UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON
D.C. 20549
 
 FORM
10-K
 
 (MARK
ONE)
 S ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2007
 
 OR
 
 £ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE
TRANSITION PERIOD FROM __________ TO __________
 
 COMMISSION
FILE NUMBER: 0-22963
 
 BIG
DOG HOLDINGS, INC.
 (EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
  
 DELAWARE
              52-1868665(STATE
      OR OTHER JURISDICTION OF
              (I.R.S.
      EMPLOYER INCORPORATIONOR
      ORGANIZATION)
              IDENTIFICATION
      NO.)121 GRAY AVENUE, SANTA
      BARBARA, CALIFORNIA
              93101(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICE)
              (ZIP
      CODE)
 
 (805)
963-8727
 (REGISTRANT’S
TELEPHONE NUMBER INCLUDING AREA CODE)
 
 SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
 SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 per
share
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o  No x
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o  No x
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x  No o
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
 Indicate
by check mark whether registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
 Large
accelerated filer o    
Accelerated filer o    
Non-accelerated filer x
 Indicate
by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o  No x
 
 As of the close of business on June 30,
2007, the last business day of the registrant’s most recently completed second
fiscal quarter, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $52,990,000 based upon the closing price of
$16.35 on NASDAQ on such date.All outstanding shares of Common Stock,
other than those held by executive officers, directors and 10% shareholders are
deemed to be held by non-affiliates.
 
 As of the
close of business on March 7, 2008, the registrant had 9,486,480 shares of
common stock outstanding.
 
 DOCUMENTS
INCOPORATED BY REFERENCE
 Part III
incorporates information by reference from the definitive Proxy Statement for
the 2008 Annual Meeting of Shareholders, to be filed with the Commission no
later than 120 days after the end of the registrant’s fiscal year covered by
this Form 10-K.
  
   (THIS
PAGE INTENTIONALLY LEFT BLANK)
   2
  PART
I
 
 ITEM
      1.
              BUSINESS
 
 Unless
the context indicates otherwise, when this Annual Report on Form 10-K refers
to  “we,” “us” or “the Company,” we are referring to Big Dog Holdings,
Inc. and its subsidiaries on a consolidated basis.
 
 The
following discussion should be read in conjunction with the audited financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
 
 GENERAL
 
 Big Dog
Holdings, Inc. is the parent company of two retail chains, Big Dog USA, Inc.
(“Big Dogs”) and The Walking Company (“TWC”). Big Dogs develops, markets and
retails a branded, lifestyle collection of unique, high-quality, popular-priced
consumer products, including active wear, casual sportswear, accessories and
gifts for men and women of all ages.  TWC is the world’s leading
specialty retailer of authentic comfort footwear and
accessories.
 
 The
Company’s Big Dogs products were first sold in 1983 and operations remained
limited through 1992 when the current controlling stockholders acquired the BIG
DOGS® brand and related assets. Following the acquisition of Big Dogs, the
Company initiated a strategy of leveraging the brand through expansion of the
Big Dogs’ product line and growth of its retail stores.
 
 In March
2004, the Company, acquired the TWC retail stores out of bankruptcy. TWC
sells high-quality, technically designed comfort footwear and accessories
for men and women from leading comfort brands from around
the world.  Since its acquisition, the Company has expanded TWC
through opening of new retail stores, acquisition of other retail store chains
that it then converts into TWC stores, and development of an internet and
catalog business to generate sales and promote its store-based
business.  TWC is now the world’s leading specialty retailer of
authentic comfort footwear, operating 186 specialty stores as of
December 31, 2007 in premium malls across the nation.
 
 After
early years of growth, Big Dogs reached a level of maturity in the number of
stores and breadth of product.  The Company grew the number of Big
Dogs’ stores from five in 1993 to a peak of 231 in 2001 and has subsequently
downsized that number to 100 by March 1, 2008 as customer traffic and sales in
its outlet-based stores has declined. For Big Dogs, the Company is now focused
on brand management and means of restoring profitability for its operations. See
Risk Factors “CONTINUED LOSSES AND STORE CLOSURES IN BIG DOGS’
OPERATIONS.”
 
 By 2007
the percentage of the Company’s income generated by TWC had increased to 70%.
The Company expects that trend to continue.  As previously announced,
the Company intends to change its name from “Big Dog Holdings, Inc.” to “The
Walking Company Holdings, Inc.” to reflect the shift in the main focus of the
Company’s business to its TWC operations.
 
 BUSINESS OF
TWC
 
 TWC is a
chain of specialty retail stores selling high-quality, technically designed
comfort footwear and accessories from around the world to both men and
women, including such brands as ECCO®, Mephisto®, Dansko®, UGG® and
Pikolinos®.
 
 Having
purchased the assets of TWC out of bankruptcy in March 2004, the Company
re-focused TWC’s operations on its original core business of operating small
specialty stores in premium malls selling the best brands in the comfort
shoe category.  We acquired the business of TWC based on, among other
factors, our favorable assessment of its market niche, the favorable
demographics of that market, and an anticipated ability to realize efficiencies
and increase profitability by utilizing the retail store expertise of the
Company and by consolidating TWC’s corporate overhead operations with those of
the Company.  The footwear products sold by TWC appeal to a
large and growing demographic.
  3
  The
Company has expanded TWC’s store chain through new store opening and strategic
acquisitions.  During 2005, the Company added to the TWC chain through
the acquisition of Footworks.  Footworks operated a chain of seven
comfort footwear stores in strategic locations, including several high profile
locations on the Las Vegas Strip.  In January 2006, the Company
acquired 37 store locations of Steve’s Shoes, Inc. out of
bankruptcy.  Steve’s Shoes had operated a chain of comfort footwear
stores throughout the U.S.   under the names Steve’s Shoes,
Overland Trading Company and Sole Outdoor.  In January 2008, the
Company acquired the Natural Comfort Footwear chain of eight comfort footwear
stores in Florida.
 
 BUSINESS
STRATEGY
 
 Offer the Best Brands from
Around the World. TWC seeks out and offers to its customers shoe brands
that are of high quality, integrate comfort features, and are not widely
distributed.  TWC features a number of European and other foreign
comfort shoe brands not widely found in other US shoe
retailers.   By editing the assortment of comfort brand for its
customers and then explaining to them their benefits, TWC provides a unique and
valued service to its customer, creating brand loyalty and repeat
customers.
 
 Authentic ComfortTM.
Each brand carried integrates comfort features such as shock absorbing EVA
midsoles, hydrophobic foam insoles, waterproof leathers, anatomically contoured
footbeds, and roomy toe boxes that follow the shape of the
foot.   TWC is uniquely positioned to be the only national retail
shoe chain that markets comfort.
 
 Target a Large and Growing
Demographic. The Company has established TWC as the leading specialty
retailer of comfort footwear appealing to a broad range of consumers. Although
marketing focus is on baby boomers and working professionals, our customers
include men and women of all ages. As the baby boomers age, there is an
increasing focus on comfort footwear for both work and play.  In
addition, many of our brands are popular with working professionals such as
teachers, medical staff, foodservice personnel and others who spend long days on
their feet.
 
 Utilize Strong Market
Position.   Through store expansion and a focus on
comfort, TWC is now established as the only national specialty retailer of
comfort footwear. TWC utilizes its preeminence in the comfort market to seek
strong vendor relationships and widespread customer recognition.
 
 MERCHANDISING
 
 The TWC
product line features high-quality branded comfort footwear and accessories from
around the world.  The professional comfort line focuses on working
professionals who spend long hours on their feet.  The dress comfort
line includes more formal styles while maintaining the comfort for which TWC is
known.  The sport & active comfort line combines function and
performance with style and design to create products that fit an active
lifestyle.  The casual comfort line includes comfort footwear for
casual, everyday use.  TWC also sells accessories that are designed to
add to the comfort of the walking experience.  TWC believes that all
types of footwear are trending towards comfort and will merchandise
accordingly.
 
 TWC
experiences a level of seasonality in the types of products it
sells.  During spring/summer, the focus shifts toward
sandals.  During the fall/winter, the focus shifts toward boots,
slippers and all-weather footwear.
 
 The
majority of our footwear products range from between $80 and $150. The following
table sets forth the approximate contribution made to total TWC net sales in our
retail stores:
  % OF TOTAL NET SALESYEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005Women’s
      footwear
              
              
              58.3
              %
              
              
              55.2
              %
              
              
              54.2
              %Men’s
      footwear
              
              
              27.7
              
              
              
              30.7
              
              
              
              30.0Accessories
              
              
              14.0
              
              
              
              14.1
              
              
              
              15.8Total
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
 4
  MARKETING
 
 A
significant focus of the Company’s efforts since its acquisition of TWC has been
the implementation of an effective, coherent marketing image and
strategy.  This strategy has been implemented through a
newly-developed store design and supporting marketing
endeavors.  Through new store development and refitting old stores,
the large majority of the  chain now have the new
design.  TWC further continues its brand awareness through consistent
store layout and image, collateral materials (in-store posters, etc.), and
development of brand-identifying trademarks and slogans (Authentic ComfortTM, The
Best Brands From Around the World, etc.)  Such strategy has been
implemented with relatively little media advertising, as we believe TWC’s most
cost-effective marketing is through its stores themselves and our catalog and
website.  Also, almost all of the brands we carry contribute to a
cooperative marketing fund with TWC, largely offsetting our collateral
costs.  In addition, many of the brands we feature engage in their own
media advertising, which acts to support our stores.  TWC is also able
to leverage its marketing dollars by co-marketing with the companies whose
brands it sells and with the malls in which it has stores.
 
 RETAIL
STORES
 
 In 2007,
our retail stores contributed 98% of TWC total net sales.  As of
December 31, 2007, we operated a total of 186 stores in 38 states and the
District of Columbia. TWC stores are typically located in leading regional malls
in prosperous urban areas where the Company believes demographics are favorable.
In making site selections, we also consider a variety of other factors,
including proximity to large population centers, area income, the prestige and
potential customer-draw of the other tenants in the center or area, rent and
operating costs, store location and visibility within the center, and the
accessibility and visibility of the center from nearby
thoroughfares.
 
 The table
below sets forth the number of TWC stores located in each state as of December
31, 2007.
 
 State
              No. of
      Stores
              State
              No. of
      StoresAlabama
              2
              Michigan
              5Arkansas
              2
              Minnesota
              3Arizona
              8
              Missouri
              6California
              23
              Nevada
              8Colorado
              5
              New
      Hampshire
              3Connecticut
              4
              New
      Jersey
              8Delaware
              1
              New
      York
              6District
      of Columbia
              1
              North
      Carolina
              3Florida
              13
              Ohio
              7Georgia
              4
              Oklahoma
              1Hawaii
              6
              Oregon
              5Idaho
              1
              Pennsylvania
              6Illinois
              8
              South
      Carolina
              1Indiana
              5
              Tennessee
              3Kansas
              1
              Texas
              6Kentucky
              2
              Utah
              1Louisiana
              1
              Virginia
              5Maine
              1
              Washington
              7Maryland
              4
              Wisconsin
              3Massachusetts
              7
 
 Our TWC
stores average approximately 1,700 square feet. We opened 41 new stores and
closed six under-performing stores during 2007. Our cost to open a store in
2007, including leasehold improvements and furniture and fixtures, was
approximately $293,000.  The average per store initial inventory
(largely financed by trade payables) for the new 2007 stores was
approxi­mately $201,000 and pre-opening expenses averaged approximately
$18,000 per store.
 
 Our TWC
store operations are managed by a Senior Vice President – Retail, Vice President
– Retail, Director of Retail Operations, Director of Store Development, two
Regional Managers, 14 district managers, and eight district training
coordinators.  Each of the stores is managed and operated by a store
manager, an assistant manager and full-time and part-time sales associates. We
seek to further enhance the TWC customer’s shopping experience by developing a
knowledgeable and enthusiastic sales staff to distinguish TWC from its
competition. In this regard, we (and the companies whose shoe brands we feature)
provide instructive seminars and training to our staff to educate them on the
technical quality of our shoes and to allow them to guide our customers to the
products that best meet their comfort needs. We believe our commitment to
knowledgeable customer service enhances our ability to generate repeat business
and to attract new customers.
  5
  CATALOG
AND INTERNET SALES
 
 Our TWC
catalog and internet sales, represented approximately 2% of TWC total net sales
in 2007, compared to less than 1% in prior years.
 
 SOURCING
 
 Domestic and International
Sourcing.  TWC sources its product from a number of selected
and approved brands located in the United States and abroad.  TWC does
not own or operate any manufacturing facilities.  Occasionally, the
Company goes directly to the manufacturer and has a shoe made to TWC
specifications.
 
 
 BUSINESS OF BIG
DOGS
 
 BIG DOGS®
is an All-American, family-oriented brand that we believe has established a
unique niche in its dedication to providing quality, value and
fun.  Our products are centered around the signature BIG DOGS® name,
logo and "Big Dog" characters and are designed to appeal to a broad range of
customers. The BIG DOGS® brand conveys a sense of fun, humor and a "Big Dog
attitude," whereby each customer can feel that he or she is a "Big
Dog."
 
 The BIG
DOGS® brand is designed to appeal to men, women and children of all ages,
especially when they are engaged in leisure or recreational
activities.  We develop our apparel products, which include a wide
variety of basic apparel and related products, with an emphasis on being
functional rather than fashion-forward or trendy. These apparel products include
graphic T-shirts, shorts, knit and woven shirts, fleece items, loungewear and
boxer shorts. In addition to its BIG DOGS® line of activewear and casual
sportswear for men and women, we have a LITTLE BIG DOGS® line of infants' and
children's apparel and a BIG BIG DOGS® line of big-size apparel. We also sell a
line of non-apparel products, including plush animals, stationery and pet
products, which feature Big Dog graphics and are developed to complement our
apparel.
 
