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[FORM OF CONVERTIBLE NOTE] 
 
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT.
 
BIG DOG HOLDINGS, INC.
8.375% CONVERTIBLE NOTE DUE 2012

 
Issuance Date: April ___, 2007
Original Principal Amount: $_______________

 
      FOR VALUE RECEIVED, Big Dog Holdings, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to [___________________] or registered
assigns (“Holder”) the amount set out above as the Original Principal Amount (as
reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined
below), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest (“Interest”) on any outstanding Principal
at the rate of 8.375% per annum (the “Interest Rate”), from the date set out
above as the Issuance Date (the “Issuance Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below) or the Maturity Date,
acceleration, conversion, redemption or otherwise (in each case in accordance
with the terms hereof). This 8.375% Convertible Note due 2012 (including all
8.375% Convertible Notes due 2012 issued in exchange, transfer or replacement
hereof, this “Note”) is one of an issue of 8.375% Convertible Notes due 2012
issued pursuant to the Convertible Note Purchase Agreement (as defined below) on
the Closing Date (collectively, the “Notes”, and such other 8.375% Convertible
Notes due 2012, the “Other Notes”). Certain capitalized terms used herein are
defined in Section 28.
 
     (1) PAYMENTS ON MATURITY. Unless this Note has been earlier converted
pursuant to Section 3, on the Maturity Date the Company shall pay the Holder an
amount in cash equal to all outstanding Principal of the Note, plus any accrued
and unpaid Interest and any accrued and unpaid Late Charges. The “Maturity Date”
shall be March 31, 2012, as may be extended at the option of the Holder (i) in
the event that, and for so long as, an Event of Default (as defined in
Section 4(a)) shall have occurred and be continuing on the Maturity Date (as may
be extended pursuant to this Section 1) or any event that shall have occurred
and be continuing that with the passage of time and the failure to cure would
result in an Event of Default and (ii) through the date that is ten
(10) Business Days after the consummation of a Change of Control in the event
that a Change of Control is publicly announced or a Change of Control Notice (as
defined in Section 5(b)) is delivered prior to the Maturity Date. Other than as
specifically permitted by this Note, the Company may not prepay any portion of
the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges, if any, on Principal and Interest.
 
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     (2) INTEREST; INTEREST RATE. Interest on the outstanding Principal amount
of this Note shall commence accruing on the Issuance Date and shall be computed
on the basis of a 365-day year and actual days elapsed and shall be payable
quarterly, in arrears, on March 31, June 30, September 30, and December 31 of
each year (each, an “Interest Date”), with the first Interest Date being June
30, 2007. Interest shall be payable on each Interest Date, to the record holder
of this Note on the applicable Interest Date, in cash. Prior to the payment of
Interest on an Interest Date, Interest on this Note shall accrue at the Interest
Rate and be payable by way of inclusion of the Interest in the Conversion Amount
in accordance with Section 3(b)(i). From and after the occurrence and during the
continuance of an Event of Default, the Interest Rate shall be increased to
10.375% per annum. In the event that such Event of Default is subsequently
cured, the adjustment referred to in the preceding sentence shall cease to be
effective as of the date of such cure; provided that the Interest as calculated
and unpaid at such increased rate during the continuance of such Event of
Default shall continue to apply to the extent relating to the days after the
occurrence of such Event of Default through and including the date of cure of
such Event of Default.  
 
     (3) CONVERSION OF NOTES. This Note shall be convertible into shares of the
Company’s Common Stock on the terms and conditions set forth in this Section 3.
 
          (a) Conversion Right. Subject to the provisions of Section 3(d), at
any time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid Conversion Amount (as defined
below) into fully paid and nonassessable shares of Common Stock in accordance
with Section 3(c), at the Conversion Rate (as defined below), provided, that the
Company may, at its sole option, subject to any applicable Principal Market
shareholder approval rules, pay the Holder an amount of cash equal to the
Conversion Amount then remaining under this Note, or the portion thereof to be
converted pursuant to this Section 3(a), and reduce the number of shares of
Common Stock which would otherwise be issuable pursuant to the conversion by the
number of shares of Common Stock which would be issuable upon conversion of the
Conversion Amount then remaining under this Note, or the portion thereof to be
converted pursuant to this Section 3(a), valued at the Closing Sale Price on the
Conversion Date stated in the Conversion Notice (each as defined below)
(“Conversion Net Share Settlement”); provided, further, that if the Holder is a
director, officer, consultant or employee of the Company, the Company shall only
have the option to utilize Conversion Net Share Settlement if the Company (A)
obtains the approval of its stockholders as required by the applicable rules of
the Principal Market for issuances of Common Stock in connection with such
Conversion Net Share Settlement or (B) obtains a written opinion from outside
counsel to the Company that such approval is not required, which opinion shall
be reasonably satisfactory to the Required Holders; provided, further, that the
Company may selectively utilize Conversion Net Share Settlement among Holders
and is not bound to treat all Holders the same or on a pro rata basis with
respect to Conversion Net Share Settlement. The Company shall not issue any
fraction of a share of Common Stock upon any conversion. If the issuance would
result in the issuance of a fraction of a share of Common Stock, the Company
shall round such fraction of a share of Common Stock down to the nearest whole
share, and the Company shall pay to the Holder an amount in cash equal to such
fractional share (valued at the Conversion Price). The Company shall pay any and
all taxes that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount; provided that the Company
shall not be required to pay any tax that may be payable in respect of any
issuance of Common Stock to any Person other than the converting Holder or with
respect to any income tax due by the Holder with respect to such Common Stock.

