(FORTUNE Small Business) – Should you ever find yourself in conversation with Richard Thalheimer, it's best not to get him started on the subject of nose-hair trimmers. As it turns out, they're the one gizmo (aptly called the TurboGroomer 2.0, $59.95) that the CEO and founder of the Sharper Image says embodies the retailer's 25-year history. "We made it a really beautiful tool, designed to take an ordinary task and make it a lot more satisfying," he explains, almost dreamily.

In fact, that's what the Sharper Image has done for a lot of products since Thalheimer, now 54, stumbled upon his first gadget--a shock-resistant wristwatch for fellow joggers--back in 1977. Thalheimer, who still owns 35% of the publicly traded company, characterizes his job as "finding the screaming winners" among upscale products aimed at boosting the efficiency with which consumers work, exercise, and, yes, groom.

From the start, his fussy sensibility has informed not only what the $395 million company chooses to sell but also how it displays the products in its catalogs and website and on the shelves of its 120 retail stores. Using lush photography and catchy copy, he quickly distinguished the Sharper Image from colorless competitors that, he says, "just had a bunch of items they stuck together in a catalog." Thalheimer, by contrast, showed how an entrepreneur could compete with megastores, by exploiting a specialized niche--in his case, "selling things no one else has." Since he had grown up in retailing, he was also successful in opening up stores, the first of which appeared in 1981, adjacent to the company's San Francisco headquarters. And he's pushed to preserve the company's competitive edge by investing in in-house design.

The Sharper Image didn't design the Razor Scooter, which it began selling exclusively in 1999. "We sold almost a million of them at $100 each," Thalheimer recalls. "It was phenomenal. We've never sold a million of anything." Not even those nose-hair trimmers. --Joshua Hyatt

"I started out simply by targeting people like me: men who like gadgets. In 1977, I was a runner, and I wanted to buy a digital chronograph wristwatch. It was $300, and I realized that just about every runner wanted a waterproof, digital wristwatch because they had just been invented. The manufacturer advertised in Runner's World, but there was no place listed to buy it. So I thought, Why don't I just play off its full-page ad and put in an order blank for mail order? I called the manufacturer, and they told me to go ahead.

I knew that men were not good shoppers. So my idea was to write intelligent, informative advertising copy and put it in magazines that men enjoyed, like car magazines or flying magazines. I combined that with a first-rate graphic presentation so that the item looked as juicy and wonderful as it possibly could.

The watch was a fair seller, and I thought, This is fun. Then somebody said to me, 'You know, Richard, you should go to the Consumer Electronics Show in Las Vegas. You'll see lots of interesting products.' So on a whim, I took a flight to Las Vegas. I happened to find a little booth about the size of a card table, used by an American importer who had found this new digital stopwatch from a Taiwanese manufacturer. I brought it back and gave it to the guy who was the head of our running club. He wore the watch for about three months, and the watch held up; he bicycled ten miles every day, ran 17 miles across the Golden Gate Bridge, and then jumped into the San Francisco Bay. The watch took it. So I wrote an ad for it: 'Finally, a chronograph that keeps up with the amazing Walt Stack.' It ran as a full-page ad in Runner's World magazine. And that was a turning point in my career; it made about $300,000 in clear profit the first year. It would be a long, long time before I made that kind of money again. But I thought, Wow, this is too much fun. Why don't I try some other products?

Eventually we identified a whole bunch of products nobody had ever heard of, like the cordless telephone and the first radar detector. And I did the first ad for a little computer you wore on your belt to try to keep track of your calorie burn. 'Finally, a computer for losing weight!' we said. You'd read that and you'd go, 'Wow! What's that?' I just kept making up ads as I found interesting products, and microchips were making it possible for more new stuff to come out. One of our great headlines was 'Our $69 quartz watch is more accurate than your $2,000 Rolex.' That happened to be true, because a quartz watch is always more accurate than a mechanical watch. We introduced the first Nautilus home stomach-abdominal trainer, and it was a huge success at $400. People still use the machines--you see them in gyms all the time--but they don't buy them for their homes anymore. People are always looking to lose weight or look better. They want to look good, but they still want to get French fries. I know that because we were one of the first to introduce Dr. Dean Ornish's heart diet to a broader audience. It was a series of tapes, and it happens to be a very good program. But for the average person, it was not an interesting product.