 After
early years of growth, Big Dogs reached a level of maturity in the number of
stores and breadth of product.  The Company grew the number of Big
Dogs stores from five in 1993 to a peak of 231 in 2001 and has subsequently
downsized that number to 100 by March, 2008 as customer traffic and sales in its
outlet-based stores has declined. For Big Dogs, the Company is now focused on
brand management and means of restoring profitability for its operations. See
Risk Factors “CONTINUED LOSSES AND STORE CLOSURES IN BIG DOGS
OPERATIONS.”
 
 BUSINESS
STRATEGY
 
 Promote the Big Dog Spirit
of Fun. A key and unique element in our Big Dogs’ brand image is the
focus on fun. This spirit of fun revolves around our Big Dog character that has
broad appeal to men, women and children of all ages. We foster this spirit by
creating positive, humorous, topical and inspiring graphics and slogans that we
apply to our merchandise.
 
 Deliver High Quality at a
Good Value. Big Dogs' products are constructed using high-quality fabrics
and other materials. Many of our products feature unique graphics characterized
by advanced print techniques, as well as unique appliqués and embroideries on
many of our apparel products.
 
 Enhance Functional Products
with Graphics. Big Dogs develops functional rather than fashion-forward
products. Our focus on basics and our ability to leverage our graphics across
multiple product categories have allowed us to eliminate the need for a
traditional buyer or design staff, and thereby lower our product development
costs compared to most fashion apparel companies.
  6
  Target a Broad, Diverse
Customer Base. We believe we have established Big Dogs as an
All-American, family-oriented brand featuring products, graphic themes, slogans
and promotions that appeal to a broad range of consumers. Although our marketing
focus is on baby boomers and their kids, our customers include men, women and
children of all ages, who span a wide range of geographic areas and income
levels. Furthermore, we believe that the millions of dog and other pet owners in
the United States have a strong natural affinity for the dog-related images and
themes in Big Dogs graphics. In addition, we believe that the positive image the
brand brings to being a "Big Dog" has a special appeal to big-size
customers.
 
 Emphasize Grassroots
Marketing. We believe Big Dogs’ most effective marketing is by the
products themselves and their presentation in our retail stores, catalog and
website. As a result, we have spent relatively little on advertising. Also
important to our marketing strategy is our targeted "grassroots" marketing
activities. These activities include local and charity sponsorships (such as
high school sports teams) and community-oriented promotional events (such as the
Company's annual dog parade in Santa Barbara).
 
 MERCHANDISING
 
 The Big
Dogs’ product line features a branded, lifestyle collection of unique,
high-quality, popular-priced consumer products, including activewear, casual
sportswear, accessories and gifts. Our apparel lines include full collections of
classic unisex casual sportswear and activewear for adults and for big sizes, as
well as collections for infants and children. We continuously explore
opportunities to further leverage our brand and graphics into new product
lines.
 
 Our
apparel products are manufactured from premium cotton or quality synthetic
fabrics. Big Dogs' apparel is characterized by quality fabrics, construction and
embellishments, and is distinguished from other apparel lines by the BIG DOGS’®
name, dog logo, graphics and slogans. In addition to our distinctive graphics,
we believe we have achieved recognition for the quality and performance of our
products.
 
 The
majority of Big Dogs’ products range from between $5 and $40. The following
table sets forth the approximate contribution that each of Big Dogs’ product
categories made to total net sales in our retail stores for the year ended
December 31:
  %
      OF RETAIL STORE* NET SALESYEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005Adult
      Apparel and Accessories
              
              
              54.9
              %
              
              
              54.3
              %
              
              
              54.4
              %Big-size
      Apparel
              
              
              29.3
              
              
              
              27.4
              
              
              
              26.1Infants'
      and Children's Apparel and Accessories
              
              
              10.6
              
              
              
              12.8
              
              
              
              14.3Non-Apparel
      Products
              
              
              5.2
              
              
              
              5.5
              
              
              
              5.2Total
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
 *Does not
include catalog, wholesale and internet sales, which are skewed toward larger
sizes.
 
 Adult Apparel and
Accessories. Big Dogs sells a complete line of adult unisex activewear
and casual sportswear. We offer screen-printed and embroidered T-shirts and
sweatshirts, in a variety of styles and colors that prominently display the Big
Dogs’ graphics and slogans. In addition, we offer shorts, knit and woven casual
shirts, fleece tops and bottoms, loungewear, boxer shorts, swimwear and
sleepwear, all of which feature print designs or simply the BIG DOGS’® name
and/or dog logo. Our adult apparel line primarily focuses on basic items that
recur with relatively minor variation from season-to-season and year-to-year.
While certain of our classic, popular items and graphics have been in the Big
Dogs’ line with very little change for over ten years, we introduce new apparel
and other products throughout the year to ensure that the merchandise
assortments are consistent with the top sellers within our competitive
market.
 
 We
leverage the Big Dogs’ trademarks, characters and more popular graphics by
carefully translating them to a wide variety of apparel accessories, including
caps, socks, sunglasses, bags, and wallets. These products are
developed and introduced based on their consistency with Big Dog's brand image
and whether they complement our other products. Our accessories not only provide
an opportunity to create add-on purchases, but also minimize product development
costs and inventory risk by utilizing graphics and slogans that have first
proven popular on our graphic T-shirts.
  7
  Big-Size Apparel. We
believe the BIG DOGS’® image and the positive emphasis the brand gives to being
a "Big Dog" have a unique appeal to consumers who wear big sizes. Our BIG BIG
DOGS’® category offers a line of unisex activewear and casual sportswear. As
with the regular adult sizes, this category features screen-printed and
embroidered T-shirts and sweatshirts, in a variety of styles and colors that
prominently display the BIG DOGS’ graphic themes and slogans. In addition, we
offer shorts, knit and woven casual and sports shirts, fleece tops and bottoms,
loungewear, boxer shorts, swimwear and sleepwear, which may feature print
designs or simply the BIG DOGS’® name and/or dog logo.
 
 Infants’ and Children’s
Apparel and Accessories. The LITTLE BIG DOGS® line includes infants,
toddlers, kids and youth sizes. Products in this line include graphic T-shirts,
shirts, fleece items, infant and toddler one-pieces, boxer shorts, dresses and
shorts, virtually all of which feature distinctive graphics. The graphics and
fabrics of this line are designed to mirror many of the more popular graphics
and fabrics in the BIG DOGS® adult line in order to encourage family purchases
and leverage overall product development costs.  Our sales of
children’s apparel have decreased in recent years, primarily due to increased
competitive pressure in that category in pricing and from the mass
market.
 
 Non-Apparel Products.
We further leverage our trademarks, characters and more popular graphics by
applying them to a wide variety of adult's and children's non-apparel items,
including pet products, plush animals and other toys, sporting goods,
stationery, calendars and lunch boxes. As with apparel accessories, new
non-apparel products are developed and introduced based on whether they are
consistent with Big Dogs' brand image and complement our other products. As with
apparel accessories, the graphics applied to these products have first proven
popular on our T-shirts, resulting in lower product development costs and
inventory risk.
 
 MARKETING
 
 Big Dogs
strives to maintain a consistent brand image through the coordination of our
merchandising, marketing and sales efforts. The goal of our marketing efforts is
to present a distinctive image of quality, value and fun that consumers will
associate with our products and thereby enhance the BIG DOGS® brand image. The
BIG DOGS® brand image has been developed with relatively little advertising, as
we believe its most effective marketing is its products themselves and their
presentation in our retail stores and website.
 
 RETAIL
STORES
 
 We seek
to create a distinctive and fun shopping environment in Big Dogs stores through
the innovative display of our graphic art and humor, including in-store "T-shirt
walls" and other displays designed to immediately put the customer in a fun,
relaxed state of mind.
 
 In 2007,
2006 and 2005 our retail stores contributed approximately 91%, 93% and 94% of
Big Dog Sportswear total net sales, respectively.  As of December 31,
2007 we operated a total of 115 stores in 35 states. Big Dogs’ stores are
located in outlet malls, many of which are in tourist and recreation-oriented
shopping locations and other casual environments where the Company believes
consumers are more likely to be in a fun, relaxed state of
mind.
  8
  The table
below sets forth the number of Big Dogs’ stores located in each state as of
December 31, 2007.
 
 State
              No. of
      Stores
              State
              No. of
      StoresAlabama
              1
              Minnesota
              2Arizona
              5
              Mississippi
              3California
              17
              Missouri
              5Colorado
              1
              Nevada
              3Connecticut
              1
              New
      Hampshire
              2Delaware
              2
              New
      Jersey
              2Florida
              8
              New
      York
              4Georgia
              4
              North
      Carolina
              3Hawaii
              1
              Ohio
              2Idaho
              1
              Oregon
              4Illinois
              2
              Pennsylvania
              6Indiana
              3
              South
      Carolina
              5Iowa
              1
              Tennessee
              6Louisiana
              1
              Texas
              6Maine
              1
              Virginia
              2Maryland
              3
              Washington
              3Massachusetts
              1
              Wisconsin
              1Michigan
              3
  Our
outlet mall stores average approximately 2,800 square feet.
 
 Our Big
Dogs’ store operations are managed by an Executive Vice
President-Merchandising/Retail, Director of Retail Operations, two regional
managers and 11 district and market managers. Each of the stores is managed and
operated by a store manager, an assistant manager and full-time and part-time
sales associates.
 
 DIRECT
SALES (INTERNET)
 
 Non-retail
distribution channels, primarily catalog and internet sales, represent
approximately 9%, 7%, and 6% of Big Dog Sportswear total net sales in 2007, 2006
and 2005, respectively.
 
 Internet and Catolog.
We have the benefit of being able to develop names for our emailing list through
our retail store chain, which has been the primary source for such
list.  In recent years we have been migrating names away from the
catalog operations and over to the website.  The economics of the
continued use of the catalog are being evaluated.
 
 SOURCING
 
 Domestic and International
Sourcing. Big Dogs does not own or operate any manufacturing facilities
but we instead source our products through third-party contractors with
manufacturing facilities that are primarily overseas and to a limited extent, in
Central America. We believe that outsourcing allows us to enhance production
flexibility and capacity, while substantially reducing capital expenditures and
avoiding the costs of managing a large production workforce. In addition,
outsourcing allows us to leverage working capital, transfer risk and focus our
energy and resources on merchandising, marketing and sales.
 
 Big Dogs’
domestic sourcing is primarily limited to graphic T-shirts. Our graphic
T-shirt business is managed in-house. This includes management of screen
printing art and blanks, but not the actual screen-printing operations
which are outsourced.   Almost all other products, excluding
T-shirts, are manufactured overseas, primarily in Asia, the Near and Middle East
and Central Africa. In order to reduce our exposure to production risks and
delays arising from trade disputes, political disruption or other factors
relating to any one vendor or country, we utilize a diverse group of vendors. We
source the majority of our product from trading companies. Through these trading
companies and directly, we source from approximately 45 unaffiliated vendors,
including 32 foreign vendors in a number of countries. In order to enhance our
sourcing flexibility, we use trading companies rather than operate our own
foreign sourcing office. These trading companies assist us in selecting and
overseeing third-party vendors, sourcing fabric and monitoring quotas and other
trade regulations. We do not have supply contracts with any of our suppliers.
Although the loss of major suppliers could have a significant effect on our
immediate operating results, since we are focused on basic apparel, we believe
alternate sources of merchandise for most product categories are available at
comparable prices and that we could replace these suppliers without any
long-term adverse effect.  As the Company has downsized the operations
of Big Dogs in recent years, the decrease in the volume of product ordered from
vendors has reduced certain economies of scale that previously
existed.  See RISK FACTORS—CONTINUED LOSSES AND STORE CLOSURES IN BIG
DOGS OPERATIONS.
  9
  Quality Control. Our
quality control program is designed to ensure that all goods bearing BIG DOGS®
trademarks meet our standards. With respect to our products, Big Dogs, through
its employees and sourcing agents, develops and inspects prototypes of each
product prior to manufacture. For apparel products, Big Dogs, through its
employees and sourcing agents, inspects the prototypes and fabrics prior to
cutting by the contractors, establishes fittings based on the prototype and
inspects samples. We or our sourcing agents inspect the final product prior to
shipment to our warehouse or at the warehouse generally prior to
payment.
 
 BIG DOGS
AND TWC OPERATIONS
 
 SEGMENTS
 
 The
Company has two reportable segments, Big Dogs and TWC.  See Note 10 of
the Notes to Consolidated Financial Statements.
 
 MANAGEMENT INFORMATION
SYSTEMS
 
 The
Company is committed to utilizing technology to enhance its competitive
position. We have put in place computer hardware, systems applications and
networks that are the same as those used by a number of large retailers. These
systems support the sales and distribution of products to our stores and
customers and improve the integration and efficiency of our domestic and foreign
sourcing operations. The Company’s management information system (“MIS”)
provides integration of store, merchandising, distribution and financial
systems. These systems include stock keeping unit ("SKU") and classification
inventory tracking, purchase order management, open-to-buy, merchandise
distribution, automated ticket making, general ledger, sales audit, accounts
payable, fixed asset management, payroll and integrated financials. These
systems operate on an IBM AS 400 platform and a Microsoft NT server network and
utilize Island Pacific software. Our point-of-sale ("POS") system consists of
registers providing price look-up, e-mail and credit card and check
authorization. Through automated two-way communication with each store, sales
information, e-mail and timekeeping information are uploaded to the host system,
and receiving, price changes and systems maintenance are down-loaded through the
POS devices. Sales are updated daily in the merchandising report systems by
polling sales from each store's POS terminals. We evaluate information obtained
through daily polling, including a daily tracking of gross margin, to implement
merchandising decisions regarding reorders, markdowns and allocation of
merchandise. Catalog operations are also supported by MIS applications from an
established vendor, designed specifically to meet the unique requirements of
this business. These applications include customer service phone center, order
processing and mailing list maintenance.
 