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          (b) Conversion Rate. The number of shares of Common Stock issuable
upon conversion of any Conversion Amount pursuant to Section 3(a) shall be
determined by dividing (x) such Conversion Amount by (y) the Conversion Price
(the “Conversion Rate”).
 
               (i) “Conversion Amount” means the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made.
 
               (ii) “Conversion Price” means, as of any Conversion Date (as
defined below) or other date of determination, $18.00, subject to adjustment as
provided herein.
 
          (c) Mechanics of Conversion.
 
               (i) Optional Conversion. To convert any Conversion Amount into
shares of Common Stock on any date (a “Conversion Date”), the Holder shall
(A) transmit by facsimile (or otherwise deliver), for receipt on or prior to
8:00 p.m., New York Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to
the Company and (B) surrender this Note to a reputable overnight carrier for
delivery to the Company the day immediately following such date (or an
indemnification undertaking with respect to this Note in the case of its loss,
theft or destruction). On or before the second (2nd) Trading Day following the
date of receipt of a Conversion Notice, the Company shall transmit by facsimile
a confirmation of receipt of such Conversion Notice to the Holder and the
Company’s transfer agent (the “Transfer Agent”). On or before the third
(3rd)Trading Day following the date of receipt of a Conversion Notice (the
“Share Delivery Date”), the Company shall (X) provided that the Transfer Agent
is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system
or (Y) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and deliver to the address as specified in
the Conversion Notice, a certificate, registered in the name of the Holder or
its designee, for the number of shares of Common Stock to which the Holder shall
be entitled. If this Note is surrendered for conversion and the outstanding
Principal of this Note is greater than the Principal portion of the Conversion
Amount being converted, then the Company shall as soon as practicable and in no
event later than three (3) Business Days after receipt of this Note and at its
own expense, issue and deliver to the holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal not converted. The Person
or Persons entitled to receive the shares of Common Stock issuable upon a
conversion of this Note shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on the Conversion Date.
 
               (ii) Registration; Book-Entry. The Company shall maintain a
register (the “Register”) for the recordation of the names and addresses of the
holders of each Note and the principal amount of the Notes held by such holders
(the “Registered Notes”). The entries in the Register shall be conclusive and
binding for all purposes absent manifest error. The Company and the holders of
the Notes shall treat each Person whose name is recorded in the Register as the
owner of a Note for all purposes, including, without limitation, the right to
receive payments of principal and interest hereunder, notwithstanding notice to
the contrary. A Registered Note may be assigned or sold in whole or in part only
by registration of such assignment or sale on the Register. Upon its receipt of
a request to assign or sell all or part of any Registered Note by a Holder, the
Company shall record the information contained therein in the Register and issue
one or more new Registered Notes in the same aggregate principal amount as the
principal amount of the surrendered Registered Note to the designated assignee
or transferee pursuant to Section 18. Upon conversion of any portion of this
Note in accordance with the terms hereof, the Holder shall be required to
physically surrender this Note to the Company and the Company shall, at its own
expense, issue and deliver to the Holder a new Note (in accordance with Section
18(d)) representing the outstanding Principal of the Note not converted. The
Holder and the Company shall maintain records showing the Principal, Interest
and Late Charges, if any, converted and the dates of such conversions or shall
use such other method, reasonably satisfactory to the Holder and the Company, so
as not to require physical surrender of this Note upon conversion.

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               (iii) Pro Rata Conversion; Disputes. In the event that the
Company receives a Conversion Notice from more than one holder of Notes for the
same Conversion Date and the Company can convert some, but not all, of such
portions of the Notes submitted for conversion, the Company, subject to
Section 3(d), shall convert from each holder of Notes electing to have Notes
converted on such date a pro rata amount of such holder’s portion of its Notes
submitted for conversion based on the principal amount of Notes submitted for
conversion on such date by such holder relative to the aggregate principal
amount of all Notes submitted for conversion on such date. In the event of a
dispute as to the number of shares of Common Stock issuable to the Holder in
connection with a conversion of this Note, the Company shall issue to the Holder
the number of shares of Common Stock not in dispute and resolve such dispute in
accordance with Section 23.
 
               (iv) Company’s Right of Mandatory Conversion.
 
