.

The credit facility allows for seasonal borrowings as follows:

<TABLE>
<CAPTION>
OCTOBER 1 THROUGH DECEMBER 31,
- ------------------------------
<S> <C>
2000 $31 million
2001 $32 million
2002 $33 million
</TABLE>

At January 31, 1999 and 1998, the Company had no amounts outstanding on its
revolving loan credit facility. Letter of credit commitments as of January 31,
1999 and 1998 were $4,108,000 and $2,321,000, respectively.

In addition, the credit facility provides for term loans for capital
expenditures (Term Loans) up to an aggregate of $4.5 million. Amounts borrowed
under the Term Loans bear interest at a variable rate of either prime plus 0.50%
(8.25% at January 31,1999) per annum or at LIBOR plus 2.50% per annum based on
financial performance. Each Term Loan is to be repaid in 36 equal monthly
principal installments. Notes payable included a Term Loan which bears interest
at a variable rate of prime plus 0.50%, (8.25% at January 31, 1999) provides for
monthly principal payments of $55,555 plus the related interest payment, and
matures in October 1999. At January 31, 1999 and 1998, the balance of the Term
Loan was $500,000 and $1,167,000, respectively.

Notes payable included a mortgage loan collateralized by the Company's
distribution center. This note bears interest at a fixed rate of 8.40%, provides
for monthly payments of principal and interest in the amount of $29,367, and
matures in January 2011. At January 31, 1999 and 1998, the balance of this note
was $2,648,000 and $2,772,000, respectively.

At January 31, 1998, notes payable also included a mortgage loan collateralized
by equipment. This note was paid off in fiscal 1998 with the proceeds from sale
of the collateralized equipment.

Future minimum principal payments on notes payable at January 31, 1999, are as
follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31,
------------------------------
DOLLARS IN THOUSANDS
<S> <C>
2000............................................... $ 635
2001............................................... 147
2002............................................... 160
2003............................................... 173
2004............................................... 189
Later years........................................ 1,844
------
Total notes payable.............................. $3,148
======
</TABLE>

F-9
<PAGE> 56
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE E -- INCOME TAXES

Currently payable (refundable):
Federal............................................... $ 3,848 $(1,036) $ 248
State................................................. 679 (183) 44
------- ------- -------
4,527 (1,219) 292
Deferred:
Federal............................................... (1,240) 1,372 (2,710)
State................................................. (219) 242 (478)
------- ------- -------
(1,459) 1,614 (3,188)
------- ------- -------
$ 3,068 $ 395 $(2,896)
======= ======= =======
</TABLE>

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,
---------------------------------------------
1999 1998 1997
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
------------- ------------- -------------
<S> <C> <C> <C>
Federal tax rate........................................ 34.0% 34.0% 34.0%
State income tax, less federal benefit.................. 6.0 6.0 6.0
---- ---- ----
Effective tax rate...................................... 40.0% 40.0% 40.0%
==== ==== ====
</TABLE>

Deferred taxes result from differences in the recognition of expense for income
tax and financial reporting purposes. Temporary differences which give rise to
deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
-----------------------------
FISCAL YEAR ENDED
JANUARY 31,
-----------------------------
1999 1998
(FISCAL 1998) (FISCAL 1997)
------------- -------------
<S> <C> <C>
DOLLARS IN THOUSANDS

Current:
Nondeductible reserves.................................... $4,123 $3,809
Deferred catalog costs.................................... (981) (1,993)
State taxes............................................... (755) (569)
------ ------
Current -- net.............................................. 2,387 1,247
------ ------
Noncurrent:
Deferred rent............................................. 1,198 1,429
Depreciation.............................................. 2,967 2,356
Deductible software costs................................. (1,127) (1,050)
Other -- net.............................................. (173) (189)
------ ------
Noncurrent -- net........................................... 2,865 2,546
------ ------
Total............................................. $5,252 $3,793
====== ======
</TABLE>

F-10
<PAGE> 57
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE F -- LEASES

The Company leases its offices, retail facilities, and equipment under operating
leases for terms expiring at various dates through 2008. 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, 1999, are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JANUARY 31,
------------------------------
DOLLARS IN THOUSANDS
<S> <C>
2000.............................................. $14,875
2001.............................................. 13,392
2002.............................................. 9,625
2003.............................................. 9,411
2004.............................................. 8,891
Later years....................................... 19,535
-------
Total minimum lease commitments......... $75,729
=======
</TABLE>

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 payable under
the leases as deferred rent which is included in Other Liabilities.