 ALLOCATION AND DISTRIBUTION
OF MERCHANDISE
 
 Allocation
and distribution of our inventory is performed centrally at the SKU, merchandise
classification and store levels using integrated third-party software. Utilizing
our MIS capabilities, our planning and allocation group works closely with the
merchandising and retail departments to monitor and respond to customer
purchasing trends and meet the seasonal and locale-specific merchandising
requirements of our retail stores.
 
 Our main
warehouse facility and our mail order warehouse and fulfillment facility are
located in a 230,000 square-foot distribution facility in Charlotte, North
Carolina. All merchandise is delivered by vendors to this facility, where it is
inspected, entered into our merchandising software system, picked and boxed for
shipment to the stores or customers. We ship merchandise to our stores at least
weekly, to provide a steady flow of merchandise.
  10
  TRADEMARKS
 
 The
Company utilizes a variety of trademarks which it owns; including the U.S.
registered trademarks THE WALKING COMPANY®, BIG DOGS®, BIG DOG SPORTSWEAR®, dog
logo, BIG DOG®, LITTLE BIG DOGS®, and BIG BIG DOGS®. In addition, we have
registered certain of our trademarks or have registration applications pending
in other countries. We regard our trademarks and other proprietary rights as
valuable assets and believe they have significant value in the marketing of our
products. Like most popular brands, from time to time in the course of business
we discover products or businesses in the marketplace that we believe infringe
upon our trademark rights.  In addition, in regard to Big Dogs,
companies occasionally claim that a certain product or graphic of ours infringes
on their intellectual property rights (sometimes in regard to our parodies of
other’s trademarks that we do as part of the Big Dogs sense of fun). We take
action protect our trademarks and defend ourselves against claims of
others.  Actions against infringers include the use of cease and
desist letters, administrative proceedings and lawsuits.
 
 COMPETITION
 
 The level
and nature of competition differ somewhat for Big Dogs versus TWC and among the
product categories each of them feature.  Both companies compete
primarily on the basis of the brand image we develop and maintain for them, as
well as product quality assortment and price, store location and layout, and
customer service. Big Dogs also competes by offering a unique combination of
quality, value and fun (in both its products and its store
experience).  TWC also competes by offering a unique assortment of
quality, hard-to-find brands.  The markets for each of our products
are highly competitive. We believe that our long-term competitive position will
depend upon our ability to anticipate and respond effectively to changing
consumer demands and to offer customers a wide variety of high-quality, unique
products at competitive prices.
 
 Although
we believe Big Dogs does not compete directly with any single company with
respect to its entire range of merchandise, within each merchandise category it
competes with well-known, value driven retail companies such as Penny’s, Kohl’s
and Mervyn’s, as well as other national and regional department stores,
specialty retailers and apparel designers and manufacturers. In addition, in
recent years, the amount of casual sportswear and activewear manufactured
specifically for department stores and sold under their own labels has
significantly increased.
 
 TWC
competes primarily with small independent specialty shoe retailers (“mom &
pop” operators), small shoes chains and also department store operators such as
Nordstrom and Federated.  We believe that due to the relatively high
price points for the shoes TWC offers and the high-level of customer service
required to effectively sell the technical comfort benefits of such shoes, the
big-box, mass-market retailers do not present a significant potential
competitive threat to TWC.
 
 Some of
the Company’s competitors are significantly larger and more diversified and have
substantially greater financial, distribution, marketing and other resources and
have achieved greater recognition for their brand names than the
Company.
 
 SEASONALITY
 
 For a
discussion of the extent to which the business of the Company is seasonal, see
“Seasonality and Quarterly Results” in “Part I. Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.”
 
 WORKING CAPITAL
ITEMS
 
 The
Company, as well as the retail industry, experiences significant fluctuations in
working capital related to their seasonality.  The Company maintains a
line of credit, which provides them with the flexibility to increase inventory,
as needed, in advance of those periods of higher sales demand.
  11
  EMPLOYEES
 
 At March
3, 2008, we had approximately 1,100 full-time and 1,200 part-time employees. Our
need for part-time retail employees fluctuates significantly based on seasonal
needs.  No employees are covered by collective bargaining
agreements.
 
 AVAILABLE
INFORMATION
 
 Big Dogs’
website is www.bigdogs.com and
TWC’s website is at www.thewalkingcompany.com.  We
make available free of charge through our www.bigdogs.com
website the Company’s annual, quarterly and current reports, and any amendments
to those reports, as soon as reasonably practical after electronically filing
such reports with the Securities and Exchange Commission.  This
website is intended to be an inactive textual reference only and none of the
information contained in our website is part of this report or is incorporated
in this report by reference.
 
 ITEM
      1A.
              RISK
      FACTORS
 
 See
discussion of Risk Factors in “Part I. Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
 
 ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
 
 Not
applicable.
 
 ITEM
      2.
              PROPERTIES
 
 Our
corporate headquarters are in leased offices comprising approximately 24,000
square feet in Santa Barbara, California. This lease expires July 2011, with two
options to extend for five years each.  Our distribution facility is
located in Charlotte, North Carolina in a building comprising approximately
230,000 square feet under a lease that expires in 2016.  We have two
options to extend this lease for ten years each.  Additionally, the
TWC merchandising department is in an office comprising approximately 17,500
square feet in Westlake Village, California.  This lease expires in
December 2013, with two options to extend for five years each.
 
 We lease
all of our store locations. Big Dogs store leases are typically for an initial
term of five years with a five-year option and provide for base rent plus
contingent rent based upon a percentage of sales in excess of agreed-upon sales
levels.  In recent years, we have negotiated shorter-term renewals for
Big Dogs’ stores in malls where we perceive a risk of declining
sales.  See “Item 1. BUSINESS – RETAIL STORES” for both Big Dogs and
TWC.  The leases for TWC store locations typically have longer terms,
as required by leading mall developers.
 
 ITEM
      3.
              LEGAL
      PROCEEDINGS
 
 In
Marlene Korman v. The Walking Company,  TWC was sued in the Eastern
District of Pennsylvania in a purported class action lawsuit under the Fair and
Accurate Credit Transactions Act (“FACTA”) because the plaintiff received a
receipt with the expiration date from her debit credit card on
it.  The plaintiff alleges that that was a “willful” violation of
FACTA, entitling her and the other members of the class to statutory damages of
$100 to $1,000 per person.  The Company has denied the complaint and
is defending the action.  The Company cannot predict the likelihood of
a favorable or unfavorable outcome in this matter, but at this time does not
believe that the outcome of such litigation will have a material adverse impact
on our operations or financial condition.
 
 From time
to time we are involved in other pending or threatened litigation incidental to
our business.  We believe that the outcome of such litigation will not have
amaterial
adverse impact on our operations or financial condition.
 
 ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF THE SECURITY
HOLDERS
 
 Not
applicable.
  12
  PART
II
 
 ITEM
      5.
              MARKET
      FOR THE REGISTRANT’S COMMON EQUITY,
RELATED
 STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 The
common stock of our Company is traded on the NASDAQ Global Market under the
symbol BDOG. The following table sets forth, for the period from the first
quarter 2006 through the fourth quarter 2007, the high and low “sales” prices of
the shares of our common stock, as reported on the NASDAQ Global
Market.
 
 2007
              
              
              2006High
              
              
              Low
              
              
              High
              
              
              LowFirst
      Quarter
              
              $
              16.12
              
              
              $
              15.14
              
              
              $
              14.80
              
              
              $
              7.41Second
      Quarter
              
              
              17.74
              
              
              
              15.51
              
              
              
              14.49
              
              
              
              11.20Third
      Quarter
              
              
              16.61
              
              
              
              14.35
              
              
              
              12.58
              
              
              
              10.26Fourth
      Quarter
              
              
              15.74
              
              
              
              13.55
              
              
              
              16.45
              
              
              
              12.30
 
 On March
7, 2008, the last sales price of the common stock as reported on the NASDAQ
Global Market was $7.61 per share. As of March 7, 2008, we had approximately 150
shareholders of record of our common stock.
 
 Our
current credit agreement prohibits the payment of dividends (see Liquidity and
Capital Resources). We did not pay a dividend in 2007 and 2006, and do not
expect to pay dividends in the foreseeable future.
 
 Performance
Graph
 
 The
performance graph below compares the cumulative shareholder return on the Big
Dog Holdings’ Common Stock with the cumulative total return on the NASDAQ RETAIL
INDEX and the NADAQ COMPOSITE INDEX. The graph assumes an investment of $100.00
on January 1, 2002. The performance graph represents past performance and should
not be considered an indication of future performance.
  
 13
  ITEM
      6.
              SELECTED
      FINANCIAL DATA
 
 The
selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K.
 
 YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(in
      thousands, except per share and operating data)STATEMENT
      OF OPERATIONS DATA:Net
      sales
              
              $
              233,268
              
              
              $
              218,604
              
              
              $
              179,115
              
              
              $
              161,358
              
              
              $
              103,757Cost
      of goods sold
              
              
              110,820
              
              
              
              101,723
              
              
              
              80,311
              
              
              
              72,733
              
              
              
              45,025Gross
      profit
              
              
              122,448
              
              
              
              116,881
              
              
              
              98,804
              
              
              
              88,625
              
              
              
              58,732Selling,
      marketing and distribution expenses
              
              
              113,024
              
              
              
              103,428
              
              
              
              80,624
              
              
              
              73,956
              
              
              
              49,089General
      and administrative expenses
              
              
              10,799
              
              
              
              9,823
              
              
              
              9,631
              
              
              
              8,060
              
              
              
              5,199Total
      operating expenses
              
              
              123,823
              
              
              
              113,251
              
              
              
              90,255
              
              
              
              82,016
              
              
              
              54,288(Loss)
      Income from operations
              
              
              (1,375
              )
              
              
              3,630
              
              
              
              8,549
              
              
              
              6,609
              
              
              
              4,444Other
      income
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (82
              )
              
              
              ---Interest
      income
              
              
              (10
              )
              
              
              (8
              )
              
              
              (44
              )
              
              
              (26
              )
              
              
              (2
              )Interest
      expense
              
              
              4,255
              
              
              
              2,084
              
              
              
              976
              
              
              
              857
              
              
              
              320(Loss)
      Income before (benefit from) provision for income taxes
              
              
              (5,620
              )
              
              
              1,554
              
              
              
              7,617
              
              
              
              5,860
              
              
              
              4,126(Benefit
      from) Provision for income taxes
              
              
              (2,164
              )
              
              
              583
              
              
              
              2,894
              
              
              
              2,172
              
              
              
              1,489Net
      (loss) income
              
              $
              (3,456
              )
              
              $
              971
              
              
              $
              4,723
              
              
              $
              3,688
              
              
              $
              2,637Net
      (loss) income per shareBasic
              
              $
              (0.37
              )
              
              $
              0.11
              
              
              $
              0.52
              
              
              $
              0.42
              
              
              $
              0.32Diluted
              
              $
              (0.37
              )
              
              $
              0.10
              
              
              $
              0.49
              
              
              $
              0.40
              
              
              $
              0.32Weighted
      average common sharesBasic
              
              
              9,421
              
              
              
              9,180
              
              
              
              9,145
              
              
              
              8,722
              
              
              
              8,307Diluted
              
              
              9,421
              
              
              
              9,531
              
              
              
              9,726
              
              
              
              9,174
              
              
              
              8,307OPERATING
      DATA:Number
      of stores (1)Stores
      open at beginning of period
              
              
              306
              
              
              
              268
              
              
              
              262
              
              
              
              203
              
              
              
              209Stores
      added due to acquisitions
              
              
              ---
              
              
              
              37
              
              
              
              7
              
              
              
              72
              
              
              
              ---Stores
      opened during period
              
              
              43
              
              
              
              27
              
              
              
              14
              
              
              
              5
              
              
              
              7Stores
      closed during period
              
              
              (48
              )
              
              
              (26
              )
              
              
              (15
              )
              
              
              (18
              )
              
              
              (13
              )Stores
      open at end of period
              
              
              301
              
              
              
              306
              
              
              
              268
              
              
              
              262
              
              
              
              203Comparable
      stores sales increase (decrease) (2) (3)
(4)
              
              
              2.3
              %
              
              
              3.0
              %
              
              
              3.3
              %
              
              
              3.5
              %
              
              
              (3.6
              )%BALANCE
      SHEET DATA:Working
      capital
              
              $
              30,609
              
              
              $
              22,590
              
              
              $
              31,639
              
              
              $
              32,727
              
              
              $
              29,574Total
      assets
              
              
              123,622
              
              
              
              102,661
              
              
              
              72,753
              
              
              
              58,831
              
              
              
              42,582Total
      indebtedness (5)
              
              
              47,790
              
              
              
              30,346
              
              
              
              9,183
              
              
              
              1,092
              
              
              
              ---Stockholders’
      equity
              
              
              46,280
              
              
              
              49,128
              
              
              
              46,448
              
              
              
              42,541
              
              
              
              34,214
 
 (1)
Includes three temporary stores which were open as of December 31,
2003.
  (2)
Comparable store sales represent net sales of stores open at least one full
year. Big Dog stores are considered comparable beginning on the first day of the
third month following the one-year anniversary of their opening.  TWC
stores are considered comparable beginning on the first day of the first month
following the one-year anniversary of their opening. Stores that are relocated
but remain in the same shopping area remain in the comparable store base. The
Company believes this method best reflects the effect of one-time promotional
events and is most consistent with industry methods.
 14
  (3) In
2007, comparable store sales increase consists of an 8.1% increase in TWC
comparable store sales, which is offset by an 8.3% decrease in Big Dogs
comparable store sales.  In 2006, comparable store sales increase
consists of a 10.6% increase in TWC comparable store sales, which is offset by a
4.8% decrease in Big Dogs comparable store sales.  In 2005, comparable
store sales increase consists of a 12.8% increase in TWC comparable store sales,
which is offset by a 4.1% decrease in Big Dogs comparable store
sales.  In 2004, comparable store sales increase consists of a 12.7%
increase in TWC comparable store sales, which is offset by a 1.9% decrease in
Big Dogs comparable store sales.
  (4)
Comparable store sales increase also includes internet and catalog sales after
April 1, 2007.  Our internet and catalog sales represent less than
3.0% of total sales in 2007.
 