                    (A) Mandatory Conversion. If at any time from and after the
eighteen (18) month anniversary of the Issuance Date (the “Mandatory Conversion
Eligibility Date”), (i) (X) the Closing Sale Price of the Common Stock exceeds
for each of any twenty (20) consecutive Trading Days following the Mandatory
Conversion Eligibility Date (the “Mandatory Conversion Measuring Period”) 175%
of the Conversion Price on the Issuance Date (as adjusted for any stock splits,
stock dividends, recapitalizations, combinations, reverse stock splits or other
similar events during such period) or (Y) a bona fide firm commitment
underwritten public offering of the Common Stock resulting in gross proceeds to
the Company in excess of $30 million has been consummated (which offering may
occur at any time after the Issuance Date), the Closing Sale Price of the Common
Stock for the Mandatory Conversion Measuring Period exceeds 150% of the
Conversion Price on the Issuance Date (as adjusted for any stock splits, stock
dividends, recapitalizations, combinations, reverse stock splits or other
similar events during such period) and (ii) there is not an Equity Conditions
Failure then existing, the Company shall have the right to require the Holder to
convert all, or any portion, of the Conversion Amount then remaining under this
Note into fully paid, validly issued and nonassessable shares of Common Stock in
accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory
Conversion Date (as defined below) with respect to the Conversion Amount (a
“Mandatory Conversion”); provided, that the Company may, at its sole option,
subject to any applicable Principal Market shareholder approval rules, pay the
Holder an amount of cash equal to the Conversion Amount then remaining under
this Note, or the portion thereof to be converted pursuant to this Section
3(c)(iv)(A), and reduce the number of shares of Common Stock which would
otherwise be issuable pursuant to the Mandatory Conversion by the number of
shares of Common Stock which would be issuable upon conversion of the Conversion
Amount then remaining under this Note, or the portion thereof to be converted
pursuant to this Section 3(c)(iv)(A), valued at the Closing Sale Price on the
Mandatory Conversion Date stated in the Mandatory Conversion Notice (each as
defined below) (“Mandatory Net Share Settlement”); provided, further, that if
the Holder is a director, officer, consultant or employee of the Company, the
Company shall only have the option to utilize Mandatory Net Share Settlement if
the Company (A) obtains the approval of its stockholders as required by the
applicable rules of the Principal Market for issuances of Common Stock in
connection with such Mandatory Net Share Settlement or (B) obtains a written
opinion from outside counsel to the Company that such approval is not required,
which opinion shall be reasonably satisfactory to the Required Holders;
provided, further, that the Company may selectively utilize Mandatory Net Share
Settlement among Holders and is not bound to treat all Holders the same or on a
pro rata basis with respect to Mandatory Net Share Settlement. The Company may
exercise its right to require conversion under this Section 3(c)(i)(A) by
delivering within not more than three (3) Trading Days following the end of any
such Mandatory Conversion Measuring Period a written notice thereof by facsimile
and overnight courier to all, but not less than all, of the holders of Notes and
the Transfer Agent (the “Mandatory Conversion Notice” and the date all of the
holders received such notice is referred to as the “Mandatory Conversion Notice
Date”). The Mandatory Conversion Notice shall be irrevocable. The Mandatory
Conversion Notice shall state (1) the Trading Day selected for the Mandatory
Conversion in accordance herewith, which Trading Day shall be at least twenty
(20) Trading Days but not more than sixty (60) Trading Days following the
Mandatory Conversion Notice Date (the “Mandatory Conversion Date”), (2) the
aggregate Conversion Amount of the Notes subject to mandatory conversion from
all of the holders of the Notes pursuant hereto (and analogous provisions under
the Other Notes) , and (3) whether the Company is utilizing Mandatory Net Share
Settlement. All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Note required
to be converted on the Mandatory Conversion Date. The mechanics of conversion
set forth in Section 3(c) shall apply to any Mandatory Conversion as if the
Company and the Transfer Agent had received from the Holder on the Mandatory
Conversion Date a Conversion Notice with respect to the Conversion Amount being
converted pursuant to the Mandatory Conversion.

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                    (B) Pro Rata Conversion Requirement. If the Company elects
to cause a conversion of any Conversion Amount of this Note pursuant to
Section 3(c)(i)(A), then it must simultaneously take the same action in the same
proportion with respect to the Other Notes. If the Company elects a Mandatory
Conversion of this Note pursuant to Section 3(c)(i)(A) (or similar provisions
under the Other Notes) with respect to less than all of the Conversion Amounts
of the Notes then outstanding, then the Company shall require conversion of a
Conversion Amount from each of the holders of the Notes equal to the product of
(I) the aggregate Conversion Amount of Notes which the Company has elected to
cause to be converted pursuant to Section 3(c)(i)(A), multiplied by (II) the
fraction, the numerator of which is the sum of the aggregate Original Principal
Amount of the Notes purchased by such holder of outstanding Notes and the
denominator of which is the sum of the aggregate Original Principal Amount of
the Notes purchased by all holders holding outstanding Notes (such fraction with
respect to each holder is referred to as its “Conversion Allocation Percentage,”
and such amount with respect to each holder is referred to as its “Pro Rata
Conversion Amount”); provided, however, that in the event that any holder’s Pro
Rata Conversion Amount exceeds the outstanding Principal amount of such holder’s
Note, then such excess Pro Rata Conversion Amount shall be allocated amongst the
remaining holders of Notes in accordance with the foregoing formula. In the
event that the initial holder of any Notes shall sell or otherwise transfer any
of such holder’s Notes, the transferee shall be allocated a pro rata portion of
such holder’s Conversion Allocation Percentage and the Pro Rata Conversion
Amount.

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          (d) Limitations on Conversions.
 
               (i) Principal Market Regulation.
 