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.

Net rental expense for all operating leases was as follows:

<TABLE>
<CAPTION>
---------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------
1999 1998 1997
(FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
DOLLARS IN THOUSANDS ------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals......................................... $15,273 $13,812 $13,259
Percentage rentals and other charges.................... 5,914 5,559 5,546
------- ------- -------
$21,187 $19,371 $18,805
======= ======= =======
</TABLE>

NOTE G -- STOCKHOLDERS' EQUITY

Under the Company's stock repurchase program, the Company is authorized by its
Board of Directors to repurchase up to $1,600,000 of common stock. Through
January 31, 1999, the Company has repurchased a total of 186,100 shares at an
average price of $5.95 per share, including 35,000 shares in fiscal 1997 for
$124,000.

Under the Company's 1985 Stock Option Plan, as amended, non-qualified options to
purchase common stock are granted to officers, key employees and consultants, up
to an aggregate 2,405,000 shares. Options 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. The Stock Option Plan limits the maximum number
of shares any one individual may be granted per fiscal year, and allows
individuals owning more than 25% of the Company's common stock to receive stock
options. Non-employee members of the Board are ineligible to receive stock
option grants under this plan.

The Company also has the 1994 Non-Employee Directors Stock Option Plan, as
approved by stockholders, to allow for stock option grants of common stock to
the non-employee members of the Board of Directors, up to an aggregate 50,000
shares. Options 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

F-11
<PAGE> 58
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

At January 31, 1999, the Company had reserved 403,500 shares and 19,000 shares,
under the 1985 Stock Option Plan and the 1994 Non-Employee Directors Stock
Option Plan, respectively, for the granting of additional stock options.

ADDITIONAL STOCK PLAN INFORMATION

As discussed in Note A, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
requires the disclosure of pro forma net earnings (loss) and earnings (loss) per
share had the Company adopted the fair value method as of the beginning of
fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards.

These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
five years from date of grant; stock volatility, 51% in both fiscal 1998 and
1997, and 45% in fiscal 1996; risk-free interest rates, 5.12% in fiscal 1998,
6.10% in fiscal 1997, and 6.21% in fiscal 1996; and no dividends during the
expected term.

The Company's calculations are based on a single option valuation approach, and
forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1998, fiscal 1997, and fiscal 1996 awards had been amortized to expense
over the vesting period of the awards, pro forma net earnings (loss) would have
been $4,338,715 ($0.51 earnings per share -- basic and $0.48 earnings per
share -- diluted) in fiscal 1998, $383,000 ($0.05 earnings per share -- basic
and $0.04 earnings per share -- diluted) in fiscal 1997, and $(4,576,000) ($0.55
loss per share -- basic and diluted) in fiscal 1996. However, the impact of
outstanding non-vested stock options granted prior to fiscal 1995 has been
excluded from the pro forma calculation; accordingly, the fiscal 1998, fiscal
1997, and fiscal 1996 pro forma adjustments are not necessarily indicative of
future period pro forma adjustments, when the calculation will apply to all
future applicable stock options.

F-12
<PAGE> 59
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following table reflects the activity under these plans:

<TABLE>
<CAPTION>
-----------------------------
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at January 31, 1996................................. 1,178,270 $4.03
Granted (weighted average fair value of $1.70).............. 951,800 3.54
Exercised................................................... (15,960) 4.39
Cancelled................................................... (609,610) 5.58
---------
Balance at January 31, 1997................................. 1,504,500 3.13
Granted (weighted average fair value of $1.81).............. 129,300 3.24
Exercised................................................... (124,340) 1.92
Cancelled................................................... (71,260) 3.83
---------
Balance at January 31, 1998................................. 1,438,200 3.21
Granted (weighted average fair value of $2.07).............. 463,000 4.05
Exercised................................................... (410,715) 2.39
Cancelled................................................... (345,380) 3.48
---------
Balance at January 31, 1999................................. 1,145,105 $3.76
=========
Exercisable at January 31, 1997............................. 624,000 $2.49
=========
Exercisable at January 31, 1998............................. 591,000 $2.73
=========
Exercisable at January 31, 1999............................. 379,000 $3.58
=========
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------ ------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OF OPTIONS REMAINING CONTRACTUAL WEIGHTED AVERAGE OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.16 - $1.99 9,995 2.9 $1.88 10,000 $1.88
2.00 - 3.99 976,470 8.5 3.58 326,000 3.40
4.00 - 7.94 158,640 8.9 4.99 43,000 5.33
--------- -------
$1.16 - $7.94 1,145,105 8.5 $3.76 379,000 $3.58
========= =======
</TABLE>

NOTE H -- 401K SAVINGS PLAN

The Company maintains a defined contribution, 401k 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 $73,000,
$77,000, and $81,000 for the fiscal years ended January 31, 1999, 1998, and
1997, respectively.