 (5)
Includes notes payable, obligations under the bank line of credit and
obligations under capital leases.
  ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company contained
elsewhere in this Form 10-K.
 
 GENERAL
 
 Big Dog
Holdings, Inc. is the parent company of two retail chains, Big Dog USA, Inc.,
which does business as “Big Dog Sportswear” (“Big Dogs” or “Big Dog Sportswear”)
and The Walking Company (“TWC”). Big Dogs develops, markets and retails a
branded, lifestyle collection of unique, high-quality, popular-priced consumer
products, including active wear, casual sportswear, accessories and
gifts.   TWC, acquired March 3, 2004, is a specialty retailer of
authentic comfort footwear and accessories.
 
 RESULTS
OF OPERATIONS
 
 The
following table sets forth, for the periods indicated, certain selected
statement of operations data expressed as a percentage of net
sales:
 
 YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005Net
      sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of goods sold
              
              
              47.5
              
              
              
              46.5
              
              
              
              44.8Gross
      profit
              
              
              52.5
              
              
              
              53.5
              
              
              
              55.2Selling,
      marketing and distribution expenses
              
              
              48.5
              
              
              
              47.3
              
              
              
              45.0General
      and administrative expenses
              
              
              4.6
              
              
              
              4.5
              
              
              
              5.4Total
      operating expenses
              
              
              53.1
              
              
              
              51.8
              
              
              
              50.4(Loss)/Income
      from operations
              
              
              (0.6
              %)
              
              
              1.7
              %
              
              
              4.8
              %
 
 YEARS
ENDED DECEMBER 31, 2007 AND 2006
 
 NET
SALES. Net sales consist of sales from the Company’s stores, catalog, internet
website, and corporate sales accounts, all net of returns and
allowances.  Net sales increased to $233.3 million in 2007 from $218.6
million in 2006, an increase of $14.7 million, or 6.7%.  The increase
is primarily driven by our TWC segment and relates to the impact of the TWC
sales growth.  The increase is offset in part by decreased sales from
the Big Dogs’ segment.
  15
  TWC
Operations.  Net sales from TWC operations increased to $162.1
million in 2007 from $135.7 million in 2006, an increase of $26.4 million, or
19.5%.  Of this increase $10.0 million related to an 8.1% increase in
comparable store sales which includes TWC catalog/Internet sales after April 1,
2007; $14.5 million was attributable to an increase in TWC sales for stores not
yet qualifying as comparable stores, which includes the closure of stores netted
against new stores opened in the period; $1.5 million attributable to the
acquisition of Steve’s Shoes in January, 2006, and a $0.4 million increase in
the Company’s TWC catalog/Internet business prior to being included in
comparable store sales.  The increase in TWC comparable store sales is
primarily related to improved inventory levels and merchandise selection at the
TWC stores.
 
 Big Dogs’
Operations.  Net sales from Big Dogs’ operations decreased to
$71.1 million in 2007 from $82.9 million in 2006, a decrease of $11.8 million,
or 14.2%.  Of this decrease $5.6 million was attributable to an 8.3%
decrease in Big Dog Sportswear comparable store sales for the period, and $6.3
million was attributable to a decrease in Big Dog Sportswear sales for stores
not qualifying as comparable stores, which includes the closure of unprofitable
stores netted against new stores opened in the period.  The decreases
were offset by a $0.1 million increase in the Company’s Big Dog Sportswear
corporate sales business.  The decrease in Big Dog Sportswear
comparable store sales is primarily related to an overall decrease in consumer
traffic in our stores and outlet locations.  The decrease in Big Dog
Sportswear sales for stores not qualifying as comparable stores is primarily
attributable to an additional nineteen net Big Dogs store closures during 2007
as compared to 2006, with 40 net Big Dogs stores closed in 2007 and 21 net Big
Dog stores closed in 2006.
 
 GROSS
PROFIT. Gross profit increased to $122.4 million in 2007 from $116.9 million in
2006, an increase of $5.5 million, or 4.7%. As a percentage of net sales, gross
profit decreased to 52.5% in 2007 from 53.5% in 2006.  TWC’s gross
profit remained relatively constant in 2007 and 2006 at 51.3% and 51.7%,
respectively.  Big Dogs’ gross profit remained relatively constant in
2007 and 2006 at 55.2% and 56.3%, respectively.  Gross profit may not
be comparable to those of other retailers, since some retailers include
distribution costs and store occupancy costs in costs of goods sold, while we
exclude them from gross margin, including them instead in selling, marketing and
distribution expenses.
 
 SELLING,
MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution
expenses consist of expenses associated with creating, distributing, and selling
products through all channels of distribution, including occupancy, payroll and
catalog costs. Selling, marketing and distribution expenses increased to $113.0 million in 2007 from
$103.4 million in 2006, an increase of $9.6 million, or
9.3%.  As a percentage of net sales these expenses increased to 48.5%
in 2007 from 47.3% in 2006, an increase of 1.2%. The increase is primarily
related to spreading the fixed component of Big Dogs expenses over a smaller
sales base, increased expenses related to operating the Steve’s Shoes stores
acquired out of bankruptcy, and an increase in corporate infrastructure to
facilitate future growth in the Company’s TWC segment.
 
 GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist of
administrative salaries, corporate occupancy costs and other corporate expenses.
General and administrative expenses increased to $10.8 million in 2007 from
$9.8 million in 2006.   As a percentage of net sales these
expenses remained relatively constant in 2007 and 2006 at 4.6% and 4.5%,
respectively.  The increase is attributable to an increase in
administration to support the Company’s continued growth.
 
 INTEREST
INCOME. Interest income for 2007 and 2006 was less than $0.1
million.  Interest income is primarily earned on excess cash balances
invested on an overnight basis.  As the Company generally uses excess
cash to reduce the outstanding balances on their line of credit, interest income
in future periods is not expected to be significant.
 
 INTEREST
EXPENSE. Interest expense increased to $4.3 million in 2007, from $2.1 million
in 2006 related to an increase in borrowing as a result of new store
construction and the Steve’s Shoes acquisition and additional working capital
requirement.
 
 INCOME
TAXES. In 2007, the Company recorded an income tax benefit at an effective
income tax rate of 38.5%.  The Company believes it will fully realize
this benefit by amending prior year tax returns to carry back the 2007 tax
loss.  In 2006, the provision for income taxes reflects a 37.5%
effective tax rate.
  16
  YEARS
ENDED DECEMBER 31, 2006 AND 2005
 
 NET
SALES. Net sales consist of sales from the Company’s stores, catalog, internet
website, and corporate sales accounts, all net of returns and
allowances.  Net sales increased to $218.6 million in 2006 from $179.1
million in 2005, an increase of $39.5 million, or 22.1%.  The increase
is primarily driven by our TWC segment and relates to the impact of the TWC
acquisitions as well as sales growth.  The increase is offset in part
by decreased sales from the Big Dogs’ segment.
 
 TWC
Operations.  Net sales from TWC operations increased to $135.7
million in 2006 from $87.0 million in 2005, an increase of $48.7 million, or
56.0%.  The increase was primarily attributable to the acquisitions of
Footworks in August, 2005 and Steve’s Shoes in January, 2006, which increased
sales by $7.5 million and $21.2 million in 2006, respectively.  In
addition, an increase of $8.5 million was attributable to a 10.6% increase in
comparable store sales, $10.7 million attributable to an increase in TWC sales
for stores not yet qualifying as comparable stores, which includes the closure
of stores netted against new stores opened in the period, and a $0.8 million
increase in the Company’s TWC catalog/Internet business.  The increase
in TWC comparable store sales is primarily related to improved inventory levels
and merchandise selection at the TWC stores since the Company purchased TWC out
of bankruptcy in March 2004.
 
 Big Dogs’
Operations.  Net sales from Big Dogs’ operations decreased to
$82.9 million in 2006 from $92.1 million in 2005, a decrease of $9.2 million, or
10.0%.  The decrease was related to $3.7 million attributable to a
4.8% decrease in Big Dog Sportswear comparable store sales for the period, $5.7
million attributable to a decrease in Big Dog Sportswear sales for stores not
qualifying as comparable stores, which includes the closure of unprofitable
stores netted against new stores opened in the period, and $0.1 million
attributable to a decrease in the Company’s Big Dog Sportswear corporate sales
business.  The decreases were offset by a $0.3 million increase in the
Company’s Big Dog Sportswear catalog/Internet business.  The decrease
in Big Dog Sportswear comparable store sales is primarily related to an overall
decrease in consumer traffic in our stores and outlet locations.  The
decrease in Big Dog Sportswear sales for stores not qualifying as comparable
stores is primarily attributable to an additional nine net Big Dog store
closures during 2006 as compared to 2005, with 21 net Big Dog stores closed in
2006 and 12 net Big Dog stores closed in 2005.
 
 GROSS
PROFIT. Gross profit increased to $116.9 million in 2006 from $98.8 million in
2005, an increase of $18.1 million, or 18.3%. As a percentage of net sales,
gross profit decreased to 53.5% in 2006 from 55.2% in 2005.  TWC’s
gross profit remained relatively constant in 2006 and 2005 at 51.7% and 51.8%,
respectively.  Big Dogs’ gross profit decreased to 56.3% in 2006
compared to 58.4% in 2005.  The 2.1% decrease was primarily due to a
shift to promotional sales from higher-margined sales.  Gross profit
may not be comparable to those of other retailers, since some retailers include
distribution costs and store occupancy costs in costs of goods sold, while we
exclude them from gross margin, including them instead in selling, marketing and
distribution expenses.
 
 SELLING,
MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution
expenses increased to $103.4 million in 2006 from
$80.6 million in 2005, an increase of $22.8 million, or 28.3%. The
$22.8 million increase is primarily due to the acquisition of Footworks on
August 31, 2005 and Steve’s Shoes on January 31, 2006.  As a
percentage of net sales these expenses increased to 47.3% in 2006 from 45.0% in
2005, an increase of 2.3%. The increase is primarily related to spreading the
fixed component of Big Dog expenses over a smaller sales base, increased
expenses related to operating the Steve’s Shoes stores acquired out of
bankruptcy, an additional $0.7 million incurred to relocate the Company’s
distribution center to a larger facility, and an increase in corporate
infrastructure to facilitate future growth in the Company’s TWC
segment.
 
 GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to
$9.8 million in 2006
from $9.6 million in 2005.   As a percentage of net sales these
expenses decreased to 4.5% in 2006 from 5.4% in 2005, a decrease of
0.9%.  The increase is attributable to a small increase in
administration to support the Company’s continued growth.
 
 INTEREST
INCOME. Interest income for 2006 and 2005 was less than $0.1
million.  Interest income is primarily earned on excess cash balances
invested on an overnight basis.  As the Company generally uses excess
cash to reduce the outstanding balances on their line of credit, interest income
in future periods is not expected to be significant.
  17
  INTEREST
EXPENSE. Interest expense increased to $2.1 million in 2006, from $1.0 million
in 2005 related to an increase in borrowing as a result of new store
construction and the Footworks and Steve’s Shoes acquisitions and additional
working capital requirement.
 
 INCOME
TAXES. In 2006, the provision for income taxes reflects a 37.5% effective tax
rate, compared to a 38.0% effective tax rate in 2005.
 
 SEASONALITY
AND QUARTERLY RESULTS
 
 Our two
retail chains, Big Dog Sportswear and TWC, experience differing levels of
seasonality.  The seasonality of TWC stores closely resembles
traditional retailers.  The fourth quarter has historically accounted
for the largest percentage of our TWC annual sales and profits.  We
believe the seasonality of our Big Dog Sportswear stores is somewhat different
than many apparel retailers since a significant number of our Big Dog Sportswear
stores are located in tourist areas and outdoor malls that have different
visitation patterns than urban and suburban retail centers.  The third
and fourth quarters (consisting of the summer vacation, back-to-school and
Christmas seasons) have historically accounted for the largest percentage of our
Big Dog Sportswear annual sales and profits. We have historically incurred
operating losses in the first half of the year and may be expected to do so in
the foreseeable future.
 
