EXHIBIT 10.4

CONVERTIBLE NOTE PURCHASE AGREEMENT

This Convertible Note Purchase Agreement (this "Agreement") is effective as of
September 6, 2012 (the "Effective Date"), by and among (i) SPY Inc., a Delaware
corporation (the "Company"), (ii) SPY Optic, Inc., a California corporation and
wholly owned subsidiary of the Company ("SPY North America"), and (iii)
Harlingwood (Alpha) LLC, a Delaware Limited Liability Company ("Investor").

RECITALS

A. The parties desire that, upon the terms and conditions contained herein, SPY
North America shall issue and sell to Investor, and Investor shall purchase from
SPY North America, the subordinated convertible promissory note in principal
amount of U.S. $1,000,000 (one million dollars) in substantially the form
attached to this Agreement as Exhibit A (the "Note"), which Note is convertible
into shares of the Company's Common Stock, $0.0001 par value per share (the
"Common Stock"); and

B. The Note and the shares of Common Stock issuable upon conversion as specified
in the Note (the "Conversion Shares") are sometimes collectively referred to
herein as the "Securities."

C. The offer and sale of the Securities are being made without registration
under the Act, in reliance upon the provisions of Regulation D promulgated under
the Act, Section 4(2) of the Act, and such other exemptions from the
registration requirements of the Act as may be available with respect to the
purchase of the Securities to be made hereunder.

AGREEMENT

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company, SPY North America, and
Investor agree as follows:

 I.  
     Definitions

     Definitions. In addition to the terms defined elsewhere in this Agreement,
     the following terms have the meanings indicated in this Section 1.1:

     

     "Act" means the Securities Act of 1933, as amended.

     

     "Affiliate" means any Person that, directly or indirectly through one or
     more intermediaries, controls, is controlled by, or is under common control
     with a Person, as such terms are used in and construed under Rule 144 under
     the Act. Without limitation to the foregoing, with respect to Investor,
     (a) any Person having the right to direct the disposition of the Securities
     will be deemed to be an Affiliate and (b) any owner of Investor who does
     not have the right to direct the disposition of the Securities and is not
     part of any committee or group which has the right to direct disposition of
     the Conversion Shares will not be deemed an Affiliate.

     "Enforceability Exceptions" means any exceptions to the enforceability of
     any agreement under applicable bankruptcy, insolvency, reorganization,
     fraudulent conveyance, moratorium or other similar law relating to or
     affecting the enforcement of creditors' rights generally, and as limited by
     laws and principals relating to the availability of specific performance,
     injunctive relief or other remedies.

     

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     

     "Knowledge" of or "knowledge" of means the actual knowledge, after
     reasonable inquiry, including inquiry of direct reports, of any director or
     executive officer of a Person.

     

     "Liens" means a lien, charge, security interest, encumbrance, right of
     first refusal, preemptive right or other restriction.

     

     "Person" means an individual or corporation, partnership, trust,
     incorporated or unincorporated association, joint venture, limited
     liability company, joint stock company, government (or an agency or
     subdivision thereof) or other entity of any kind.

     "Registration Rights Agreement" a registration rights agreement in a form
     acceptable to the parties hereto providing the Investor with piggyback
     registration rights.

     

     "Regulation D" means Regulation D promulgated under the Act.

     

     "Rule 144" means Rule 144 promulgated by the SEC pursuant to the Act, as
     such Rule may be amended from time to time, or any similar rule or
     regulation hereafter adopted by the SEC having substantially the same
     effect as such Rule.

     

     "SEC" means the United States Securities and Exchange Commission.

     

     "SEC Reports" means any and all filings made by the Company or its
     directors and officers with the SEC, including, without limitation,
     quarterly reports on Form 10-Q, annual reports on Form 10-K, current
     reports on Form 8-K and proxy statements.

     

     "Short Sales" means (i) all "short sales" (as defined in Rule 200
     promulgated under Regulation SHO under the Exchange Act) of the Common
     Stock, whether or not against the box, and (ii) all forward sale contracts,
     options, puts, calls, swaps or "put equivalent positions" (as defined in
     Rule 16a-1(h) under the Exchange Act) with respect to the Common Stock.

     

     "Subsidiary" means as to any Person, any Person (i) of which such first
     Person directly or indirectly owns securities or other equity interests
     representing more than 50% of the aggregate voting power or (ii) of which
     such first Person possesses directly or indirectly more than 50% of the
     right to elect directors or Persons holding similar positions.

     

     "Trading Day" means a day on which the Trading Market is open for business.

     

     "Trading Market" means the Over-the-Counter Bulletin Board.

 II. 
     Purchase and Sale

     Purchase of Note. SPY North America hereby issues and sells and Investor
     hereby purchases the Note payable in U.S. dollars by wire transfer to an
     account specified in writing by the Company or SPY North America. SPY North
     America agrees that the proceeds from the sale of the Note shall be used as
     general working capital.
     
     Certificate for Conversion Shares; Registration Rights
     
     . The Company shall take all reasonable efforts to ensure prompt delivery
     to Investor of the certificate evidencing the Conversion Shares issuable
     upon conversion of the Note. Concurrently with the execution and delivery
     hereof, the parties shall enter into a registration rights agreement
     related to the Conversion Shares.
     