                    (A) The Company shall not be obligated to issue any shares
of Common Stock upon conversion of this Note, and the Holder of this Note shall
not have the right to receive upon conversion of this Note any shares of Common
Stock, if the issuance of such shares of Common Stock would exceed the aggregate
number of shares of Common Stock which the Company may issue upon conversion or
exercise, as applicable, of the Notes without breaching the Company’s
obligations under the rules or regulations of the Principal Market including,
without limitation, that no shares of Common Stock shall be issued pursuant to
Net Share Settlement (as defined below) that would result in the aggregate of
all shares of Common Stock issued pursuant to Net Share Settlement being equal
to 20% or more of the Common Stock (or securities convertible or exercisable for
Common Stock) or voting power of the Company outstanding immediately prior to
the date hereof, (the “Exchange Cap”), except that such limitation shall not
apply in the event that the Company (A) obtains the approval of its stockholders
as required by the applicable rules of the Principal Market for issuances of
Common Stock in excess of such amount or (B) obtains a written opinion from
outside counsel to the Company that such approval is not required, which opinion
shall be reasonably satisfactory to the Required Holders
 
                    (B) The Company shall not be obligated to issue any shares
of Common Stock upon the Maturity Date of this Note, and the Holder of this Note
shall not have the right to receive upon the Maturity Date of this Note any
shares of Common Stock, if the issuance of such shares of Common Stock would
exceed the aggregate number of shares of Common Stock which the Company may
issue upon conversion of the Notes without breaching the Exchange Cap, except
that such limitation shall not apply in the event that the Company (A) obtains
the approval of its stockholders as required by the applicable rules of the
Principal Market for issuances of Common Stock in excess of such amount or
(B) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
Required Holders.
 
     (4) RIGHTS UPON EVENT OF DEFAULT.
 
          (a) Event of Default. Each of the following events shall constitute an
“Event of Default”:
 
               (i)  the Company’s failure to pay to the Holder any amount of
Principal (including, without limitation, any redemption payments), Interest,
Late Charges or other amounts when and as due under this Note or any other
Transaction Document (as defined in the Convertible Note Purchase Agreement) or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, except, in the case of a failure to pay Interest and Late
Charges when and as due, in which case only if such failure continues for a
period of at least five (5) Business Days;

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               (ii) the Company or any of its Subsidiaries pursuant to or within
the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law
for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a
voluntary case, (B) consents to the entry of an order for relief against it in
an involuntary case, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official (a “Custodian”), (D) makes a general
assignment for the benefit of its creditors or (E) admits in writing that it is
generally unable to pay its debts as they become due;
 
               (iii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against the Company or any of
its Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company
or any of its Subsidiaries or (C) orders the liquidation of the Company or any
of its Subsidiaries; or
 
               (iv)  the Company breaches any covenant or other term or
condition or any material representation or warranty of any Transaction
Document, except, in the case of a breach of a covenant which is curable, only
if such breach continues for a period of at least thirty (30) consecutive
Business Days after the Company’s receipt of written notice thereof.
 
     (5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
 
          (a) Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 5(a) pursuant to
written agreements in form and substance satisfactory to the Required Holders
and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to the Notes, including, without
limitation, having a principal amount and interest rate equal to the principal
amounts then outstanding and the interest rates of the Notes held by such
holder, having similar conversion rights as the Notes and having similar ranking
to the Notes, and satisfactory to the Required Holders and (ii) the Successor
Entity (including its Parent Entity) is a publicly traded corporation whose
common stock is quoted on or listed for trading on an Eligible Market. Upon the
occurrence of any Fundamental Transaction, the Successor Entity shall succeed
to, and be substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note referring to the “Company” shall refer
instead to the Successor Entity), and may exercise every right and power of the
Company and shall assume all of the obligations of the Company under this Note
with the same effect as if such Successor Entity had been named as the Company
herein. Upon consummation of the Fundamental Transaction, the Successor Entity
shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of the Company’s Common Stock (or
other securities, cash, assets or other property) issuable upon the conversion
or redemption of the Notes prior to such Fundamental Transaction, such shares of
the publicly traded common stock (or their equivalent) of the Successor Entity
(including its Parent Entity), as adjusted in accordance with the provisions of
this Note. The provisions of this Section shall apply similarly and equally to
successive Fundamental Transactions and shall be applied without regard to any
limitations on the conversion or redemption of this Note.

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          (b) Redemption Right.  No sooner than fifteen (15) days nor later than
five (5) days prior to the consummation of a Change of Control, but not prior to
the public announcement of such Change of Control, the Company may deliver
written notice to the Holder of its intent to redeem all, but not less than all,
of the Notes (a “Change of Control Notice”). In the event of a redemption
pursuant to this Section 5, the Note shall be redeemed by the Company in cash at
a price equal to the greater of (i) the product of (x) the Conversion Amount
being redeemed and (y) the quotient determined by dividing (A) the Closing Sale
Price of the Common Stock immediately prior to the consummation of the Change of
Control by (B) the Conversion Price and (ii) the product of the Conversion
Amount being redeemed and the Change of Control Premium (the “Change of Control
Redemption Price”); provided, that the Company may, at its sole option, subject
to any applicable Principal Market shareholder approval rules, pay the Holder an
amount of cash equal to the Conversion Amount, and pay the remainder of the
amount due the Holder hereunder in shares of Common Stock, valued at the Closing
Sale Price on the Trading Date immediately prior to the Change of Control
(“Change of Control Net Share Settlement” and together with Conversion net
Settlement and Mandatory Net Share Settlement, “Net Share Settlement”);
provided, further, that if the Holder is a director, officer, consultant or
employee of the Company, the Company shall only have the option to utilize
Change of Control Net Share Settlement if the Company (A) obtains the approval
of its stockholders as required by the applicable rules of the Principal Market
for issuances of Common Stock in connection with such Change of Control Net
Share Settlement or (B) obtains a written opinion from outside counsel to the
Company that such approval is not required, which opinion shall be reasonably
satisfactory to the Required Holders; provided, further, that the Company may
selectively utilize Change of Control Net Share Settlement among Holders and is
not bound to treat all Holders the same or on a pro rata basis with respect to
Change of Control Net Share Settlement. Redemptions required by this Section 5
shall be made in accordance with the provisions of Section 12 and shall have
priority to payments to stockholders in connection with a Change of Control. To
the extent redemptions required by this Section 5(b) are deemed or determined by
a court of competent jurisdiction to be prepayments of the Note by the Company,
such redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 5, but subject to Section 3(d), until
the Change of Control Redemption Price is paid in full, the Conversion Amount
submitted for redemption under this Section 5(c) may be converted, in whole or
in part, by the Holder into Common Stock pursuant to Section 3. The parties
hereto agree that in the event of the Company’s redemption of any portion of the
Note under this Section 5(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 5(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder’s actual loss of its investment opportunity
and not as a penalty.
 