 Our
quarterly results of operations may also fluctuate as a result of a variety of
factors, including the timing of store openings, the amount of revenue
contributed by new stores, changes in comparable store sales, changes in the mix
of products sold, customer acceptance of new products, the timing and level of
markdowns, competitive factors and general economic conditions.
 
 OFF
BALANCE SHEET ARRANGEMENTS
 
 The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our consolidated financial condition,
changes in our consolidated financial condition, revenues or expenses,
consolidated results of operations, liquidity, capital expenditures or capital
resources.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 During
2007, our primary uses of cash were for merchandise inventories, capital
expenditures, and general operating activity.  We satisfied our cash
requirements from existing cash balances, funds provided by the convertible debt
financing, and short-term borrowings under our line of credit
agreements.
 
 Cash
provided by (used in) operating activities was $1.2 million and ($2.1) million
for 2007 and 2006, respectively.  The $3.3 million increase in cash
provided by operating activities primarily relates to a $6.1 million decrease in
inventory purchases and various fluctuations in operating assets and
liabilities, which was offset by a $4.4 million decrease in our net
income.  Inventory purchases decreased as a result of reduced
purchasing for the Big Dog segment.
 
 Cash used
in investing activities was $19.0 million and $20.5 million for 2007 and 2006,
respectively.  Of the cash used in investing activities in 2007, $19.2
million was used for capital expenditures, including 41 new TWC store openings,
two new Big Dog Sportswear store openings, retrofitting existing stores and
corporate additions, which was offset by $0.2 million of proceeds from the sale
of equipment related to the relocation of our distribution center from
California to North Carolina at the end of 2006.  Of the cash used in
investing activities in 2006, $15.9 million was used for capital expenditures,
including 24 new TWC store openings, three new Big Dog Sportswear store
openings, retrofitting existing stores and corporate additions.  In
addition, $4.6 million was used to acquire Steve’s Shoes, Inc.
 
 Cash
provided by financing activities in 2007 was $16.7 million compared to $22.6
million of cash used in financing activities in 2006. The decrease is primarily
related to reduced borrowings in 2007 as compared to 2006.  During
2007 we provided for our cash needs in part through longer term borrowings with
the issuance of convertible debt and proceeds from a sale/leaseback
transaction.
  18
  In
October 2001, the Company entered into a credit facility with Wells Fargo Retail
Finance (“WFRF”), which was most recently amended in March 2008 (the “Amended
Credit Agreement”) and previously amended in November,
2006.  Subsequent to the November 2006 amendment, the Amended Credit
Agreement provides for a total commitment of $60,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to
$3,000,000.  Prior to the amendment, the agreement provided for a
total commitment of $47,000,000.  The Company’s ability to borrow
under the facility was determined using an availability formula based on
eligible assets.  The facility was collateralized by substantially all
of the Company’s assets and requires daily, weekly and monthly financial
reporting as well as compliance with financial, affirmative and negative
covenants.  The most significant of the amended financial covenants,
amended in March 2008, includes compliance with a pre-defined annual maximum
capital expenditure amount and a restriction on the payment of
dividends.  At December 31, 2007, the Company was not in compliance
with one of its covenants, and subsequently obtained a waiver from
WFRF.  For all other periods presented, the Company was in compliance
with all covenants, as amended.  This credit agreement provides for a
performance-pricing structured interest charge which was based on excess
availability levels.  The interest rate ranged from the bank’s base
rate (7.25% as of December 31, 2007) or a LIBOR loan rate plus a margin ranging
up to 1.75% (6.43% as of December 31, 2007).  The Company had
$2,203,000 in borrowings based on the bank’s base rate and $21,000,000 in LIBOR
loans outstanding at December 31, 2007.  The Amended Credit Agreement
expires in October 2011.  At December 31, 2007, the Company had
approximately $1,733,000 of outstanding letters of credit expiring through
October 2008, which includes a $1,000,000 stand-by letter of credit related to a
promissory note entered in conjunction with the acquisition of Footworks in
2005.
 
 Long-term
Borrowings
 
 Notes
Payable
 
 On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes (“Note” or
“Notes”) due March 31, 2012, interest payable quarterly. $3.0 million of the
Notes were sold to management. The Notes are convertible into fully paid and
nonassessable shares of the Company’s common stock to an aggregate of up to
1,027,777 shares at any time after the issuance date, at an initial conversion
price of $18.00 per share.  Any time after the eighteen month
anniversary of the issuance date, the Company has the right to require the
holder of a Note to convert any remaining amount under a Note into common stock
if: (i) (x) the closing sale price of the common stock exceeds 175% of the
conversion price on the issuance date for each of any 20 consecutive trading
days or (y) following the consummation of a bona fide firm commitment
underwritten public offering of the common stock resulting in gross proceeds to
the Registrant in excess of $30 million, the closing sale price of the common
stock exceeds 150% of the conversion price on the issuance date for each of any
20 consecutive trading days and (ii) certain equity conditions have been met. In
circumstances where Notes are being converted either in connection with a
voluntary conversion or an exercise of the Company’s right to force conversion,
the Company has the option to settle such conversion by a net share settlement,
for some or all of the Notes. If it exercises such right, the Company is to pay
the outstanding principal amount of a Note in cash and settle the amount of
equity in such Investor’s conversion right by delivery of shares of common stock
of equal value.  If the Notes are not converted before its maturity,
the Notes will be redeemed by the Company on the maturity date at a redemption
price equal to 100% of the principal amount of the notes then outstanding, plus
any accrued and unpaid interest. The offer and sale of the Notes were made in
accordance with Rule 506 of Regulation D of the Securities Act of
1933.  The net proceeds from the sale of the Notes were $17,141,000
after $1,359,000 of debt issuance costs.  Debt issuance costs are
being amortized over the term of the note.  Amortization of debt
issuance costs totaling $204,000 is included in interest expense for the year
ended December 31, 2007 on the accompanying statements of
operations.    As of December 31, 2007, the convertible note
payable balance includes unamortized debt issuance costs of $1,155,000 in the
accompanying consolidated balance sheet.  The net proceeds of this
offering were used to reduce the outstanding balance of Company’s line of
credit.  On June 21, 2007, the Company filed an S-3 Registration
Statement to register the 1,027,777 shares of common stock which are convertible
under the agreement and it became effective in September 2007.  As of
December 31, 2007, the Company’s stock price was $14.45, which was less than the
conversion price of $18.00.  Accordingly, the Company anticipates the
Notes will be settled in cash at maturity.
 
 On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO, Andrew
Feshbach).  The purchase price was $16.00 per share, less the exercise
price of the options, which ranged from $6.50 to $10.00 per
share.  The $16.00 price represents a discount of approximately 5%
from the May 9, 2007 closing price of $16.80.  The net purchase price
was $1,965,000.  The Company paid for the options by delivery of notes
bearing interest at 7% per annum and payable in two equal installments on April
10, 2008 and April 10, 2009.  At December 31, 2007, $982,000 of the
notes is classified as current portion of long-term debt to related parties in
the accompanying consolidated balance sheet.
  19
  In
conjunction with the Company’s acquisition of Footworks in 2005, Wells Fargo
Retail Finance issued a $3,000,000 four-year term loan
facility.  Monthly payments of $55,555 were due beginning in March of
2006 with the balance due at the maturity date of the loan, October
2009.  The term loan interest charge is Prime plus .5% or LIBOR plus
2.75% (7.75% at December 31, 2007).  At December 31, 2007, $667,000 of
the term loan facility is classified as current and is included in current
portion of long-term debt in the accompanying consolidated balance
sheet.
 
 Additionally,
in conjunction with the acquisition of Footworks, the Company also entered into
a $3,000,000 three-year promissory note with the seller, Bianca of Nevada,
Inc.  The principal on this note is payable in three annual
installments beginning August 31, 2006.  The note bears an interest
rate of 5.0% and accrued interest is payable quarterly beginning December
2005.  The note is partially secured by a $1,000,000 stand-by letter
of credit as the second principal installment was paid in August
2007.  At December 31, 2007, $1,000,000 of the promissory note is
classified as current and is included in current portion of long-term debt in
the accompanying consolidated balance sheet.
 
 As part
of the acquisition of The Walking Company, TWC assumed priority tax claims
totaling approximately $627,000.  The Bankruptcy Code requires that
each holder of a priority tax claim will be paid in full with interest at the
rate of six percent per year with annual payments for a period of six
years.  At December 31, 2007 and 2006, $51,000 and $60,000,
respectively, of the priority tax claim note is classified as current and is
included in current portion of long-term debt in the accompanying consolidated
balance sheets.  As of December 31, 2007 and 2006, the remaining notes
had a balance of $4,000 and $52,000, respectively.
 
 Capital
Lease
 
 In the
first quarter 2007, the Company entered into a $2,973,000 four-year capital
lease agreement to finance equipment purchased for the Company’s new
distribution center located in North Carolina.  The capital lease
agreement requires monthly payments of approximately $75,000 through March 2011
and includes a dollar purchase option at the end of the
term.  Depreciation expense of equipment purchased under this capital
lease is included in selling, marketing and distribution expense in the
accompanying consolidated statement of operations.
 
 Management
believes that available cash, the credit facilities in place at December 31,
2007, and cash generated from operations will be adequate to fund the Company’s
working capital requirements for the foreseeable future.
  20
  COMMITMENTS
AND OBLIGATIONS
 
 As of
December 31, 2007, we had the following obligations, which include both
principal and interest payments:
 
 Amounts
      of Commitment Expiration per PeriodTotal
      Amounts Committed
              
              
              Less
      than 1 year
              
              
              1
      to 3 years
              
              
              4
      to 5 years
              
              
              Over
      5 yearsDebt:Revolving
      line of credit
              
              $
              24,796,000
              
              
              $
              24,796,000
              
              
              $
              ---
              
              
              $
              ---
              
              
              $
              ---Convertible
      debt
              
              
              25,085,000
              
              
              
              1,549,000
              
              
              
              3,099,000
              
              
              
              20,437,000
              
              
              
              ---Notes
      payable, related party
              
              
              2,071,000
              
              
              
              1,070,000
              
              
              
              1,001,000
              
              
              
              ---
              
              
              
              ---Notes
      payable
              
              
              2,981,000
              
              
              
              1,814,000
              
              
              
              1,167,000
              
              
              
              ---
              
              
              
              ---Priority
      tax claims
              
              
              59,000
              
              
              
              55,000
              
              
              
              4,000
              
              
              
              ---
              
              
              
              ---Contractual
      Obligations:Operating
      leases
              
              
              288,718,000
              
              
              
              37,728,000
              
              
              
              64,234,000
              
              
              
              51,441,000
              
              
              
              135,315,000Capital
      leases
              
              
              2,902,000
              
              
              
              841,000
              
              
              
              1,831,000
              
              
              
              230,000
              
              
              
              ---Other
      Commercial Commitments:Letters
      of credit
              
              
              1,732,000
              
              
              
              1,732,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---Total
      Commitments
              
              $
              348,344,000
              
              
              $
              69,585,000
              
              
              $
              71,336,000
              
              
              $
              72,108,000
              
              
              $
              135,315,000
 
 Revolving
Lines of Credit – We have a revolving credit facility with Wells Fargo Retail
Finance that we use to finance our operations.  Commitments related to
interest on the credit facility are estimated based on the prior year’s average
balance and the current weighted average interest rate (6.51% at December 31,
2007).  See “Part I. Item 7. – Liquidity and Capital Resources” for
additional information regarding our credit facility.
 
 Convertible
Debt – On April 3, 2007, we issued and sold $18.5 million of 8.375% Convertible
Notes due March 31, 2012, interest payable quarterly. The Notes are convertible
into fully paid and nonassessable shares of the Company’s common stock to an
aggregate of up to 1,027,777 shares at any time after the issuance date, at an
initial conversion price of $18.00 per share.  See “Part I. Item 7. –
Liquidity and Capital Resources” for additional information regarding our
convertible debt.
 
 Notes
Payable, Related Party - On May 9, 2007, we purchased from certain officers of
the Company all of the vested employee stock options held by them that would
otherwise have expired on or before May 9, 2008.  The Company paid for
the options by delivery of notes bearing interest at 7% per annum and payable in
two equal installments on April 10, 2008 and April 10, 2009.  See
“Part I. Item 7. – Liquidity and Capital Resources” for additional information
regarding our notes payable, related party.
 
 Notes
Payable – In conjunction with the acquisition of Footworks, we entered into two
loans used to finance the purchase.  Commitments related to interest
expense on these loans are estimated based on expected balance and the current
interest rates (ranging from 5% to 7.75% at December 31, 2007).  See
“Part I. Item 7. – Liquidity and Capital Resources” for additional information
regarding our notes payable.
 
 Priority
Tax Claims – In conjunction with the acquisition of The Walking Company, we
assumed priority tax claims.  Commitments related to interest expense
on these claims are estimated based on the expected balance and the current
interest rate of 6%.  See “Part I. Item 7. – Liquidity and Capital
Resources” for additional information regarding our priority tax claim
debt.
 
 Operating
Leases - We lease retail and office space under various operating leases.
Certain leases are cancelable with substantial penalties. See “Part I. Item 2. —
Properties” for additional information regarding our leases.
 
 Capital
Leases – We lease certain warehouse equipment, computer and copier equipment
under various capital leases.  Certain leases are cancelable with
substantial penalties.
  21
  Letters
of Credit - We open letters of credit to facilitate inventory purchases as
required by certain vendors.  The letters of credit list certain
documentation requirements that each vendor must present to our bank before
payment is made.  We are obligated to make these payments upon presentation
of these documents.
 