     

     REPRESENTATIONS AND WARRANTIES

     Representations and Warranties of the Company

     . Except as disclosed in the SEC Reports filed with the SEC prior to the
     date hereof, the Company and SPY North America hereby jointly and severally
     make the representations and warranties set forth below to Investor:

     

     Organization and Qualification
     
     . Each of the Company and the Subsidiaries is an entity duly incorporated
     or otherwise organized, validly existing and in good standing under the
     laws of the jurisdiction of its incorporation or organization (as
     applicable), with the requisite power and authority to own and use its
     properties and assets and to carry on its business as currently conducted.
     Neither the Company nor any Subsidiary is in violation or default of any of
     the provisions of its respective certificate or articles of incorporation,
     bylaws or other organizational or charter documents. Each of the Company
     and the Subsidiaries is duly qualified to conduct business and is in good
     standing as a foreign corporation or other entity in each jurisdiction in
     which the nature of the business conducted or property owned by it makes
     such qualification necessary, except where the failure to be so qualified
     or in good standing, as the case may be, could not have or reasonably be
     expected to result in (i) a material adverse effect on the legality,
     validity or enforceability of this Agreement, (ii) a material adverse
     effect on the results of operations, assets, business, or financial
     condition of the Company and the Subsidiaries, taken as a whole, or (iii) a
     material adverse effect on the Company's ability to perform in any material
     respect on a timely basis its obligations under this Agreement (any of (i),
     (ii) or (iii), a "
     Material Adverse Effect
     ") and, to the knowledge of the Company, no proceeding has been instituted
     in any such jurisdiction revoking, limiting or curtailing or seeking to
     revoke, limit or curtail such power and authority or qualification.
     
     
     
     Authorization; Enforcement
     
     . Each of the Company and SPY North America has the requisite corporate
     power and authority to enter into and to consummate the transactions
     contemplated by this Agreement and otherwise to carry out its obligations
     hereunder or thereunder. The execution and delivery of this Agreement by
     the Company and SPY North America, and the issuance of the Securities and
     consummation by the Company of the transactions contemplated pursuant to
     this Agreement have been duly authorized by all necessary action on the
     part of the Company and no further consent or action is required by the
     Company. This Agreement and the Note when executed and delivered by the
     Company and SPY North America, as applicable, shall constitute the valid
     and binding obligation of signing entity enforceable against it in
     accordance with its terms subject to the Enforceability Exceptions.
     
     
     
     No Conflicts
     
     . The execution, delivery and performance of this Agreement by the Company
     and SPY North America and the issuance and sale of the Securities do not
     and will not (i) conflict with or violate any provision of the Company's or
     any Subsidiary's certificate or articles of incorporation, bylaws or other
     organizational or charter documents, (ii) conflict with, or constitute a
     default (or an event that with notice or lapse of time or both would become
     a default) under, result in the creation of any Lien upon any of the
     properties or assets of the Company or any Subsidiary, or give to others
     any rights of termination, amendment, acceleration or cancellation (with or
     without notice, lapse of time or both) of, any agreement, credit facility,
     debt or other instrument (evidencing a Company or Subsidiary debt or
     otherwise) or other understanding to which the Company or any Subsidiary is
     a party or by which any property or asset of the Company or any Subsidiary
     is bound or affected, or (iii) conflict with or result in a violation of
     any law, rule, regulation, order, judgment, injunction, decree or other
     restriction of any court or governmental authority to which the Company or
     a Subsidiary is subject (including federal and state securities laws and
     regulations), or by which any property or asset of the Company or a
     Subsidiary is bound or affected, except in the case of each of clauses
     (ii) and (iii), such as could not have or reasonably be expected to result
     in a Material Adverse Effect.
     
     
     
     Filings, Consents and Approvals
     
     . Neither the Company nor any Subsidiary is required to obtain any consent,
     waiver, authorization or order of, give any notice to, or make any filing
     or registration with, any court or other federal, state, local or other
     governmental authority or other Person in connection with the execution,
     delivery and performance by the Company of this Agreement other than, as
     applicable, the filing of a Form D with the SEC and such filings as are
     required to be made under applicable state securities laws.
     
     
     
     Issuance of the Conversion Shares
     
     . The Conversion Shares are duly authorized and, when issued and paid for
     in accordance with this Agreement and the Note, will be duly and validly
     issued, fully paid and nonassessable, free and clear of all Liens imposed
     by the Company or SPY North America other than restrictions on transfer
     provided for in this Agreement. The Company shall instruct the transfer
     agent for the Common Stock to issue a certificate to Investor evidencing
     the Conversion Shares upon issuance in accordance with the Note.
     