     (6) RESERVED.
 
     (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
 
          (a) Adjustment of Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price in effect immediately prior to
such combination will be proportionately increased.

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          (b) De Minimis Adjustments. No adjustment in the Conversion Price
shall be required unless such adjustment would require an increase or decrease
of at least $0.01 in such price; provided, however, that any adjustment which by
reason of this Section 7(d) is not required to be made shall be carried forward
and taken into account in any subsequent adjustments under this Section 7. All
calculations under this Section 7 shall be made by the Company in good faith and
shall be made to the nearest cent or to the nearest one hundredth of a share, as
applicable. No adjustment need be made for a change in the par value or no par
value of the Company’s Common Stock.
 
     (8) RESERVED.
 
     (9) RESERVED.
 
     (10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation, Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Note, and will at all times in good faith carry out all of the
provisions of this Note and take all action as may be required to protect the
rights of the Holder of this Note.
 
     (11) RESERVATION OF AUTHORIZED SHARES.
 
          (a) Reservation. The Company shall initially reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for each
of the Notes equal to 100% of the Conversion Rate with respect to the Conversion
Amount of each such Note as of the Issuance Date. So long as any of the Notes
are outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 100% of the number of shares
of Common Stock as shall from time to time be necessary to effect the conversion
of all of the Notes then outstanding; provided that at no time shall the number
of shares of Common Stock so reserved be less than the number of shares required
to be reserved by the previous sentence (without regard to any limitations on
conversions) (the “Required Reserve Amount”). The initial number of shares of
Common Stock reserved for conversions of the Notes and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the principal amount of the Notes held by each holder at the
Closing (as defined in the Convertible Note Purchase Agreement) or increase in
the number of reserved shares, as the case may be (the “Authorized Share
Allocation”). In the event that a holder shall sell or otherwise transfer any of
such holder’s Notes, each transferee shall be allocated a pro rata portion of
such holder’s Authorized Share Allocation. Any shares of Common Stock reserved
and allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

9

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          (b) Insufficient Authorized Shares. If at any time while any of the
Notes remain outstanding the Company does not have a sufficient number of
authorized and unreserved shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Notes at least a number of shares of
Common Stock equal to the Required Reserve Amount (an “Authorized Share
Failure”), then the Company shall immediately take all action necessary to
increase the Company’s authorized shares of Common Stock to an amount sufficient
to allow the Company to reserve the Required Reserve Amount for the Notes then
outstanding. Without limiting the generality of the foregoing sentence, as soon
as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than sixty (60) days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its stockholders
for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they
approve such proposal.
 
     (12)  REDEMPTION.
 
          (a) Mechanics. If the Company has submitted a Change of Control Notice
in accordance with Section 5(b), the Company shall deliver the applicable Change
of Control Redemption Price to the Holder concurrently with the consummation of
such Change of Control. In the event that the Company does not pay the
applicable Redemption Price to the Holder within the time period required, at
any time thereafter and until the Company pays such unpaid Redemption Price in
full, the Holder shall have the option, in lieu of redemption, to require the
Company to promptly return to the Holder all or any portion of this Note
representing the Conversion Amount that was submitted for redemption and for
which the applicable Redemption Price (together with any Late Charges thereon)
has not been paid. Upon the Company’s receipt of such notice, the Redemption
Notice shall be null and void with respect to such Conversion Amount. The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such notice
with respect to the Conversion Amount subject to such notice.
 
     (13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of
this Note, except as required by law, including, but not limited to, the General
Corporation Law of the State of Delaware and as expressly provided in this Note.
 
     (14) RANKING. All payments due under this Note shall be unsecured
obligations of the Company, ranking subordinate to the existing, or any future
debt or credit facilities of the Company and its Subsidiaries.
 
     (15) RESERVED.
 
     (16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at
a meeting duly called for such purpose or the written consent without a meeting
of the Required Holders shall be required for any change or amendment to this
Note or the Other Notes. No consideration shall be offered or paid to any holder
of Notes to amend or consent to a waiver or modification of the Notes unless the
same consideration also is offered to all of the holders of Notes.
 