 See
additional discussion above under Liquidity and Capital Resources.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. In addition, FIN 48 excludes income taxes from SFAS
No. 5, Accounting for
Contingencies. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and provides transitional guidance for treating
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after
adoption. We implemented FIN 48 effective January 1, 2007.  The
implementation had no impact on the Company’s consolidated financial
statements.
 
 In
July 2006, the Emerging Issues Task Force promulgated Issue No. 06-3
(“Issue”), How Taxes Collected
from Customers and Remitted to Governmental Authorities Should be Presented in
the Income Statement (i.e., Gross Versus Net Presentation). The Task
Force concluded that entities should present these taxes in the income statement
on either a gross or a net basis based upon their accounting policy. However,
this Issue states that if such taxes are significant, and are presented on a
gross basis, the amounts of those taxes should be disclosed. This Issue should
be applied to financial reports for interim and annual reporting periods
beginning after December 15, 2006. Since the Company currently records
taxes on a net basis (i.e., sales tax is not included in sales, but is instead
recorded as a liability under accrued expenses), the adoption of this Issue did
not have a material impact on the Company’s consolidated financial
statements.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement provides guidance for using fair value to measure assets and
liabilities. The statement also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The statement applies whenever other
statements require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new circumstances. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. There are numerous previously issued statements dealing with fair values
that are amended by SFAS No. 157. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 157 will have
on the Company’s consolidated financial statements.
 
 In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”)
No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. SAB No. 108 (a.k.a. SAB Topic 1.N)
addresses quantifying the financial statement effects of misstatements or, more
specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial
statements. SAB No. 108 does not change the SEC staff’s previous positions in
SAB No. 99, Materiality (a.k.a. SAB Topic
1.M) regarding qualitative considerations in assessing the materiality of
misstatements. SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 did not have a material
impact on the Company’s consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.SFAS No. 159 provides companies
with an option to report many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. The FASB believes that SFAS No. 159
helps to mitigate accounting-induced volatility by enabling companies to report
related assets and liabilities at fair value, which would likely reduce the need
for companies to comply with detailed rules for hedge accounting. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities, and would require
entities to display the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance sheet. The new
statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157, Fair Value Measurements. This
statement is effective as of the beginning of an entity’s first fiscal year
beginning after November 15, 2007. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 159 will have
on the Company’s consolidated financial statements.
  22
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS No. 141(R)”), which establishes principles and
requirements for how the acquirer of a business is to (i) recognize and
measure in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
(ii) recognize and measure the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determine what
information to disclose to enable users of its financial statements to evaluate
the nature and financial effects of the business combination. This statement
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. This replaces the guidance of
SFAS No. 141, “Business Combinations”
(“SFAS No. 141”) which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. In addition, costs incurred by the acquirer to
effect the acquisition and restructuring costs that the acquirer expects to
incur, but is not obligated to incur, are to be recognized separately from the
acquisition. SFAS No. 141(R) applies to all transactions or other
events in which an entity obtains control of one or more businesses. This
statement requires an acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date,
measured at their acquisition-date fair values. An acquirer is required to
recognize assets or liabilities arising from all other contingencies as of the
acquisition date, measured at their acquisition-date fair values, only if it is
more likely than not that they meet the definition of an asset or a liability in
FASB Concepts Statement No. 6, “Elements of Financial Statements.”This Statement requires the acquirer to recognize goodwill as of the
acquisition date, measured as a residual, which generally will be the excess of
the consideration transferred plus the fair value of any noncontrolling interest
in the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Contingent consideration should be recognized at the
acquisition date, measured at its fair value at that date.
SFAS No. 141(R) defines a bargain purchase as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree, and requires the acquirer to recognize
that excess in earnings as attributable to the acquirer. This statement is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early application is prohibited. The Company is
currently evaluating the effect SFAS No. 141(R) will have on its
accounting for, and reporting of, business combinations consummated on or after
January 1, 2009.
 
 There are
no other accounting standards issued as of March 12, 2007 that are expected
to have a material impact on the Company’s consolidated financial
statements.
 
 CRITICAL
ACCOUNTING POLICIES
 
 We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. Our significant
accounting policies are discussed in Note 1 to the consolidated financial
statements. Certain of these accounting policies as discussed below require
management to make estimates and assumptions about future events that could
materially affect the reported amounts of assets, liabilities, revenues and
expenses and disclosure of contingent assets and liabilities.  Our
most critical estimate relates to projecting future cash flows used in assessing
future store operating performance and testing long-lived assets, including
goodwill, for impairment.
 
 We
evaluate the carrying value of long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable.  This evaluation
is performed based on the estimated undiscounted future cash flows from
operating activities compared with the carrying value of the related
asset.  If the undiscounted future cash flows are less than the
carrying value, an impairment loss is recognized, measured by the difference
between the carrying value and the estimated fair value of the assets, with such
estimated fair values determined using the best information available generally
based on prices for similar assets for stores recently opened.  There
were no impairment losses included in the consolidated results of operations for
the years ended December 31, 2007, 2006 and 2005.
  23
  The
Company is self insured for medical insurance coverage.  The self
insurance liability is based on the historical claims rate and is anticipated to
cover reported claims as well as incurred but not reported
claims.  The Company also maintains stop loss insurance coverage which
reimburses the Company for an individual claim in excess of $130,000 and for
company-wide claims in excess of an aggregate amount. The annual aggregate
amount is determined based on a per month, per participant amount which ranges
from $283 to $749.
 
 Inventories,
consisting substantially of finished goods, are valued at the lower of cost
(first-in, first-out and weighted average methods) or market. We continually
evaluate our inventories by assessing slow moving current product as well as
prior seasons' inventory. Market value of non-current inventory is estimated
based on historical sales trends for this category of inventory, the impact of
market trends, and an evaluation of economic conditions. The Company closely
monitors its off-price sales to ensure the actual results closely match initial
estimates. Estimates are regularly updated based upon this continuing
review.  Inventory adjustments incurred during the years ended
December 31, 2007 and 2006 were $0.6 and $0.2, respectively.  No
adjustment was made in 2005.
 
 We
account for income taxes using an asset and liability approach for measuring
deferred income taxes based on temporary differences between the financial
statement and income tax bases of assets and liabilities existing at each
balance sheet date.  A valuation allowance is established, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized.   The Company considers a number of factors to
determine if a valuation allowance is necessary, including historical earnings
and past experience with similar timing differences.  For the three
years ended December 31, 2007, the Company determined that a valuation allowance
was not required.
 
 Effective
January 1, 2007 we began accounting for uncertain tax provisions under the
provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (“FIN 48”).  FIN 48 prescribes a comprehensive model for
how a company should recognize and measure the impact of uncertain tax positions
on its financial statements.  Determining whether an uncertain tax
position should be recognized and how to measure the amount of the tax benefit
requires significant judgment.  As a result of adoption, we did not
record any initial amount for previously unrecognized tax liabilities, and as of
December 31, 2007, we did not recognize any additional estimated
liability.
 
 RISK
FACTORS
 
 Investors
in the Company should consider the following risk factors as well as the other
information contained herein.
 
 CONTROL
BY MAJORITY SHAREHOLDER, SMALL PUBLIC FLOAT, AND LOW TRADING VOLUME OF SHARES.
Our Chairman of the Board, Fred Kayne, owns approximately 56% of Big Dogs’
outstanding common stock.  In addition, approximately 66% of our
shares are held by Mr. Kayne and other directors, officers or beneficial owners
of more than 10%, none of whom have historically traded in the shares on any
regular basis.  As a result, Mr. Kayne, acting either individually or
with the Company’s current directors and executive officers, will be able to
control the election of directors, and to determine the outcome of any other
matter submitted to a vote of our stockholders, including a change in
control.  While our shares are currently listed on the NASDAQ Global
Market System, the average daily trading volume, particularly in recent years,
has been very low.  Due to all the foregoing, and other factors, there
has been and can expect to be significant illiquidity in our
shares.
 
 CONTINUED
LOSSES AND STORE CLOSURES IN BIG DOGS OPERATIONS.  Big Dogs incurred
net losses of over $1.2 million in 2006 and $2.6 million in
2007.  Such losses are largely attributable to declining traffic in
its outlet-based retail stores.  In 2007, the Company
closed 42underperforming Big Dogs
stores, and has closed another 15 Big Dogs store in 2008 to
date.  Further store closures are expected as the Company seeks
opportunities to shift the focus of Big Dogs business more toward means of
generating income outside of its retail stores.  Store
closures will reduce sales and result in the Company incurring additional costs
related to the closure.  One result of such downsizing of Big Dogs is
that the decrease in the volume of product ordered from vendors has reduced
certain economies of scale that previously existed, which can be expected to
increase costs.
 
 CHANGES
IN CONSUMER PREFERENCES. The consumer products industry in general and the
apparel industry in particular, are subject to changing consumer demands and
preferences. Although we believe our Big Dogs and TWC products historically have
not been significantly affected by fashion trends, its products are subject to
changing consumer preferences. Big Dogs’ results will depend significantly on
our ability to produce popular graphics and products that anticipate, gauge and
respond in a timely manner to changing consumer demands and
preferences.  We also continue to evaluate our introduction of more
risqué graphics in the Big Dogs line in recent years, and balance their sales
against the risk of offending some customers.  In addition, over the
years general consumer preferences rise and decline in regard to the type of
graphic and logo-oriented merchandise provided by Big Dogs, which can have an
effect on our business.
  24
  FACTORS
AFFECTING STORE TRAFFIC. Nearly all of our stores for both Big Dogs and TWC are
located in malls.  Accordingly our sales in such stores are, and will
in the future continue to be, affected by the ability of such malls to continue
to generate customer traffic.  Big Dogs stores are located largely in
outlet malls, with a majority of such malls we have selected being in tourist
areas or tourist-serving areas where we think the customers will be attracted to
Big Dogs merchandise.  Outlet mall traffic appears to have declined
overall in recent years. In addition, tourism may from time to time adversely be
affected by such factors as economic downturns, adverse weather, war or
international conflict, acts of terrorism or terrorism alerts, and increases in
the cost of travel. In addition, customer traffic in both outlet malls and the
regional malls in which TWC has stores is also affected by such factors as
changing consumer preferences, opening of new malls in the area, the closing of
high-profile stores in the mall and declines in the desirability of the shopping
environment in a particular mall.
 
 DEPENDENCE
ON KEY PERSONNEL. Our success is significantly dependent on the performance of
our key management, particularly Chief Executive Officer, Andrew Feshbach,
Executive Vice President—Merchandising, Doug Nilsen, Executive Vice President -
Business Affairs, General Counsel, Anthony Wall, Chief Financial Officer,
Roberta Morris, Senior Vice President – Retail Operations, Lee Cox and Senior
Vice President – Merchandising, Michael Grenley.  We cannot assure you
that we will be able to attract and retain key personnel.  The loss of
our key personnel could have an adverse effect on the Company’s results of
operations and financial position. We do, however, maintain key-person life
insurance policies on all of our senior executive officers.
 
 DEPENDENCE
ON THIRD-PARTY AND FOREIGN MANUFACTURERS AND SUPPLIERS. We do not own or operate
any manufacturing facilities and are therefore dependent on third parties for
the manufacture and supply of our Big Dogs and TWC products. The loss of major
suppliers or the failure of such suppliers to timely deliver our products or to
meet our quality standards, could adversely affect our ability to deliver
products to our customers in a timely manner. The majority of our Big Dogs
products are purchased from trading companies with relationships with
manufacturing facilities located outside the United States. Our operations could
be adversely affected by events that result in disruption of trade from foreign
countries in which our suppliers are located.  Our staff or agents
periodically visit and observe the operations of such foreign and domestic
manufacturers, but we do not control such manufacturers or their labor
practices. Therefore we cannot necessarily prevent legal or ethical violations
by independent manufacturers of Big Dogs goods, and it is uncertain what impact
such violations would have on us.
 
 SUBSTANTIAL
COMPETITION. The markets for each of our products are highly competitive. In
regard to our Big Dogs apparel products, the increased consumer shift toward
large mass-market and discount retailers has put substantial pricing and
competitive pressure on apparel retailers in general.  We believe Big
Dogs’ long-term competitive position will depend upon our ability to anticipate
and respond effectively to changing consumer demands and to offer customers a
wide variety of high-quality, fun products at competitive prices.
 
 RELIANCE
ON INFORMATION SYSTEMS.  We rely on various information systems to
manage our operations and regularly make investments to upgrade, enhance or
replace such systems. Substantial disruptions affecting our information systems
could have an adverse effect on our business.
 
 DEPENDENCE
ON TRADEMARKS.  We use a number of trademarks, the primary ones of
which are registered with the United States Patent and Trademark Office and in a
number of foreign countries. While we believe our trademark rights are strong,
in our pursuit and defense of particular infringement claims it cannot be
assured that we will always prevail.  See “Business –
Trademarks.”
 
 FORWARD-LOOKING
STATEMENTS
 
 This
Annual Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Form 10-K that are not
purely historical are forward-looking statements, including without limitation
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. Such forward-looking statements include the discussions in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations regarding the seasonality of business, expected new store openings,
integration of acquisition and costs and inflation risks. All forward-looking
statements in this document are based upon information available to us on the
date hereof, and we assume no obligation to update any such forward-looking
statements.
  25
  ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 We do not
believe we have material exposure to losses from market-rate sensitive
instruments. We have not invested in derivative financial
instruments.  Our overseas sourcing contracts are denominated in US
dollars.
 