     
     
     Capitalization
     
     . The Company's authorized and outstanding capital stock is as set forth in
     its Quarterly Report on Form 10-Q for the quarter ended June 30, 2012,
     which has not changed materially as of the date hereof. All of the
     outstanding shares of capital stock of the Company are validly issued,
     fully paid and nonassessable, have been issued in compliance with all
     federal and state securities laws, and none of such outstanding shares was
     issued in violation of any preemptive rights or similar rights to subscribe
     for or purchase securities. There are no stockholders agreements, voting
     agreements or other similar agreements with respect to the Company's
     capital stock to which the Company is a party or, to the knowledge of the
     Company, between or among any of the Company's stockholders. As of the date
     hereof, there is no existing option, warrant, call, right, or agreement of
     any character to which the Company is a party requiring, and there are no
     securities of the Company outstanding which upon conversion or exchange
     would require, the issuance of any shares of capital stock of the Company
     or other securities convertible into, exchangeable for or evidencing the
     right to subscribe for or purchase shares of capital stock of the Company,
     except for (i) options outstanding under the Company's stock option plan
     described in the SEC Reports, (ii) warrants initially exercisable into
     244,163 shares of Common Stock, originally issued to Regent Pacific
     Management Corporation as described in the SEC Reports, and (iii) the
     promissory note (in principal amount of $7 million, excluding payment in
     kind interest added to principal) issued to Costa Brava Partnership III,
     L.P. (
     "
     Costa Brava
     "
     ) described in the Company's Form 8-K filed with the SEC on August 8, 2012.
     
     
     
     Material Changes
     
     . Since the date of the latest audited financial statements included within
     the SEC Reports, (i) the Company has not altered its method of accounting,
     (ii) the Company has not declared or made any dividend or distribution of
     cash or other property to its stockholders or purchased, redeemed or made
     any agreements to purchase or redeem any shares of its capital stock and
     (iii) the Company has not issued any equity securities to any officer,
     director or Affiliate, except pursuant to existing Company stock option
     plans.
     
     
     
     Litigation
     
     . There is no action, suit, inquiry, notice of violation, proceeding or
     investigation pending or, to the knowledge of the Company, threatened
     against or affecting the Company, any Subsidiary or any of their respective
     properties before or by any court, arbitrator, governmental or
     administrative agency or regulatory authority (federal, state, county,
     local or foreign) (collectively, an "
     Action
     "), which (i) adversely affects or challenges the legality, validity or
     enforceability of this Agreement or the Securities, or (ii) could, if there
     were an unfavorable decision, have or reasonably be expected to result in a
     Material Adverse Effect. Neither the Company nor any Subsidiary, nor any
     director or officer thereof, is or has been the subject of any Action
     involving a claim of violation of or liability under federal or state
     securities laws or a claim of breach of fiduciary duty. There has not been,
     and to the knowledge of the Company there is not pending or contemplated,
     any investigation by the SEC involving the Company or any current or former
     director or officer of the Company. The SEC has not issued any stop order
     or other order suspending the effectiveness of any registration statement
     filed by the Company or any Subsidiary under the Exchange Act or the Act.
     
     
     
     Labor Relations
     
     . No material labor dispute exists or, to the knowledge of the Company, is
     imminent with respect to any of the employees of the Company, which could
     reasonably be expected to result in a Material Adverse Effect.
     
     
     
     Regulatory Permits
     
     . The Company and the Subsidiaries possess all certificates, authorizations
     and permits issued by the appropriate federal, state, local or foreign
     regulatory authorities necessary to conduct their respective businesses as
     described in its most recently filed Annual Report on Form 10-K, except
     where the failure to possess such permits could not, individually or in the
     aggregate, have or reasonably be expected to result in a Material Adverse
     Effect ("
     Material Permits
     "), and neither the Company nor any Subsidiary has received any notice of
     proceedings relating to the revocation or modification of any Material
     Permit.
     
     
     
     Title to Assets
     
     . The Company and the Subsidiaries have good and marketable title in fee
     simple to all real property owned by them that is material to the business
     of the Company and the Subsidiaries and good and marketable title in all
     personal property owned by them that is material to the business of the
     Company and the Subsidiaries, in each case free and clear of all Liens,
     except for Liens as do not materially interfere with the use made and
     proposed to be made of such property by the Company and the Subsidiaries
     and Liens for the payment of federal, state or other taxes, the payment of
     which is neither delinquent nor subject to penalties.
     
     
     
     Patents and Trademarks
     
     . The Company and the Subsidiaries have, or have rights to use, all
     patents, patent applications, trademarks, trademark applications, service
     marks, trade names, copyrights, licenses and other similar rights that are
     necessary or material for use in connection with their respective
     businesses as described in the SEC Reports and which the failure to so have
     could have a Material Adverse Effect (collectively, the "
     Intellectual Property Rights
     "). Neither the Company nor any Subsidiary has received a written notice
     that the Intellectual Property Rights used by the Company or any Subsidiary
     violates or infringes upon the rights of any Person in a manner that would
     have a Material Adverse Effect. To the knowledge of the Company, all such
     Intellectual Property Rights are enforceable and there is no existing
     infringement by another Person of any of the Intellectual Property Rights
     of others that would have a Material Adverse Effect.
     