     (17) TRANSFER. This Note may be offered, sold, assigned or transferred by
the Holder without the consent of the Company, subject only to the provisions of
Section 12 of the Convertible Note Purchase Agreement.

10

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     (18) REISSUANCE OF THIS NOTE.
 
           (a) Transfer. If this Note is to be transferred, the Holder shall
surrender this Note to the Company, whereupon the Company will forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with
Section 18(d)), registered as the Holder may request, representing the
outstanding Principal being transferred by the Holder and, if less then the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 18(d)) to the Holder representing the outstanding Principal not
being transferred. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii)
following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the
face of this Note.
 
               (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company
of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and, in the case of loss, theft or
destruction, of any indemnification undertaking by the Holder to the Company in
customary form and, in the case of mutilation, upon surrender and cancellation
of this Note, the Company shall execute and deliver to the Holder a new Note (in
accordance with Section 18(d)) representing the outstanding Principal.
 
               (c) Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section 18(d) and in
principal amounts of at least $1,000.00) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.
 
               (d) Issuance of New Notes. Whenever the Company is required to
issue a new Note pursuant to the terms of this Note, such new Note (i) shall be
of like tenor with this Note, (ii) shall represent, as indicated on the face of
such new Note, the Principal remaining outstanding (or in the case of a new Note
being issued pursuant to Section 18(a) or Section 18(c), the Principal
designated by the Holder which, when added to the principal represented by the
other new Notes issued in connection with such issuance, does not exceed the
Principal remaining outstanding under this Note immediately prior to such
issuance of new Notes), (iii) shall have an issuance date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent
accrued and unpaid Interest and Late Charges on the Principal and Interest of
this Note, if any, from the Issuance Date.
 
          (19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. Amounts set forth or provided for
herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the Holder and shall not, except
as expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof). The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

11

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          (20) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this
Note is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors’ rights and
involving a claim under this Note, then the Company shall pay the costs incurred
by the Holder for such collection, enforcement or action or in connection with
such bankruptcy, reorganization, receivership or other proceeding, including,
but not limited to, financial advisory fees and attorneys’ fees and
disbursements.
 
          (21) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and all the Purchasers and shall not be construed against
any person as the drafter hereof. The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.
 
          (22) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.
 
          (23) DISPUTE RESOLUTION.
 
          (a) All disputes, claims, or controversies arising out of or relating
to this Note that are not resolved by mutual agreement shall be resolved by
litigation, or if the Company and the Holder agree to resolve any particular
dispute by arbitration, then such arbitration shall be conducted in accordance
with the procedures set forth in Section 23(b) below.
 
          (b) In the event the parties hereto agree to resolve a particular
dispute by arbitration, the following procedures will apply: Such dispute shall
be submitted to arbitration by one arbitrator mutually agreed upon by the
parties, and if no agreement can be reached within thirty (30) days after names
of potential arbitrators have been proposed by J.A.M.S./Endispute, Inc. or its
successor, then by one arbitrator having reasonable experience in corporate
finance transactions of the type provided for in this Agreement and who is
chosen by J.A.M.S./Endispute, Inc. or its successor. The arbitration shall take
place in Los Angeles, California, in accordance with the J.A.M.S./Endispute,
Inc. rules then in effect, and judgment upon any award rendered in such
arbitration will be binding and may be entered in any court having jurisdiction
thereof. There shall be limited discovery prior to the arbitration hearing as
follows: (a) exchange of witness lists and copies of documentary evidence and
documents relating to or arising out of the issues to be arbitrated, (b)
depositions of all party witnesses and (c) such other depositions as may be
allowed by the arbitrators upon a showing of good cause. Depositions shall be
conducted in accordance with the California Rules of Civil Procedure, the
arbitrator shall be required to provide in writing to the parties the basis for
the award or order of such arbitrator, and a court reporter shall record all
hearings, with such record constituting the official transcript of such
proceedings. The prevailing party shall be entitled to reasonable attorney’s
fees, costs, and necessary disbursements in addition to any other relief to
which such party may be entitled.

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          (24) NOTICES; PAYMENTS.
 
               (a) Notices. Whenever notice is required to be given under this
Note, unless otherwise provided herein, such notice shall be given in accordance
with Section 13 of the Convertible Note Purchase Agreement. The Company shall
provide the Holder with prompt written notice of all actions taken pursuant to
this Note, including in reasonable detail a description of such action and the
reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of
the Conversion Price, setting forth in reasonable detail, and certifying, the
calculation of such adjustment and (ii) at least twenty (20) days prior to the
date on which the Company closes its books or takes a record (A) with respect to
any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any Fundamental Transaction, dissolution or liquidation,
provided in each case that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.
 
               (b) Payments. Whenever any payment of cash is to be made by the
Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Purchasers, shall initially be as set forth on the Schedule
of Buyers attached to the Convertible Note Purchase Agreement); provided that
the Holder may elect to receive a payment of cash via wire transfer of
immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever
any amount expressed to be due by the terms of this Note is due on any day which
is not a Business Day, the same shall instead be due on the next succeeding day
which is a Business Day and, in the case of any Interest Date which is not the
date on which this Note is paid in full, the extension of the due date thereof
shall not be taken into account for purposes of determining the amount of
Interest due on such date. Any amount of Principal or other amounts due under
the Transaction Documents which is not paid when due shall result in a late
charge being incurred and payable by the Company in an amount equal to interest
on such amount at the rate of two percent (2%) per annum from the date such
amount was due until the same is paid in full (“Late Charge”).
 