 Our
consolidated financial position and consolidated results of operations are
subject to market risk associated with interest rate movements on
borrowings.  Currently, our credit facilities contain a
performance-pricing structured-interest charge based on excess availability
levels and index based on Prime or LIBOR.  Additionally, we have a
term loan with an interest charge index based on Prime or LIBOR.  We
had $23,203,000 outstanding borrowings under these arrangements as of December
31, 2007.  Based on these outstanding borrowings at December 31, 2007
and the current market condition, a one percent increase in the applicable
interest rates would decrease our annual cash flow and pretax earnings by
approximately $232,000. Conversely, a one percent decrease in the applicable
interest rates would increase annual cash flow and pretax earnings by
$232,000.  Our market risk on interest rate movements will increase
based on higher borrowing levels.  See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.”
 
 ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
 
 See
“Index to Consolidated Financial Statements” at Item 15(a) for a listing of the
consolidated financial statements filed as part of this report.
 
 ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
  AND
 FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM
      9A.
              CONTROLS
      AND PROCEDURES
 
 (a) Evaluation of Disclosure
Controls and Procedures. We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our
reports pursuant to the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded accurately, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. As required by Rules 13a-15(b) and 15d-15(b)
under the Exchange Act, we carried out an evaluation, under the supervision and
with the participation of senior management, including our Chief Executive
Officer and our Chief Financial Officer, of our disclosure controls and
procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e)
promulgated under the Exchange Act, as of the end of the period covered by this
report. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level as of the end of the period covered
by this report.
 
 (b) Management’s Annual Report on
Internal Control Over Financial Reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of our internal control over financial reporting as of
December 31, 2007 based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under that framework and
applicable Securities and Exchange Commission rules, our management concluded
that our internal control over financial reporting was effective as of December
31, 2007.
  26
  (c) Attestation Report of Registered
Public Accounting Firm.This annual report does not include an
attestation report of the company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
company to provide only management’s report in this annual report.
 
 (d) Changes in Internal Control Over
Financial Reporting.   There were no changes in our internal
control over financial reporting during our fourth fiscal quarter for 2007 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
  ITEM
      9B.
              OTHER
      INFORMATION.
 
 None.
 
 ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 Other
information with respect to this item is incorporated by reference from the
registrant’s definitive proxy statement to be filed with the Commission not
later than 120 days after the end of the registrant’s fiscal year.
 
 EXECUTIVE
OFFICERS OF THE REGISTRANT
 
 Set forth
below are the names, ages, titles and present and recent past positions of
persons serving as our executive officers as of March 1, 2008:
 
 NAME
              AGE
              POSITIONAndrew
      D. Feshbach
              47
              President,
      Chief Executive Officer and DirectorDouglas
      N. Nilsen
              59
              Executive
      Vice President - Merchandising (Big Dog USA)Anthony
      J. Wall
              52
              Executive
      Vice President - Business Affairs, General Counsel and
      SecretaryRoberta
      J. Morris
              48
              Chief
      Financial Officer, Treasurer and Assistant SecretaryLee
      M. Cox
              39
              Senior
      Vice President – Retail OperationsMichael
      Grenley
              50
              Senior
      Vice President–Merchandising (TWC)
 
 ANDREW D.
FESHBACH co-founded the Company in May 1992 and has served as President, Chief
Executive Officer and as a director since that time. From 1990 until the
present, he has served as a Vice President of Fortune Financial, a private
merchant banking firm owned by the Company’s Chairman and majority stockholder,
Fred Kayne.  Mr. Feshbach has an M.B.A. from Harvard
University.
 
 DOUGLAS
N. NILSEN has served as Executive Vice President—Merchandising for Big Dog USA
for more than five years. From 1990 to September 1995, he served as Director of
Merchandise at Walt Disney Attractions, Inc. for its U.S. theme parks and
resorts, and in such capacity was responsible for merchandising all apparel and
accessories. Mr. Nilsen has an M.B.A. from New York University.
 
 ANTHONY
J. WALL has served as Executive Vice President, General Counsel and Secretary of
the Company for more than five years. Mr. Wall also provides occasional legal
services to Fortune Fashions Industries LLC, a custom manufacturer of
embellished apparel, Paige Premium Denim, a designer and manufacturer of denim
jeans and casuals apparel, Fortune Swimwear, a manufacturer of swimwear for the
mass market, and Terravant Wine Company, a custom-crush wine facility, all of
which are controlled by Fred Kayne.
 
 ROBERTA
J. MORRIS has served as Chief Financial Officer since March 1998, having
previously served as Senior Vice President—Finance since January 1995. Prior to
joining the Company in 1993, Ms. Morris was employed as a Senior Audit Manager
with Deloitte & Touche LLP.  Ms. Morris is a certified public
accountant.
  27
  LEE M.
COX joined the Company in September 2000 and has served as Senior Vice President
– Retail since February 2001.  From 1994 until September 2000, Mr. Cox
was employed by Adidas Retail, Inc. in various capacities, most recently as
Director of Retail Stores.
 
 MICHAEL
GRENLEY joined the Company in March 2004 and serves as Senior Vice President –
Merchandising for TWC.  From 1994 until the Company’s acquisition of
The Walking Company, Mr. Grenley served as Executive Vice President
- Merchandise and Chief Operations Officer for the previous The
Walking Company.  Prior to The Walking Company, Mr. Grenley was a Vice
President of Merchandise at Macy's California.
 
 The
members of the Audit Committee of the Board of Directors are Steven Good
(Chairman), David Walsh and Skip Coomber. Our Board, in its judgment, has
determined that Mr. Good meets the Securities and Exchange Commission’s
definition of audit committee financial expert and has designated him as such.
Our Board has further determined that Messrs. Good, Walsh and Coomber are
independent as such term is used under Schedule 14A of the Securities Exchange
Act of 1934.
 
 We have
adopted a code of ethics for our principal executive officer and senior
financial officers. Copies of the code of ethics are available by writing to Big
Dog Holdings, Inc., Attention General Counsel, 121 Gray Ave., Santa Barbara, CA
93101. Should any changes to or waivers of this code of ethics be made, such
changes to or waivers will be timely disclosed on the Company’s website, unless
the same is disclosed in a current report on Form 8-K filed with the Securities
Exchange Commission.
 
 ITEM
      11.
              EXECUTIVE
      COMPENSATION
 
 Information
with respect to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission not later than 120
days after the end of the registrant’s fiscal year.
 
 ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
 
 Information
with respect to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission not later than 120
days after the end of the registrant’s fiscal year.
 
 ITEM
      13.
              CERTAIN
      RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE
 
 
 Information
with respect to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission not later than 120
days after the end of the registrant’s fiscal year.
 
 ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES
 
 The
information required by Item 14 of Part III is incorporated by reference from
the Proxy Statement of Big Dog Holdings, Inc., relating to the 2008 Annual
Meeting of Stockholders, to be filed with the SEC within 120 days of the fiscal
2007 year end.
 
 PART
IV
 
 ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.
 
 (a)
              1.
              The
      financial statements listed in the “Index to Consolidated Financial
      Statements” at page F-1 are filed as a part of this
  report.
 
 2.
              Schedule
      II – Valuation and Qualifying
Accounts
  28
  Schedules
other than that referred to above have been omitted because they are not
applicable or are not required under the instructions contained in Regulation
S-X or because the information is included elsewhere in the Consolidated
Financial Statements or the Notes thereto.
  3.
              Exhibits
      included or incorporated herein:
 See
“Index to Exhibits.”
 
 (b)
              Reports
      on Form 8-K.
 On
November 9, 2007 the Company filed a Form 8-K to disclose third quarter
financial results.
 On
December 6, 2007 the Company filed a Form 8-K to report that the holiday sales
for The Walking Company were successfully launched with strong results over the
Thanksgiving weekend.
  29
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on March 28, 2008
on its behalf by the undersigned, thereunto duly authorized.
  BIG
      DOG HOLDINGS, INC.By
              /s/ANDREW D. FESHBACHAndrew
      D. FeshbachChief
      Executive Officer and President
 
 Each
person whose signature appears below hereby authorizes Andrew D. Feshbach and
Anthony J. Wall or either of them, as attorneys-in-fact to sign on his behalf,
individually, and in each capacity stated below and to file all amendments
and/or supplements to the Annual Report on Form 10-K.
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 SIGNATURE
                
                TITLE
                
                DATE/s/ANDREW D. FESHBACH
                
                Chief
      Executive Officer, President and Director (Principal Executive
      Officer)
                
                March
      28, 2008Andrew
      D. Feshbach/s/ROBERTA J. MORRIS
                
                Chief
      Financial Officer, Treasurer and Assistant Secretary (Principal Financial
      and Accounting Officer)
                
                March
      28, 2008Roberta
      J. Morris/s/FRED KAYNE
                
                Chairman
      of the Board
                
                March
      28, 2008Fred
      Kayne/s/SKIP R. COOMBER, III
                
                Director
                
                March
      28, 2008Skip
      R. Coomber, III/s/STEVEN C. GOOD
                
                Director
                
                March
      28, 2008Steven
      C. Good/s/DAVID J. WALSH
                
                Director
                
                March
      28, 2008David
      J. Walsh
 30
 BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 YEARS
ENDED DECEMBER 31, 2007, 2006, and 2005
 
 
 PAGEReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets as of December 31, 2007 and 2006
              F-3Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006, and
      2005
              F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2007,
      2006, and 2005
              F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006, and
      2005
              F-6Notes
      to the Consolidated Financial Statements
              F-8
  F-1
  REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 To the
Board of Directors
 Big Dog
Holdings, Inc. and subsidiaries
 Santa
Barbara, California
 
 We have
audited the consolidated balance sheets of Big Dog Holdings, Inc. and
subsidiaries (collectively, the “Company”) as of December 31, 2007 and 2006, and
the related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31,
2007.  Our audits also included the financial statement schedule of
the Company listed in Item 15(a).  These financial statements and
financial statement schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.  Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
 
 As
discussed in Note 1 to the consolidated financial statements, the Company has
adopted the provisions of Statement of Financial Accounting Standards
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” on January 1, 2007.
 
 We were
not engaged to examine management's assertion about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2007 and,
accordingly, we do not express an opinion thereon.
 
 
 SINGER
LEWAK GREENBAUM & GOLDSTEIN LLP
 
 
 Los
Angeles, California
 March 28,
2008
  F-2
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
 
 DECEMBER
      31,2007
              
              
              2006ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              2,529,000
              
              
              $
              3,587,000Receivables,
      net
              
              
              3,756,000
              
              
              
              2,511,000Income
      taxes receivable
              
              
              5,049,000
              
              
              
              ---Inventories,
      net
              
              
              63,927,000
              
              
              
              58,608,000Prepaid
      expenses and other current assets
              
              
              1,796,000
              
              
              
              1,170,000Deferred
      income taxes (Note 7)
              
              
              1,805,000
              
              
              
              2,741,000Total
      current assets
              
              
              78,862,000
              
              
              
              68,617,000PROPERTY
      AND EQUIPMENT, net (Note 2)
              
              
              35,642,000
              
              
              
              24,174,000INTANGIBLE
      ASSETS, net (Notes 1 and 4)
              
              
              3,689,000
              
              
              
              4,125,000GOODWILL
      (Note 4)
              
              
              3,131,000
              
              
              
              3,131,000DEFERRED
      INCOME TAXES (Note 7)
              
              
              1,863,000
              
              
              
              2,221,000OTHER
      ASSETS
              
              
              435,000
              
              
              
              393,000TOTAL
              
              $
              123,622,000
              
              
              $
              102,661,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Short-term
      borrowings (Note 5)
              
              $
              23,203,000
              
              
              $
              25,722,000Current
      portion of long-term debt (Note 6)
              
              
              1,718,000
              
              
              
              1,726,000Current
      portion of long-term debt, related party (Note 6)
              
              
              982,000
              
              
              
              ---Current
      portion of capital lease obligation (Note 8)
              
              
              683,000
              
              
              
              43,000Accounts
      payable
              
              
              12,974,000
              
              
              
              8,690,000Income
      taxes payable (Note 7)
              
              
              ---
              
              
              
              1,511,000Accrued
      expenses and other current liabilities (Note 3)
              
              
              8,693,000
              
              
              
              8,335,000Total
      current liabilities
              
              
              48,253,000
              
              
              
              46,027,000LONG
      TERM CONVERTIBLE DEBT, NET ($3,000,000 held by related parties) (Note
      6)
              
              
              17,345,000
              
              
              
              ---NOTE
      PAYABLE, RELATED PARTY (Note 6)
              
              
              983,000
              
              
              
              ---NOTE
      PAYABLE (Note 6)
              
              
              1,115,000
              
              
              
              2,829,000CAPITAL
      LEASE OBLIGATIONS (Note 8)
              
              
              1,761,000
              
              
              
              26,000DEFERRED
      RENT AND LEASE INCENTIVES (Note 8)
              
              
              7,795,000
              
              
              
              4,508,000DEFERRED
      GAIN ON SALE-LEASEBACK (Note 2)
              
              
              90,000
              
              
              
              143,000Total
      liabilities
              
              
              77,342,000
              
              
              
              53,533,000COMMITMENTS
      AND CONTINGENCIES (Notes 5 and 8)STOCKHOLDERS'
      EQUITY (Note 9):Preferred
      stock, $.01 par value, 3,000,000 shares authorized, none issued and
      outstanding
              
              $
              ---
              
              
              $
              ---Common
      stock $.01 par value, 30,000,000 shares authorized, 11,187,608 and
      10,973,264 shares issued at December 31, 2007 and 2006,
      respectively
              
              
              111,000
              
              
              