     
     
     Transactions With Affiliates and Employees
     
     . None of the officers or directors of the Company and, to the knowledge of
     the Company, none of the employees of the Company is presently a party to
     any transaction with the Company or any Subsidiary (other than for services
     as employees, officers and directors), including any contract, agreement or
     other arrangement providing for the furnishing of services to or by,
     providing for rental of real or personal property to or from, or otherwise
     requiring payments to or from any officer, director or such employee or, to
     the knowledge of the Company, any entity in which any officer, director, or
     any such employee has a substantial interest or is an officer, director,
     trustee or partner, in each case which would require disclosure pursuant to
     Item 404 of Regulation S-K promulgated under the Exchange Act other than
     (i) for payment of salary or consulting fees for services rendered,
     (ii) reimbursement for expenses incurred on behalf of the Company and
     (iii) for other employee benefits, including stock option agreements under
     any stock option plan of the Company.
     
     
     
     Certain Fees
     
     . No brokerage or finder's fees or commissions are or will be payable by
     Investor to any broker, financial advisor or consultant, finder, placement
     agent, investment banker, bank or other Person with respect to the
     transactions contemplated by this Agreement pursuant to any agreement with
     the Company.
     
     
     
     Private Placement
     
     . Assuming the accuracy of Investor's representations and warranties set
     forth in
     Section 3.2
     , no registration under the Act is required for the offer and sale of the
     Securities to Investor as contemplated hereby. The issuance and sale of the
     Securities hereunder does not contravene the rules and regulations of the
     Trading Market.
     
     
     
     Investment Company.
     
     Neither the Company or SPY North America is , nor is either an Affiliate
     of, and immediately after receipt of payment for the Securities will not be
     or be an Affiliate of, an "
     investment company
     " within the meaning of the Investment Company Act of 1940, as amended. The
     Company and SPY North America shall each conduct its business in a manner
     so that it will not become subject to the Investment Company Act.
     
     
     
     Listing and Maintenance Requirements
     
     . The Common Stock is registered pursuant to Section 12(g) of the Exchange
     Act, and the Company has taken no action designed to, or which to its
     knowledge is likely to have the effect of, terminating the registration of
     the Common Stock under the Exchange Act, nor has the Company received any
     notification that the SEC is contemplating terminating such registration.
     The Common Stock is quoted on the Trading Market.
     
     
     
     Application of Takeover Protections
     
     . The Company and its Board of Directors have taken all necessary action,
     if any, in order to render inapplicable any control share acquisition,
     business combination, poison pill (including any distribution under a
     rights agreement) or other similar anti-takeover provision under the
     Company's Certificate of Incorporation or the laws of its state of
     incorporation that is or could become applicable to Investor as a result of
     Investor and the Company fulfilling their obligations or exercising their
     rights under this Agreement, including without limitation the Company's
     issuance of the Securities and Investor's ownership of the Securities.
     
     
     
     Disclosure
     
     . The Company and SPY North America understand and confirm that Investor
     will rely on the representations and covenants of the Company and SPY North
     America contained in this Agreement in effecting transactions in securities
     of the Company. The Company and SPY North America acknowledge and agree
     that Investor does not make or has made any representations or warranties
     with respect to the transactions contemplated hereby other than those
     specifically set forth in
     Section 3.2
     hereof.
     
     
     
     No Integrated Offering
     
     . Neither the Company, nor any of its Affiliates, nor any Person acting on
     its or their behalf, has directly or indirectly, made any offers or sales
     of any security or solicited any offers to buy any security, under
     circumstances that would cause this offering of the Securities to be
     integrated with prior offerings by the Company for purposes of the Act or
     which could violate any applicable shareholder approval provisions,
     including, without limitation, under the rules and regulations of the
     Trading Market.
     
     
     
     Financial Condition/Indebtedness
     
     . Neither the Company or SPY North America has no knowledge of any facts or
     circumstances, which lead it to believe that it will file for
     reorganization or liquidation under the bankruptcy or reorganization laws
     of any jurisdiction within one year from the Effective Date.
     
     
     
     No General Solicitation or Advertising in Regard to this Transaction
     
     . Neither the Company nor, to the knowledge of the Company, any of its
     directors or officers (i) has conducted or will conduct any general
     solicitation (as that term is used in Rule 502(c) of Regulation D) or
     general advertising with respect to the sale of the Note, or (ii) made any
     offers or sales of any security or solicited any offers to buy any security
     under any circumstances that would require registration of the Securities
     under the Act.
     
     
     
     Foreign Corrupt Practices.
     
     Neither the Company, nor to the knowledge of the Company, any agent or
     other person acting on behalf of the Company, has (i) directly or
     indirectly, used any corrupt funds for unlawful contributions, gifts,
     entertainment or other unlawful expenses related to foreign or domestic
     political activity, (ii) made any unlawful payment to foreign or domestic
     government officials or employees or to any foreign or domestic political
     parties or campaigns from corporate funds, (iii) failed to disclose fully
     any contribution made by the Company (or made by any person acting on its
     behalf of which the Company is aware) which is in violation of law, or
     (iv) violated in any material respect any provision of the Foreign Corrupt
     Practices Act of 1977, as amended.
     