NOTE I -- PROVISION FOR LOSS DUE TO CLOSURE OF SPA COLLECTION DIVISION

The Company critically evaluates the results and long-term potential of its
current and test business concepts in order to determine which will generate the
greatest return on its investments. As part of this process, in January 1997 the
Company decided to close the unprofitable SPA Collection division.

During the fourth quarter of fiscal 1996, the Company incurred a one-time charge
related to the closure of the SPA Collection division of $8,000,000 ($4,800,000
net of the tax benefit, or 56 cents loss per share). The one-time charge
primarily related to the lease commitments and the net book value of fixed
assets related to the SPA Collection division. The liability related to this
one-time charge at January 31, 1999, and January 31, 1998, in the amount of
$200,000 and $3,822,000, respectively, was included in accrued expenses.

F-13
<PAGE> 60
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE J -- 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 an adverse material effect on the Company's financial position and results
of operations.

NOTE K -- SEGMENT INFORMATION

The Company classifies its business interests into two reportable segments:
retail stores and catalog. 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 tax expense or benefit. 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>
---------------------------------------------
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------
1999 1998 1997
DOLLARS IN THOUSANDS (FISCAL 1998) (FISCAL 1997) (FISCAL 1996)
-------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Stores.................................................. $162,371 $151,589 $149,321
Catalog................................................. 70,750 58,772 53,577
Other................................................... 9,993 6,454 7,347
-------- -------- --------
Total Revenues........................................ $243,114 $216,815 $210,245
======== ======== ========
Operating Contributions:
Stores.................................................. $ 19,405 $ 15,170 $ 7,634
Catalog................................................. 8,814 3,059 7,411
Unallocated............................................. (20,549) (17,241) (22,286)
-------- -------- --------
Earnings (Loss) Before Income Tax (Benefit)............. $ 7,670 $ 988 $ (7,241)
======== ======== ========
Depreciation and Amortization:
Stores.................................................. $ 2,812 $ 2,516 $ 2,692
Catalog................................................. -- -- --
Unallocated............................................. 2,215 1,818 1,503
-------- -------- --------
Total Depreciation and Amortization................... $ 5,027 $ 4,334 $ 4,195
======== ======== ========
Asset Expenditures:
Stores.................................................. $ 5,988 $ 2,722 $ 4,104
Catalog................................................. -- -- --
Unallocated............................................. 2,443 1,715 2,475
-------- -------- --------
Total Asset Expenditures.............................. $ 8,431 $ 4,437 $ 6,579
======== ======== ========
Assets:
Stores.................................................. $ 13,673 $ 11,564 $ 14,434
Catalog................................................. -- -- --
Unallocated............................................. 68,372 67,098 64,370
-------- -------- --------
Total Assets.......................................... $ 82,045 $ 78,662 $ 78,804
======== ======== ========
</TABLE>