          (25) CANCELLATION. After all Principal, accrued Interest and other
amounts at any time owed on this Note have been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
 
          (26) WAIVER OF NOTICE. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Note and the Convertible Note Purchase Agreement.
 
          (27) GOVERNING LAW; JURISDICTION; SEVERABILITY; JURY TRIAL. This Note
shall be governed by, and construed in accordance with, the internal laws of the
State of New York, without giving effect to the principles of conflicts of law.
THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
HEREBY. 

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     (28) CERTAIN DEFINITIONS. For purposes of this Note, the following terms
shall have the following meanings:
 
               (a) “Bloomberg” means Bloomberg Financial Markets.
 
               (b) “Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.
 
               (c) “Change of Control” means any Fundamental Transaction other
than (A) any reorganization, recapitalization or reclassification of Common
Stock, in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.
 
               (d) “Change of Control Premium” means, (i) until the first
anniversary of the Issuance Date, 120%, (ii) commencing on the first anniversary
of the Issuance Date until the second anniversary of the Issuance Date, 115%,
(iii) commencing on the second anniversary of the Issuance Date until the third
anniversary of the Issuance Date, 110% and (iv) commencing on the third
anniversary of the Issuance Date, 105%.
 
               (e) “Closing Bid Price” and “Closing Sale Price” means, for any
security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid
Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price, as the case may be, of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder. If
the Company and the Holder are unable to agree upon the fair market value of
such security, then such dispute shall be resolved pursuant to Section 23. All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.

14

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               (f) “Closing Date” shall have the meaning set forth in the
Convertible Note Purchase Agreement, which date is the date the Company
initially issued Notes pursuant to the terms of the Convertible Note Purchase
Agreement.
 
               (g) “Common Stock Deemed Outstanding” means, at any given time,
the number of shares of Common Stock outstanding at such time, plus the number
of shares of Common Stock deemed to be outstanding pursuant to Sections 7(a)(i)
and 7(a)(ii) hereof regardless of whether the Options or Convertible Securities
are actually exercisable at such time, but excluding any Common Stock owned or
held by or for the account of the Company or issuable upon conversion or
exercise, as applicable, of the Notes.
 
               (h) “Contingent Obligation” means, as to any Person, any direct
or indirect liability, contingent or otherwise, of that Person with respect to
any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
 
               (i) “Convertible Note Purchase Agreement” means that certain
convertible note purchase agreement dated as of the Subscription Date by and
among the Company and the initial holders of the Notes pursuant to which the
Company issued the Notes.
 
               (j) “Eligible Market” means the Principal Market, The New York
Stock Exchange, Inc., the American Stock Exchange, The Nasdaq Global Select
Market or The Nasdaq Capital Market.
 
               (k) “Equity Conditions” means each of the following conditions:
(i) on the applicable date of determination, either (x) the Registration
Statement filed pursuant to the Purchase Agreement shall be effective and
available for the resale of all remaining Registrable Securities in accordance
with the terms of the Purchase Agreement or (y) all shares of Common Stock
issuable upon conversion of the Notes shall be eligible for sale without
restriction and without the need for registration under any applicable federal
or state securities laws; (ii) on the applicable date of determination, the
Common Stock is designated for quotation on the Principal Market or any other
Eligible Market and shall not have been suspended from trading on such exchange
or market (other than suspensions of not more than two (2) days and occurring
prior to the applicable date of determination due to business announcements by
the Company) nor shall delisting or suspension by such exchange or market been
threatened or pending either (A) in writing by such exchange or market or (B) by
falling below the then effective minimum listing maintenance requirements of
such exchange or market; (iii) any applicable shares of Common Stock to be
issued in connection with the event requiring determination may be issued in
full without violating Section 3(d) hereof and the rules or regulations of the
Principal Market or any other applicable Eligible Market; and (iv) on the
applicable date of determination, there shall not have occurred either (A) an
Event of Default or (B) an event that with the passage of time or giving of
notice would constitute an Event of Default.
 
               (l) “Equity Conditions Failure” means that on any day during the
period commencing ten (10) Trading Days prior to the applicable Mandatory
Conversion Notice Date through the applicable Mandatory Conversion Date, the
Equity Conditions have not been satisfied (or waived in writing by the Holder).

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               (m) “Fundamental Transaction” means that the Company shall,
directly or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving corporation)
another Person or Persons, if the holders of the Voting Stock (not including any
shares of Voting Stock held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such consolidation
or merger) immediately prior to such consolidation or merger shall hold or have
the right to direct the voting of less than 50% of the Voting Stock or such
voting securities of such other surviving Person immediately following such
transaction, or (ii) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not including any shares of Voting Stock held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or
(iv) consummate a stock purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other Person acquires
more than the 50% of the outstanding shares of Voting Stock (not including any
shares of Voting Stock held by the other Person or other Persons making or party
to, or associated or affiliated with the other Persons making or party to, such
stock purchase agreement or other business combination), (v) reorganize,
recapitalize or reclassify its Common Stock or (vi) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 50% of the aggregate ordinary
voting power represented by issued and outstanding Common Stock; provided, a
joint venture, licensing arrangement or other strategic relationship involving
the licensing, manufacturing or marketing of, or other similar arrangement with
respect to, any of the Company’s products (even if such arrangement or
relationship involves an investment in the Company) shall not be a Fundamental
Transaction.
 