     
     
     Accountants
     
     . The Company's accountants are Mayer Hoffman McCann P.C. , a registered
     public accounting firm as required by the Act.
     
     
     
     SEC Reports
     
     . As of their respective dates, the SEC Reports (i) were complete and
     accurate in all material respects and (ii) complied in all material
     respects with the requirements of the Act and the Exchange Act, as
     applicable, except to the extent that such SEC Reports were amended in
     which case they were correct and complete in all material respects and
     complied in all material respects with the requirements of the Act and the
     Exchange Act as of the date of the final amendment thereto.
     
     

     Representations and Warranties of Investor

     . Investor hereby represents and warrants as of the Effective Date as
     follows:

     

     Organization; Authority
     
     . Investor is an entity duly organized, validly existing and in good
     standing under the laws of the jurisdiction of its organization with full
     limited liability company power and authority to enter into and to
     consummate the transactions contemplated by this Agreement and otherwise to
     carry out its obligations thereunder. The execution, delivery and
     performance by Investor of the transactions contemplated by this Agreement
     have been duly authorized by all necessary limited liability company action
     on the part of Investor and no further consent or action is required by
     Investor. This Agreement has been duly executed by Investor and constitutes
     the valid and legally binding obligation of Investor, enforceable against
     it in accordance with its terms, subject to the Enforceability Exceptions.
     
     
     
     No Conflicts
     
     . The execution, delivery and performance of this Agreement by Investor do
     not and will not (i) conflict with or violate any provision of Investor's
     articles of organization or operating agreement. (ii) conflict with or
     result in a violation of any law, rule, regulation, order, judgment,
     injunction, decree or other restriction of any court or governmental
     authority to which Investor is subject (including federal and state
     securities laws and regulations), except in the case of clause (ii), such
     as could not have or reasonably be expected to result in a material adverse
     effect on Investor's ability to purchase the Securities pursuant to this
     Agreement.
     
     
     
     Filings, Consents and Approvals
     
     . Investor is not required to obtain any consent, waiver, authorization or
     order of, give any notice to, or make any filing or registration with, any
     court or other federal, state, local or other governmental authority or
     other Person in connection with the execution, delivery and performance by
     Investor of this Agreement, except for any filings required under
     Section 13 of the Exchange Act.
     
     
     
     No View to Distribute
     
     . Investor understands that the Securities are "restricted securities" and
     have not been registered under the Act or any applicable state securities
     law, and is and will be acquiring the Securities as principal for its own
     account and not with a view to, or for resale in connection with, any
     distribution thereof within the meaning of the Act (this representation and
     warranty not limiting Investor's right to sell the Conversion Shares
     pursuant to registration statement or otherwise in compliance with
     applicable federal and state securities laws).
     
     
     
     Investor Status
     
     . At the Effective Date, Investor is an "
     accredited investor
     " as defined in Rule 501(a)(8) under the Act. Investor is not required to
     be registered as a broker-dealer under Section 15 of the Exchange Act.
     
     
     
     Experience of Investor
     
     . Investor, either alone or together with its representatives, has such
     knowledge, sophistication and experience in business and financial matters
     so as to be capable of evaluating the merits and risks of the prospective
     investment in the Securities, and has so evaluated the merits and risks of
     such investment. Investor is able to bear the economic risk of an
     investment in the Securities and, at the present time, is able to afford a
     complete loss of such investment. During the course of the transaction
     contemplated by this Agreement, and before acquiring the Note, Investor has
     (i) had the opportunity to be provided with financial and other written
     information about the Company included in all documents the Company has
     publicly filed with the SEC, and (ii) asked questions concerning the
     business of the Company, its financial performance and its finances as
     described in the SEC Reports and received answers to such questions.
     Investor understands that no United States federal or state agency or any
     other government or governmental agency has passed on or made any
     recommendation or endorsement of the Securities or the fairness or
     suitability of the investment in the Securities nor have such authorities
     passed upon or endorsed the merits of the offering of the Securities.
     
     
     
     General Solicitation
     
     . Investor is not purchasing the Note as a result of any advertisement,
     article, notice or other communication regarding the Note published in any
     newspaper, magazine or similar media or broadcast over television or radio
     or presented at any seminar or any other general solicitation or general
     advertisement.
     
     
     
     Disclosure
     
     . Investor understands and confirms that the Company will rely on the
     representations of the Investor contained herein in entering into this
     Agreement and effecting the transactions contemplated hereby. Investor
     acknowledges and agrees that the Company does not make and has not made any
     representations or warranties with respect to the transactions contemplated
     hereby other than those specifically set forth in
     Section 3.1
     hereof.
     
     
     
     Regulation M
     
     . Investor is aware that the anti-manipulation rules of Regulation M under
     the Exchange Act may apply to sales of Common Stock and other activities
     with respect to the Common Stock by Investor.
     
     
     
     Certain Fees. No brokerage or finder's fees or commissions are or will be
     payable by the Company to any broker, financial advisor or consultant,
     finder, placement agent, investment banker, bank or other Person with
     respect to the transactions contemplated by this Agreement pursuant to any
     agreement with Investor.
     