F-14
<PAGE> 61
SHARPER IMAGE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE L -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
FISCAL YEAR ENDED JANUARY 31, 1999 1998 1998 1998 1999
---------------------------------- --------- -------- ----------- -----------
DOLLARS IN THOUSAND EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Revenues................................................... $39,751 $49,532 $42,955 $110,876
Expenses
Cost of products......................................... 20,743 25,780 22,404 54,204
Buying and occupancy..................................... 6,337 6,261 6,397 7,158
Advertising and promotion................................ 4,512 6,904 4,906 11,074
General, selling and administrative...................... 11,646 12,383 12,285 22,692
Other income (expense)..................................... (163) (176) 603 (22)
Earnings (loss) before income tax (benefit)................ (3,650) (1,972) (2,434) 15,726
Income Tax (benefit)....................................... (1,460) (789) (974) 6,291
Net earnings (loss)........................................ $(2,190) $(1,183) $(1,460) $ 9,435
Net earnings (loss) per share --
Basic(1)................................................. $ (0.26) $ (0.14) $ (0.17) $ 1.08
Diluted(2)............................................... $ (0.26) $ (0.14) $ (0.17) $ 0.98
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
FISCAL YEAR ENDED JANUARY 31, 1998 1997 1997 1997 1998
---------------------------------- --------- -------- ----------- -----------
DOLLARS IN THOUSAND EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Revenues................................................... $36,273 $43,340 $41,106 $96,096
Expenses
Cost of products......................................... 19,563 23,472 22,115 50,385
Buying and occupancy..................................... 5,707 5,783 5,946 6,468
Advertising and promotion................................ 3,546 4,715 4,036 10,498
General, selling and administrative...................... 11,021 11,739 11,429 18,885
Other income (expense)..................................... (45) (118) (198) (158)
Earnings (loss) before income tax (benefit)................ (3,609) (2,487) (2,618) 9,702
Income Tax (benefit)....................................... (1,443) (995) (1,047) 3,880
Net earnings (loss)........................................ $(2,166) $(1,492) $(1,571) $ 5,822
Net earnings (loss) per share --
Basic(1)................................................. $ (0.26) $ (0.18) $ (0.19) $ 0.70
Diluted (2).............................................. $ (0.26) $ (0.18) $ (0.19) $ 0.67
</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.

F-15
<PAGE> 62

[INSIDE BACK COVER PAGE OF PROSPECTUS]

[PHOTOGRAPHS OF SAMPLE PRODUCTS WITH PRODUCT DESCRIPTIONS]
<PAGE> 63

[OUTSIDE BACK COVER PAGE OF PROSPECTUS]

[THE SHARPER IMAGE]

[LOGO]
<PAGE> 64

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses payable by the Registrant
in connection with the sale of common stock being registered. All amounts are
estimates except the registration fee, the NASD fee and the Nasdaq National
Market.

<TABLE>
<CAPTION>
AMOUNT
TO
BE PAID
-------
<S> <C>
Registration fee............................................ $ 9,412
NASD filing fee............................................. 3,886
Nasdaq National Market fee.................................. 17,500
Printing and engraving...................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent fees and expenses............................ *
D&O Insurance............................................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>

- -------------------------
* To be filed by amendment.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the General Corporation Law of the state of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests, and, for criminal proceedings,
had no reasonable cause to believe his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses which
such officer or director actually and reasonably incurred.

The Company's Certificate of Incorporation provides that the Company shall
indemnify its directors to the fullest extent permitted by law either now or
hereafter. Article VII, Section 6 of the Bylaws of the Company provides for
indemnification of the officers and directors of the Company to the fullest
extent permitted by applicable law. The Company has also entered into an
agreement with each of its directors and certain of its officers, a form of
which is attached as Exhibit 10.9 hereto, wherein it has agreed to indemnify
each of them to the fullest extent permitted by law. Reference is also made to
Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Company against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").

II-1
<PAGE> 65

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S>
1.01 Form of Underwriting Agreement (To be filed by amendment).
5.01 Opinion of Brobeck Phleger & Harrison LLP (To be filed by
amendment).
10.1 Amended and Restated Stock Option Plan (Incorporated by
reference to appendix to Form 14A for the fiscal year ended
January 31, 1998).
10.2 1994 Non-Employee Director Stock Option Plan dated October
7, 1994, as amended (Incorporated by reference to appendix
to Form 14A for the fiscal year ended January 31, 1998).
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 purchased 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)).
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 Real Estate Installment Note and Mortgage dated October 4,
1993 among the Company and Lee Thalheimer, Trustee for the
Alan Thalheimer Trust (Incorporated by reference to Exhibit
10.20 to Form 10-K for the fiscal year ended January 31,
1994).
10.11 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).
10.12 The Sharper Image 401(k) Savings Plan (Incorporated by
reference to Exhibit 10.21 to Registration Statement on Form
S-8 (Registration No. 33-80504) dated June 21, 1994)).
10.13 Chief Executive Officer Compensation Plan dated February 3,
1995 (Incorporated by reference to Exhibit 10.24 to Form
10-K for the fiscal year ended January 31, 1995).
10.14 Annual Report for the Sharper Image 401(k) Savings Plan
(Incorporated by reference to Form 11-K (Registration No.
33-80504) for the plan year ended December 31, 1995).
10.15 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).
10.16 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).
10.17 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).
10.18 Warrant to Purchase Common Stock Agreement dated May 15,
1996 between the Company and The CIT Group/Business Credit
Inc (Incorporated by reference to Exhibit 10.20 to the Form
10-Q for the quarter ended April 30, 1996).
</TABLE>