               (n) “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.
 
               (o) “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
 
               (p) “Principal Market” means The Nasdaq Global Market.
 
               (q) “Redemption Notices” means, collectively, the Change of
Control Redemption Notices and the Holder Redemption Notice, each of the
foregoing, individually, a Redemption Notice.
 
               (r) “Redemption Prices” means, collectively, Change of Control
Redemption Price, each of the foregoing, individually, a Redemption Price.
 
               (s) “Required Holders” means the holders of Notes representing at
least two-thirds (2/3rd) of the aggregate principal amount of the Notes then
outstanding.

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               (t) “SEC” means the United States Securities and Exchange
Commission.
 
               (u) “Subscription Date” means April 3, 2007.
 
               (v) “Subsidiary” means any entity in which the Company, directly
or indirectly, owns any of the capital stock or holds an equity or similar
interest.
 
               (w) “Successor Entity” means the Person, which may be the
Company, formed by, resulting from or surviving any Fundamental Transaction or
the Person with which such Fundamental Transaction shall have been made,
provided that if such Person is not a publicly traded entity whose common stock
or equivalent equity security is quoted or listed for trading on an Eligible
Market, Successor Entity shall mean such Person’s Parent Entity.
 
               (x) “Trading Day” means any day on which the Common Stock is
traded on the Principal Market, or, if the Principal Market is not the principal
trading market for the Common Stock, then on the principal securities exchange
or securities market on which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York Time).
 
               (y) “Voting Stock” of a Person means capital stock of such Person
of the class or classes pursuant to which the holders thereof have the general
voting power to elect, or the general power to appoint, at least a majority of
the board of directors, managers or trustees of such Person (irrespective of
whether or not at the time capital stock of any other class or classes shall
have or might have voting power by reason of the happening of any contingency).
 
     (29) DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.
 
(30) ACKNOWLEDGEMENTS. THE HOLDER HEREBY ACKNOWLEDGES RECEIPT OF A DRAFT OF THE
COMPANY’S FORM 10-K ANTICIPATED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON APRIL 2, 2007. THE HOLDER FURTHER ACKNOWLEDGES THAT WITH RESPECT
TO NET SHARE SETTLEMENT, THE COMPANY IS NOT OBLIGATED TO TREAT ALL HOLDERS THE
SAME OR ON A PRO RATA BASIS WITH RESPECT TO THE COMPANY’S UTILIZING NET SHARE
SETTLEMENT. WITHOUT LIMITING THE FOREGOING, THE HOLDER ACKNOWLEDGES THAT
DIRECTORS, OFFICERS, CONSULTANTS OR EMPLOYEES OF THE COMPANY MAY, SUBJECT TO ANY
APPLICABLE PRINCIPAL MARKET SHAREHOLDER APPROVAL RULES, BE AMONG HOLDERS SUBJECT
TO THE COMPANY’S NET SHARE SETTLEMENT OPTION.
 
[Signature Page Follows] 

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     IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as
of the Issuance Date set out above.
 
BIG DOG HOLDINGS, INC.
By:
 
 
 
 
 
 
Name: 
 
 
Title:
 

 
18

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Purchaser:_______________________________________
 
 
By:____________________________________________
 
 
Print Name:______________________________________
 
 
Title:___________________________________________
 
19

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EXHIBIT I 
 
BIG DOG HOLDINGS, INC. 
 
CONVERSION NOTICE 
 
Reference is made to the 8.375% Convertible Note due 2012 (the “Note”) issued to
the undersigned by Big Dog Holdings, Inc. (the “Company”). In accordance with
and pursuant to the Note, the undersigned hereby elects to convert the
Conversion Amount (as defined in the Note) of the Note indicated below into
shares of Common Stock par value $0.01 per share (the “Common Stock”) of the
Company, as of the date specified below.
 
 
Date of Conversion:_________________________
 
Aggregate Conversion Amount to be converted:______________________________
 

 
Please confirm the following information:
 
Conversion Price:____________________
 
Number of shares of Common Stock to be issued:_____________________________
 
 
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:
 
Issue to:____________________________________
 
Address:____________________________________
 
    _________________________________
 
Facsimile Number:______________________________
 
Authorization:
 
 
By:_________________________________________
 
Name:_______________________________________
 
Title:________________________________________
 
Dated:_______________________________________
 
Account Number:______________________________
 
     (if electronic book entry transfer)
 
Transaction Code Number:__________________________________
 
     (if electronic book entry transfer)

20

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ACKNOWLEDGMENT 
 
     The Company hereby acknowledges this Conversion Notice and hereby directs
[INSERT NAME OF TRANSFER AGENT] to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated April ___,
2007 from the Company and acknowledged and agreed to by [INSERT NAME OF TRANSFER
AGENT].
 
 
 
 
 
 
 
 
 
 
 
 
BIG DOG HOLDINGS, INC.
 
 
 
 
 
 
 
By:
 
 
 
 
 
 
 
 
 
 
 
Name:
 
 
 
 
Title:
 

 
 

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