     Certain Trading Activities
     
     . Other than with respect to the transactions contemplated herein, since
     the time that Investor first discussed the transactions contemplated hereby
     with the Company until the date hereof, neither Investor nor any Affiliate
     of Investor which (i) had knowledge of the transactions contemplated
     hereby, (ii) has or shares discretion relating to Investor's investments or
     trading or information concerning Investor's investments, including in
     respect of the Securities, and (iii) is subject to Investor's review or
     input concerning such Affiliate's investments or trading (collectively, "
     Trading Affiliates
     ") has directly or indirectly, nor has any Person acting on behalf of or
     pursuant to any understanding with Investor or Trading Affiliate, effected
     or agreed to effect any transactions in the securities of the Company
     (including, without limitation, any Short Sales involving the Common
     Stock).
     
     
     
     Foreign Investor
     
     . If Investor is not a United States person (as defined by Section
     7701(a)(30) of the Internal Revenue Code of 1986), Investor hereby
     represents that it has satisfied itself as to the full observance of the
     laws of its jurisdiction in connection with any invitation to subscribe for
     the Securities or any use of this Agreement, including (i) the legal
     requirements within its jurisdiction for the purchase of the Securities,
     (ii) any foreign exchange restrictions applicable to such purchase, (iii)
     any governmental or other consents that may need to be obtained and (iv)
     the income tax and other tax consequences, if any, that may be relevant to
     the purchase, holding, redemption, sale or transfer of the Securities.
     Investor's subscription and payment for, and his or her continued
     beneficial ownership of the Securities, will not violate any applicable
     securities or other laws of Investor's jurisdiction. Investor also hereby
     represents that Investor is not a "10-percent shareholder" as defined in
     Section 871(h) of the Internal Revenue Code of 1986. The funds used for the
     Note do not violate the anti-money laundering provisions of the Money
     Laundering Control Act of 1986 or the Bank Secrecy Act of 1970, as amended
     by the USA Patriot Act of 2001.
     
     

OTHER AGREEMENTS OF THE PARTIES

Transfer Restrictions

.

The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than
pursuant to an effective registration statement or Rule 144 to the Company or to
an Affiliate of Investor or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion and shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Act. As a
condition of transfer, any such transferee shall agree in writing to be bound by
the terms of this Agreement and shall have the rights of Investor under this
Agreement and the Registration Rights Agreement.

Investor agrees to the imprinting, so long as is required by this
Section 4.1(b), of the following legend on any certificate evidencing the
Securities:

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT" or "ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. IF THE SECURITIES ARE SHARES OF COMPANY COMMON STOCK,
SUCH SHARES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.

The Company acknowledges and agrees that Investor may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Conversion Shares to a financial
institution that is an "accredited investor" as defined in Rule 501(a) under the
Act and who agrees to be bound by the provisions of this Agreement and the
Registration Rights Agreement and, if required under the terms of such
arrangement, Investor may transfer pledged or secured Securities to the pledgees
or secured parties. Such a pledge or transfer would not be subject to approval
of the Company and no legal opinion of legal counsel of the pledgee, secured
party or pledgor shall be required in connection therewith. Further, no notice
shall be required of such pledge. At Investor's expense, the Company will
execute and deliver such reasonable documentation as a pledgee or secured party
of Securities may reasonably request in connection with a pledge or transfer of
the Conversion Shares, including, if the Conversion Shares are subject to
registration pursuant to the Registration Rights Agreement, the preparation and
filing of any required prospectus supplement under Rule 424(b)(3) under the Act
or other applicable provision of the Act to appropriately amend the list of
selling stockholders thereunder.

Furnishing of Information

. Until the earlier of one year after the Effective Date or the date on which
Investor transfers all of the Conversion Shares, (a) the Company covenants to
timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required to be filed by the Company after
the Effective Date pursuant to the Exchange Act, (b) if the Company is not
required to file reports pursuant to such laws, it will prepare and furnish to
Investor and make publicly available in accordance with Rule 144(c) such
information as is required for Investor to sell the Conversion Shares under Rule
144 and (c) the Company will use its commercially reasonable efforts to take
such further action as any holder of Conversion Shares may reasonably request,
all to the extent required from time to time to enable such Person to sell such
Conversion Shares without registration under the Act in accordance with the
exemption from registration provided by Rule 144.

Integration

. The Company shall not sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2 of the
Act) that would be integrated with the offer or sale of the Conversion Shares in
a manner that would require the registration under the Act of the sale of the
Conversion Shares to Investor or that would be integrated with the offer or sale
of the Conversion Shares for purposes of the rules and regulations of any
Trading Market such that it would require shareholder approval prior to the
closing of such other transaction unless shareholder approval is obtained before
the closing of such subsequent transaction.

Securities Laws Disclosure; Required Filings; Publicity

. The Company shall file a Current Report on Form 8-K, disclosing the material
terms of the transactions contemplated hereby within the time period required by
applicable law. The Company shall assist Investor at the Company's own expense
in the preparation and filing in a timely manner of any securities laws filings
required by the purchase of the Note. Investor agrees that it shall not issue
any such press release or otherwise make any such public statement without the
prior consent of the Company, with respect to any press release of Investor,
which consent shall not unreasonably be withheld, except if such disclosure is
required by law.