II-2
<PAGE> 66

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S>
10.19 CAPEX Term Loan Promissory Note dated October 15, 1996
between the Company and The CIT Group/Business Credit Inc
(Incorporated by reference to Exhibit 10.21 to the Form 10-Q
for the quarter ended October 31, 1996).
10.20 Employment Agreement between the Company and Mr. Barry
Gilbert, its Vice Chairman and Chief Operating Officer dated
and effective December 2, 1996 (Incorporated by Reference to
Exhibit 10.20 to the Form 10-K for the year ended January
31, 1997).
10.21 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 the Form 10-K
for the year ended January 31, 1997).
10.22 Warrant to Purchase Common Stock Agreement dated February
13, 1997 between the Company and The CIT Group/Business
Credit Inc (Incorporated by Reference to Exhibit 10.22 to
the Form 10-K for the year ended January 31, 1997).
10.23 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 the Form 10-K
for the year ended January 31, 1997).
10.24 Warrant to Purchase Common Stock Agreement dated April 6,
1998 between the Company and The CIT Group/Business Credit
Inc (Incorporated by Reference to Exhibit 10.24 to the Form
10-K for the year ended January 31, 1997).
10.25 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 the Form 10-K
for the year ended January 31, 1997).
10.26 Amendment to Employment Agreement between the Company and
Mr. Barry Gilbert, its Vice Chairman and Chief Operating
Officer dated and effective November 30, 1998 (Incorporated
by Reference to Exhibit 10.26 to the Form 10-K for the year
ended January 31, 1998).
11.1 Statement Re: Computation of Earnings per Share.
(Incorporated by Reference to Exhibit 11.1 to the Form 10-K
for the year ended January 31, 1998).
13.1 1998 Annual Report to Stockholders (Incorporated by
Reference to Exhibit 13.1 to the Form 10-K for the year
ended January 31, 1999).
23.1 Independent Auditors' Consent.
23.2 Consent of Brobeck, Phleger & Harrison LLP, Reference is
made to exhibit 5.01.
23.3 Consent of Director Nominee.
</TABLE>

ITEM 17. UNDERTAKINGS

(1) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

(2) The undersigned Registrant hereby undertakes:

(a) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of the registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h)

II-3
<PAGE> 67

under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.

(b) That for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 68

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Francisco, state of California, on May 25, 1999.

SHARPER IMAGE CORPORATION

By: /s/ RICHARD J. THALHEIMER
--------------------------------------
Richard J. Thalheimer
Founder, Chairman and Chief Executive
Officer

POWER OF ATTORNEY

We the undersigned directors and officers of Sharper Image Corporation do hereby
constitute and appoint Richard Thalheimer and Tracy Wan, or either of them, our
true and lawful attorneys and agents, to do any and all such acts and things in
our name and on our behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or in any of our names and in the capacities indicated below any
and all amendments (including post-effective amendments) to this Registration
Statement, or any related Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and
we do hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD J. THALHEIMER Founder, Chairman and Chief May 25, 1999
- ----------------------------------------------------------- Executive Officer (Principal
Richard J. Thalheimer Executive Officer)

/s/ TRACY Y. WAN President and Corporate Secretary May 25, 1999
- -----------------------------------------------------------
Tracy Y. Wan

/s/ JEFFREY P. FORGAN Senior Vice President, Chief May 25, 1999
- ----------------------------------------------------------- Financial Officer (Principal
Jeffrey P. Forgan Financial and Accounting Officer)

/s/ ALAN THALHEIMER Director May 25, 1999
- -----------------------------------------------------------
Alan Thalheimer

/s/ GERALD NAPIER Director May 25, 1999
- -----------------------------------------------------------
Gerald Napier

/s/ MORTON DAVID Director May 25, 1999
- -----------------------------------------------------------
Morton David

Director May 25, 1999
- -----------------------------------------------------------
Maurice Gregg
</TABLE>