I was three years out of law school when I had a hit with the watch. I already had the catchy name of the Sharper Image because I had started a business selling copier supplies to offices, which I had learned to do one summer while in college. I had done the same business during law school, but at that point in my life I learned to sell on the telephone because I was too busy studying. Eventually I was selling office supplies by mail because I was too busy even to make the phone calls. And I got mesmerized by the whole catalog idea--that you could send out a printed message to lots of people at once and have it be consistent. When you're out there selling personally (I had also sold encyclopedias door to door), it changes every time and it can get screwed up. But doing it in print gives you the chance to make the same exact sales presentation every time. That was extremely appealing to me. And it always appealed to me to start my own business. My family had owned a department store in Arkansas. After we sold that in about 1966, my father started his own group of six stores. So I basically finished school and had a one-person copier supply business, receiving inventory in the morning and putting it in the basement of my apartment building. I would make sales calls during the day; every other morning I'd go out in my Volkswagen squareback station wagon and deliver the product. I learned some good lessons out of that, actually. I learned you can't take rejection too personally, and you can't do anything other than just play the averages.

It's the same with products. Once the Sharper Image really got going, I had a couple of product failures. Of course, once in a while my judgment is off. For example, there was this briefcase with a security alarm built in, and I thought it was something everybody would want. Well, it wasn't, because people were afraid it might go off at a meeting and they'd be fired. So it was a need we filled that nobody happened to have. But you've got to keep trying. So many people give up too easily. They get discouraged.

There were many difficult years when I myself felt frustrated. There was a time, roughly 20 years ago, when I thought franchising the Sharper Image was a great global opportunity. Our first licensee was in Switzerland, and it was the most successful; we still have that licensee. But then we tried additional licensees every place from Korea to Australia to Japan. Franchising internationally turned out not to be a very good opportunity at all. They all had their ideas of how they wanted to do it, and we weren't well organized or well managed enough to enforce a standard of consistency. What I learned from all that is that I don't like partners. I like to have control over the situation, and I like to be able to run the business the way I think it should be run.

But I never really hit a terrible, terrible obstacle until about 1989. We had gone public in 1987, and we were well known enough by then that we had a lot of counterfeit competitors. There were no fewer than about ten other catalogs and two retailers attempting to copy our formula. At the same time big category-killer stores were rolling out, big electronics stores that were copying a lot of the products that were our bestsellers. And even retailers like Macy's had a department that copied us.

So all of a sudden the products we had been selling were available in a lot of places. Our uniqueness was disappearing, and our buying department wasn't capable of really staying ahead by finding a lot of unique, innovative new products. I wasn't paying enough attention because my first daughter was born in 1987, and my second daughter was born in 1989. I felt as if I had worked really hard, and I sort of thought things were going to run themselves. I'd been told by a lot of people, 'Oh, once you become a public company, you should get a professional manager. You're just the entrepreneur. You don't really know how to run a business. You should back off.' I happen to think that is complete bull. If you're competent enough to run it yourself, there's nobody who knows better than the founder what needs to be done. There are founders--like Bill Gates at Microsoft--who are perfectly capable of maintaining the growth of their businesses. And I happen to be one of them.

But in 1989, I didn't know that. I just stepped back and let other people run the merchandising. Pretty soon we had the first year of losses in our history.

That was in 1991; we lost $2.3 million net, after tax, on sales of $180 million. Until then it had been uninterrupted success. That was a very, very painful year for me. My ego was crushed. If I hadn't owned a majority of the stock, the board would have thrown me out that year. I was in danger of losing my house. I was actually thinking that maybe my family would have to move to Oregon and live in a little condo we had there because I wouldn't be able to make my house payments in San Francisco.

So I decided that the only thing to do was totally remerchandise the business to develop unique, interesting products that had better margins and that you couldn't find anywhere else. That really was the rebirth of the Sharper Image. We've truly become a better business from that day forward. I decided at that point that we would design and create our own products. The first product we made was a tie rack that rotated. Today we manufacture two-thirds of everything we sell. The hallmark of our manufacturing has become to design a better product.

So I've learned over time to plug away at it, and I've listened and learned from the criticism I've received. In a way I've always felt sorry for myself because some people seem to have had tremendous success come very easily for them--like Ted Waitt with Gateway or Michael Dell of Dell Computer. [See Michael Dell's story on page 78.] Some people have become huge successes, and I never became a huge success, in my view. I just feel as if I worked one brick at a time. Certainly my net worth is higher than a lot of people's. But I've often found myself wishing our stock was higher and that we commanded the same multiples that some other retailers get.

But I don't let myself get too worried about that. Between the recession, the dropoff from the Razor Scooter phenomenon, and the dot-com implosion, last year was tough. A lot of people made fun of us after December 2000, when the Razor Scooters we were selling--I'd first spotted them at a show in Hong Kong and we had an exclusive on them for seven months--were really big. They said, 'The Sharper Image is a one-trick pony. They don't have anything else.' But that was just really, truly a misunderstanding of our business. We've built this tremendously diverse and strong business, and the fact that the scooters were so incredibly successful--that was just a tribute to our ability to spot a merchandise trend and jump on it. We were perfectly positioned to take advantage of the fad, and we did. We're always finding original ideas that people want. We're not just selling gadgets to guys anymore."