Shareholders Rights Plan

. No claim will be made or enforced by the Company or, to the knowledge of the
Company, any other Person that Investor is an "Acquiring Person" under any
shareholders rights plan or similar plan or arrangement in effect or hereafter
adopted by the Company, or that Investor could be deemed to trigger the
provisions of any such plan or arrangement, by virtue of receiving Securities
under this Agreement or under any other agreement between the Company and
Investor.

Indemnification of Investor

. Subject to the provisions of this Section 4.6, the Company will indemnify and
hold Investor, its Affiliates and attorneys, and each of their directors,
officers, shareholders, partners, members, owners, employees and agents
(collectively, the "Indemnified Persons"), harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation that Investor may suffer or incur
solely as a result of a legal action or legal actions concerning the purchase of
the Securities pursuant to this Agreement instituted against any Indemnified
Person by any stockholder of the Company who is not an Affiliate of Investor
(unless such action is based upon a breach of Investor's representations,
warranties or covenants under this Agreement and except if such action relates
to sales, pledges, margin sales and similar transactions by Investor to or with
any current stockholder). For the avoidance of doubt, if multiple claims are
brought against an Indemnified Person in an action and some, but not all of such
claims are subject to indemnity hereunder, then the Indemnified Person shall be
entitled to indemnity hereunder for the claims that are subject to indemnity
hereunder. If any action shall be brought against an Indemnified Person in
respect of which indemnity may be sought pursuant to this Agreement, the
Indemnified Person shall promptly notify the Company in writing, and the Company
shall have the right to assume the defense thereof with counsel of its own
choosing. The Indemnified Person shall have the right to employ separate counsel
in any such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of the Indemnified Person
except to the extent that (i) the employment thereof has been specifically
authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or
(iii) in such action there is, in the reasonable opinion of such separate
counsel, a material conflict on any material issue between the position of the
Company and the position of Investor. The Company will not be liable to an
Indemnified Person under this Agreement (a) for any settlement by an Indemnified
Person effected without the Company's prior written consent, which shall not be
unreasonably withheld or delayed; or (b) to the extent, but only to the extent,
that a loss, claim, damage or liability is attributable to Investor's breach of
any of the representations, warranties, covenants or agreements made by Investor
in this Agreement. The Company also agrees that neither Investor nor any
Affiliates of Investor nor any of the members, owners, directors, agents,
employees or controlling persons (if any), as the case may be, of Investor or
any such Affiliate shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company as a result of Investor
acquiring the Securities under this Agreement. The obligations of the Company
under this Section shall be in addition to any liability which the Company may
otherwise have with respect to a claim subject to the provisions of this
Section.

Delivery of Form W-8 BEN or Form W-9.

If not previously provided, Investor shall have completed and delivered to the
Company a validly executed IRS Form W-8 BEN or IRS Form W-9, as applicable,
establishing Investor's exemption from withholding tax.

MISCELLANEOUS

Fees and Expenses

. Except as may be otherwise set forth in this Agreement, each party shall pay
the fees and expenses of its advisers, counsel, accountants and other experts,
if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all stamp and other taxes and duties levied in connection
with the sale of the Securities, if any.

Entire Agreement

. This Agreement and the Registration Rights Agreement contain the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings, oral or written,
with respect to such subject matter.

Notices

. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given
and effective on the earliest of (a) the date of transmission, provided such
notice or communication is delivered via facsimile at the facsimile number
specified on the signature page prior to 5:30 p.m. (San Diego time) on a
business day and an electronic confirmation of delivery is received by the
sender (b) the next business day after the date of transmission, if such notice
or communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a business day or later than 5:30 p.m. (San
Diego time) on any business day, (c) one business day following the date of
mailing, if sent by a nationally recognized overnight courier service, or
(d) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such notices and communications are those set forth on
the signature pages hereof, or such other address as may be designated in
writing hereafter, in the same manner, by such Person.

Amendments; Waivers

. No provision of this Agreement may be waived or amended except in a written
instrument signed, in the case of an amendment, by (i) the Company and (ii)
those holding fifty percent of the Securities on a combined basis (whether in
the form of the Note or the Conversion Shares valued at the conversion price)
or, in the case of a waiver, by the party against whom enforcement of any such
waiver is sought. No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right.

Construction

. The headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party. All references in this Agreement
to sections are to sections of this Agreement unless expressly otherwise
indicated.

Successors and Assigns

. This Agreement shall be binding upon and inure to the benefit of the parties
and their successors and permitted assigns. Investor may assign any or all of
its rights under this Agreement to any Person to whom Investor assigns or
transfers any Securities, provided (i) such transferee agrees in writing to be
bound, with respect to the transferred Conversion Shares, by the provisions
hereof that apply to the "Investor" and (i) such assignment is in compliance
with securities laws and other applicable laws.

No Third-Party Beneficiaries

. This Agreement is intended for the benefit of the parties hereto and their
respective successors and permitted assigns and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person, except as otherwise
set forth in Section 4.6.