II-5
<PAGE> 69

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
1.01 Form of Underwriting Agreement (To be filed by amendment).
5.01 Opinion of Brobeck Phleger & Harrison LLP (To be filed by
amendment).
10.1 Amended and Restated Stock Option Plan (Incorporated by
reference to appendix to Form 14A for the fiscal year ended
January 31, 1998).
10.2 1994 Non-Employee Director Stock Option Plan dated October
7, 1994, as amended (Incorporated by reference to appendix
to Form 14A for the fiscal year ended January 31, 1998).
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 purchased 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)).
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 Real Estate Installment Note and Mortgage dated October 4,
1993 among the Company and Lee Thalheimer, Trustee for the
Alan Thalheimer Trust (Incorporated by reference to Exhibit
10.20 to Form 10-K for the fiscal year ended January 31,
1994).
10.11 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).
10.12 The Sharper Image 401(k) Savings Plan (Incorporated by
reference to Exhibit 10.21 to Registration Statement on Form
S-8 (Registration No. 33-80504) dated June 21, 1994)).
10.13 Chief Executive Officer Compensation Plan dated February 3,
1995 (Incorporated by reference to Exhibit 10.24 to Form
10-K for the fiscal year ended January 31, 1995).
10.14 Annual Report for the Sharper Image 401(k) Savings Plan
(Incorporated by reference to Form 11-K (Registration No.
33-80504) for the plan year ended December 31, 1995).
10.15 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).
10.16 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).
10.17 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).
</TABLE>
<PAGE> 70

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
10.18 Warrant to Purchase Common Stock Agreement dated May 15,
1996 between the Company and The CIT Group/Business Credit
Inc (Incorporated by reference to Exhibit 10.20 to the Form
10-Q for the quarter ended April 30, 1996).
10.19 CAPEX Term Loan Promissory Note dated October 15, 1996
between the Company and The CIT Group/Business Credit Inc
(Incorporated by reference to Exhibit 10.21 to the Form 10-Q
for the quarter ended October 31, 1996).
10.20 Employment Agreement between the Company and Mr. Barry
Gilbert, its Vice Chairman and Chief Operating Officer dated
and effective December 2, 1996 (Incorporated by Reference to
Exhibit 10.20 to the Form 10-K for the year ended January
31, 1997).
10.21 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 the Form 10-K
for the year ended January 31, 1997).
10.22 Warrant to Purchase Common Stock Agreement dated February
13, 1997 between the Company and The CIT Group/Business
Credit Inc (Incorporated by Reference to Exhibit 10.22 to
the Form 10-K for the year ended January 31, 1997).
10.23 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 the Form 10-K
for the year ended January 31, 1997).
10.24 Warrant to Purchase Common Stock Agreement dated April 6,
1998 between the Company and The CIT Group/Business Credit
Inc (Incorporated by Reference to Exhibit 10.24 to the Form
10-K for the year ended January 31, 1997).
10.25 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 the Form 10-K
for the year ended January 31, 1997).
10.26 Amendment to Employment Agreement between the Company and
Mr. Barry Gilbert, its Vice Chairman and Chief Operating
Officer dated and effective November 30, 1998 (Incorporated
by Reference to Exhibit 10.26 to the Form 10-K for the year
ended January 31, 1998).
11.1 Statement Re: Computation of Earnings per Share.
(Incorporated by Reference to Exhibit 11.1 to the Form 10-K
for the year ended January 31, 1998).
13.1 1998 Annual Report to Stockholders (Incorporated by
Reference to Exhibit 13.1 to the Form 10-K for the year
ended January 31, 1999).
23.1 Independent Auditors' Consent.
23.2 Consent of Brobeck, Phleger & Harrison LLP, Reference is
made to exhibit 5.01.
23.3 Consent of Director Nominee.
</TABLE>

<PAGE> 1
[LETTERHEAD OF DELOITTE & TOUCHE LLP]

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration Statement of
the Sharper Image Corporation on Form S-2 of our reports dated March 26, 1999
included and incorporated by reference in the Annual Report on Form 10-K of
Sharper Image Corporation for the year ended January 1, 1999 and to the use of
our reports dated March 26, 1999, appearing and incorporated by reference in the
Prospectus, which is part of this Registration Statement. We also consent to
the references to us under the heading "Summary Financial Data and Operating
Statistics", "Selected Financial Data" and "Experts" in such Prospectus.

DELOITTE & TOUCHE LLP

San Francisco California
May 24, 1999

<PAGE> 1

EXHIBIT 23.3

CONSENT OF DIRECTOR NOMINEE

Sharper Image Corporation
650 Davis Street
San Francisco, California 94111

Attention: Board of Directors

I, George James, hereby consent to be named in the Registration
Statement on Form S-2 of Sharper Image Corporation relating to the sale of
2,500,000 shares of Sharper Image Corporation's common stock.

/s/ George James
-----------------------------
George James

San Francisco, California
May 21, 1999