Governing Law

. This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California, without regard to the principles of conflicts
of law thereof.

Venue and Arbitration

. Subject only to the arbitration provisions of this Agreement, the parties
hereto hereby irrevocably submit to the exclusive jurisdiction of the state
courts of the State of California in San Diego County or the United States
District Court for the Southern District of California, for the purposes of any
lawsuit, action or other proceeding arising out of or based upon this Agreement
and the subject matter hereof. Any dispute, controversy or claim arising out of
or relating to this Agreement (other than claims for injunctive or equitable
relief), including, but not limited to, the interpretation, breach or
termination thereof (including whether the claims asserted are arbitrable),
shall be referred to and finally determined by arbitration in accordance with
the Judicial Arbitration Mediation Services ("JAMS") Comprehensive Arbitration
Rules and Procedures if the matter in dispute is over $250,000 or under JAMS
Streamlined Arbitration Rules and Procedures if the matter in dispute is
$250,000 or less. The tribunal will consist of a sole arbitrator who shall be a
retired judge, in accordance with California Code of Civil Procedure section
1280 et seq. The place of arbitration shall be San Diego, California. The
language to be used in the arbitral proceedings will be the English language.
The arbitrator shall be selected by mutual agreement of the parties or, if the
parties cannot agree, then by striking from a list of arbitrators supplied by
JAMS. The arbitration shall be a confidential proceeding, closed to the general
public. The arbitrator shall issue a written opinion stating the essential
findings and conclusions upon which the arbitrator's award is based. The
arbitrator may, in the award, allocate all or part of the costs of the
arbitration, including the fees of the arbitrator, and fees and costs of the
prevailing party. Judgment upon any award rendered by the arbitrator(s) shall be
final, and may be entered in any court having jurisdiction.

Survival

. The representations and warranties contained herein shall survive the delivery
of the Note for one year.

Execution

. This Agreement may be executed in two or more counterparts, all of which when
taken together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by facsimile
transmission or pdf, such signature shall create a valid and binding obligation
of the party executing (or on whose behalf such signature is executed) with the
same force and effect as if such facsimile or pdf signature page were an
original thereof.

Severability

. If any provision of this Agreement is held to be invalid or unenforceable in
any respect, the validity and enforceability of the remaining terms and
provisions of this Agreement shall not in any way be affected or impaired
thereby and the parties will attempt to agree upon a valid and enforceable
provision that is a reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Agreement.

Replacement of Securities

. If any certificate or instrument evidencing the Note or any Conversion Shares
is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be
issued in exchange and substitution for and upon cancellation thereof, or in
lieu of and substitution therefor, a new certificate or instrument, but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction and customary and reasonable indemnity, if requested. The
applicants for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs associated with the issuance of such
replacement.

Specific Performance

. In addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, Investor shall be entitled to
specific performance of the Company's covenants under Sections 4.2, 4.3, 4.4,
and 4.6 of this Agreement. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agree to waive in any
action for specific performance of any such obligation the defense that a remedy
at law would be adequate.

Payment Set Aside

. To the extent that the Company makes a payment or payments to Investor
pursuant to this Agreement or Investor enforces or exercises rights thereunder,
and such payment or payments or the proceeds of such enforcement or exercise or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to the
extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not
occurred.

Construction

. The parties agree that each of them and/or their respective counsel has
reviewed and had an opportunity to revise this Agreement and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Agreement or any amendments hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized signatories as of the date first
indicated above.

SPY INC.

and

SPY OPTIC INC.:

By: /s/ Michael D. Angel

Name: Michael D. Angel

Title: Chief Financial Officer

Address for Notices:

SPY Inc.

and

SPY Optic Inc.:
2070 Las Palmas Drive

Carlsbad, California 92011

Attention: Michael Marckx, President and Chief Executive Officer

Facsimile: (760) 804-8421

Email: mmarckx@o21na.com

w/copies to:

SPY Inc.

and

SPY Optic Inc.:
2070 Las Palmas Drive

Carlsbad, California 92011

Attention: Michael Angel, Chief Financial Officer, Treasurer and Secretary

Facsimile: (760) 804-8440

mangel@spyoptic.com

 

w/additional copy to:

John Hentrich

Sheppard, Mullin, Richter & Hampton LLP

12275 El Camino Real, Suite 200

San Diego, CA 92130-206

Facsimile No.: (858) 847-4865

Email: jhentrich@sheppardmullin.com

[signatures continued on next page]

HARLINGWOOD (ALPHA), LLC

By: Harlingwood Investment Partners I, LLC,

Manager

 

By: /s/ Fir Geenen

Fir Geenen, Manager

Address for Notices:

Harlingwood Alpha, LLC:

P.O. Box 7033

Rancho Santa Fe, CA 92067

Attention: Fir Geenen

Phone: (619) 758-5111

Email: fmg@harlingwood.com

With a copy to:

Matthew D. Short

Senior Counsel

Procopio, Cory, Hargreaves & Savitch LLP

525 B Street, Suite 2200

San Diego, CA 92101

Phone: (619) 525-3897

Email: matt.short@procopio.com