              109,000Additional
      paid-in capital
              
              
              28,228,000
              
              
              
              27,622,000Retained
      earnings
              
              
              27,387,000
              
              
              
              30,843,000Treasury
      stock, 1,710,598 shares at December 31, 2007 and 2006
              
              
              (9,446,000
              )
              
              
              (9,446,000
              )Total
      stockholders' equity
              
              
              46,280,000
              
              
              
              49,128,000TOTAL
              
              $
              123,622,000
              
              
              $
              102,661,000
 
 See notes
to consolidated financial statements.
  F-3
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATEDSTATEMENTSOF OPERATIONS
  YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005NET
      SALES
              
              $
              233,268,000
              
              
              $
              218,604,000
              
              
              $
              179,115,000COST
      OF GOODS SOLD
              
              
              110,820,000
              
              
              
              101,723,000
              
              
              
              80,311,000GROSS
      PROFIT
              
              
              122,448,000
              
              
              
              116,881,000
              
              
              
              98,804,000OPERATING
      EXPENSES:Selling,
      marketing and distribution
              
              
              113,024,000
              
              
              
              103,428,000
              
              
              
              80,624,000General
      and administrative
              
              
              10,799,000
              
              
              
              9,823,000
              
              
              
              9,631,000Total
      operating expenses
              
              
              123,823,000
              
              
              
              113,251,000
              
              
              
              90,255,000(LOSS)
      INCOME FROM OPERATIONS
              
              
              (1,375,000
              )
              
              
              3,630,000
              
              
              
              8,549,000INTEREST
      INCOME
              
              
              (10,000
              )
              
              
              (8,000
              )
              
              
              (44,000
              )INTEREST
      EXPENSE (Note 5 and 6)
              
              
              4,255,000
              
              
              
              2,084,000
              
              
              
              976,000(LOSS)
      INCOME BEFORE (BENEFIT FROM) PROVISION FOR INCOME TAXES
              
              
              (5,620,000
              )
              
              
              1,554,000
              
              
              
              7,617,000(BENEFIT
      FROM) PROVISION FOR INCOME TAXES (Note 7)
              
              
              (2,164,000
              )
              
              
              583,000
              
              
              
              2,894,000NET
      (LOSS) INCOME
              
              $
              (3,456,000
              )
              
              $
              971,000
              
              
              $
              4,723,000NET
      (LOSS) INCOME PER SHAREBASIC
              
              $
              (0.37
              )
              
              $
              0.11
              
              
              $
              0.52DILUTED
              
              $
              (0.37
              )
              
              $
              0.10
              
              
              $
              0.49
 
 See notes
to consolidated financial statements.
  F-4
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 
 ADDITIONALCOMMON STOCK
              
              
              PAID-IN
              
              
              RETAINED
              
              
              TREASURY STOCKSHARES
              
              
              AMOUNT
              
              
              CAPITAL
              
              
              EARNINGS
              
              
              SHARES
              
              
              AMOUNT
              
              
              TOTALBALANCE,JANUARY
      1, 2005
              
              
              10,709,030
              
              
              $
              107,000
              
              
              $
              25,513,000
              
              
              $
              25,149,000
              
              
              
              1,529,998
              
              
              $
              (8,228,000
              )
              
              $
              42,541,000Repurchased
      common stock (Note 9)
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              180,600
              
              
              
              (1,218,000
              )
              
              
              (1,218,000
              )Options
      exercised
              
              
              75,250
              
              
              
              1,000
              
              
              
              322,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              323,000Tax
      benefits related to exercise of stock options (Notes 7 and
    9)
              
              
              ---
              
              
              
              ---
              
              
              
              79,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              79,000Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              4,723,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              4,723,000BALANCE,DECEMBER
      31, 2005
              
              
              10,784,280
              
              
              
              108,000
              
              
              
              25,914,000
              
              
              
              29,872,000
              
              
              
              1,710,598
              
              
              
              (9,446,000
              )
              
              
              46,448,000Options
      exercised
              
              
              188,984
              
              
              
              1,000
              
              
              
              957,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              958,000Tax
      benefits related to exercise of stock options (Notes 7 and
    9)
              
              
              ---
              
              
              
              ---
              
              
              
              540,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              540,000Non-cash
      compensation recognized on share based payments (Note 9)
              
              
              ---
              
              
              
              ---
              
              
              
              211,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              211,000Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              971,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              971,000BALANCE,DECEMBER
      31, 2006
              
              
              10,973,264
              
              
              
              109,000
              
              
              
              27,622,000
              
              
              
              30,843,000
              
              
              
              1,710,598
              
              
              
              (9,446,000
              )
              
              
              49,128,000Options
      exercised
              
              
              214,344
              
              
              
              2,000
              
              
              
              1,184,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              1,186,000Tax
      benefits related to exercise of stock options (Notes 7 and
    9)
              
              
              ---
              
              
              
              ---
              
              
              
              1,220,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              1,220,000Non-cash
      compensation recognized on share based payments (Note 9)
              
              
              ---
              
              
              
              ---
              
              
              
              167,000
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              167,000Repurchased
      stock options (Notes 6 and 9)
              
              
              ---
              
              
              
              ---
              
              
              
              (1,965,000
              )
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (1,965,000
              )Net
      loss
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (3,456,000
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (3,456,000
              )BALANCE,DECEMBER
      31, 2007
              
              
              11,187,608
              
              
              $
              111,000
              
              
              $
              28,228,000
              
              
              $
              27,387,000
              
              
              
              1,710,598
              
              
              $
              (9,446,000
              )
              
              $
              46,280,000
 
 See notes
to consolidated financial statements.
  F-5
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OFCASH FLOWS
 
 YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
              
              $
              (3,456,000
              )
              
              $
              971,000
              
              
              $
              4,723,000Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              7,614,000
              
              
              
              6,524,000
              
              
              
              4,173,000Stock-based
      compensation expense
              
              
              167,000
              
              
              
              211,000
              
              
              
              ---Excess
      tax benefits from share-based payment arrangements
              
              
              (1,220,000
              )
              
              
              (540,000
              )
              
              
              (79,000
              )Amortization
      of deferred financing fees
              
              
              9,000
              
              
              
              16,000
              
              
              
              168,000Amortization
      of debt issuance costs
              
              
              204,000
              
              
              
              ---
              
              
              
              ---Provision
      for losses on receivables
              
              
              2,000
              
              
              
              2,000
              
              
              
              2,000Loss
      on disposition of property and equipment
              
              
              364,000
              
              
              
              14,000
              
              
              
              39,000Deferred
      income taxes
              
              
              2,514,000
              
              
              
              (1,554,000
              )
              
              
              (56,000
              )Changes
      in operating assets and liabilities:Receivables
              
              
              (1,248,000
              )
              
              
              (1,619,000
              )
              
              
              (485,000
              )Inventories
              
              
              (5,318,000
              )
              
              
              (11,422,000
              )
              
              
              (2,843,000
              )Prepaid
      expenses and other current assets
              
              
              (658,000
              )
              
              
              (111,000
              )
              
              
              (176,000
              )Accounts
      payable
              
              
              5,194,000
              
              
              
              1,212,000
              
              
              
              2,301,000Income
      taxes receivable
              
              
              (5,049,000
              )
              
              
              ---
              
              
              
              ---Income
      taxes payable
              
              
              (1,511,000
              )
              
              
              144,000
              
              
              
              (1,275,000
              )Accrued
      expenses and other current liabilities
              
              
              358,000
              
              
              
              1,588,000
              
              
              
              284,000Deferred
      rent and lease incentives
              
              
              3,288,000
              
              
              
              2,559,000
              
              
              
              526,000Deferred
      gain on sale-leaseback
              
              
              (53,000
              )
              
              
              (53,000
              )
              
              
              (53,000
              )Net
      cash provided by (used in) operating activities
              
              
              1,201,000
              
              
              
              (2,058,000
              )
              
              
              7,249,000CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
              
              
              (19,223,000
              )
              
              
              (15,870,000
              )
              
              
              (5,446,000
              )Acquisitions,
      net of cash acquired
              
              
              ---
              
              
              
              (4,587,000
              )
              
              
              (4,122,000
              )Proceeds
      from sale of property and equipment
              
              
              254,000
              
              
              
              3,000
              
              
              
              1,000Other
              
              
              (1,000
              )
              
              
              (60,000
              )
              
              
              (26,000
              )Net
      cash used in investing activities
              
              
              (18,970,000
              )
              
              
              (20,514,000
              )
              
              
              (9,593,000
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      borrowings under line of credit agreement
              
              
              (2,520,000
              )
              
              
              22,926,000
              
              
              
              2,491,000Proceeds
      from issuance of convertible debt, net of debt issuance costs of
      $1,359,000
              
              
              17,141,000
              
              
              
              ---
              
              
              
              ---Net
      funds received from sale/leaseback transaction
              
              
              2,062,000
              
              
              
              ---
              
              
              
              ---Repurchase
      of common stock
              
              
              ---
              
              
              
              ---
              
              
              
              (1,218,000
              )Payment
      of deferred financing fees
              
              
              ---
              
              
              
              ---
              
              
              
              (70,000
              )Exercise
      of stock options
              
              
              1,186,000
              
              
              
              959,000
              
              
              
              322,000Excess
      tax benefits from share-based payment arrangements
              
              
              1,220,000
              
              
              
              540,000
              
              
              
              79,000Repayment
      of capital lease obligations
              
              
              (656,000
              )
              
              
              (171,000
              )
              
              
              (220,000
              )Repayment
      of notes payable
              
              
              (1,722,000
              )
              
              
              (1,625,000
              )
              
              
              (180,000
              )Net
      cash provided by financing activities
              
              
              16,711,000
              
              
              
              22,629,000
              
              
              
              1,204,000NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (1,058,000
              )
              
              
              57,000
              
              
              
              (1,140,000
              )CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
              
              
              3,587,000
              
              
              
              3,530,000
              
              
              
              4,670,000CASH
      AND CASH EQUIVALENTS, END OF YEAR
              
              $
              2,529,000
              
              
              $
              3,587,000
              
              
              $
              3,530,000SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for:Interest
              
              $
              4,008,000
              
              
              $
              2,069,000
              
              
              $
              841,000Income
      taxes
              
              $
              3,103,000
              
              
              $
              2,532,000
              
              
              $
              4,305,000
 
 See notes
to consolidated financial statements.
  F-6
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  SUPPLEMENTAL
      INFORMATION ON NON-CASH INVESTING AND FINANCING
ACTIVITIES:2007
              
              2006
              
              
              2005ACQUISITIONS:Inventories
              
              $
              ---
              
              $
              2,669,000
              
              
              $
              1,951,000Properties
              
              
              ---
              
              
              2,052,000
              
              
              
              508,000Other
      current assets
              
              
              ---
              
              
              ---
              
              
              
              ---Intangibles
              
              
              ---
              
              
              ---
              
              
              
              4,532,000Goodwill
              
              
              ---
              
              
              ---
              
              
              
              3,131,000Accrued
      expenses and other liabilities
              
              
              ---
              
              
              (134,000
              )
              
              
              ---Redeemable
      convertible notes and rights assumed
              
              
              ---
              
              
              ---
              
              
              
              ---Notes
      payable
              
              
              ---
              
              
              ---
              
              
              
              (6,000,000
              )Net
      cash effect due to acquisitions
              
              $
              ---
              
              $
              4,587,000
              
              
              $
              4,122,000
  OTHER:Purchase
      of stock options with note payable
              
              $
              1,965,000
              
              $
              ---
              
              
              $
              ---Acquisition
      of equipment through capital lease
              
              $
              969,000
              
              $
              33,000
              
              
              $
              ---Tenant
      improvements paid by landlord
              
              $
              ---
              
              $
              480,000
              
              
              $
              ---
 
 See notes
to consolidated financial statements.
  F-7
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 ORGANIZATION
AND BUSINESS
 
 The
consolidated financial statements include the accounts of Big Dog Holdings, Inc.
and its subsidiaries Big Dog Sportswear (“Big Dogs”) and The Walking Company
(“TWC”), collectively the "Company". All significant intercompany accounts and
transactions have been eliminated.
 
 Big Dogs
principally develops and markets apparel and other consumer products through
Company-operated retail stores located throughout the United States, corporate
sales accounts, catalogs and the Internet website.
 
 TWC
principally markets and sells authentic comfort footwear and accessories through
Company-operated retail stores located throughout the United States, catalogs
and the Internet website.
 
 CASH
AND CASH EQUIVALENTS
 
 The
Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.
 
 RECEIVABLES,
NET
 
 Receivables,
net consist primarily of tenant allowances, corporate sales and credit card
transactions that remain outstanding at the end of the period.  These
amounts are reflected net of any allowance for doubtful accounts. The Company
does not extend credit to its customers, except through third-party credit
cards.
 
 INVENTORIES
 
 Inventories,
consisting substantially of finished goods, are valued at the lower of cost
(first-in, first-out and weighted average methods) or market. The Company
continually evaluates its inventories by assessing slow moving current product
as well as prior seasons' inventory. Market value of non-current inventory is
estimated based on historical sales trends for this category of inventory, the
impact of market trends, and an evaluation of economic conditions. The Company
closely monitors its off-price sales to ensure the actual results closely match
initial estimates. Estimates are regularly updated based upon this continuing
review.  Inventory adjustments incurred during the years ended
December 31, 2007 and 2006 were $559,000 and $213,000,
respectively.  No adjustment was made in 2005.
 
 PROPERTY
AND EQUIPMENT
 
 Property
and equipment are stated at cost, less accumulated
depreciation.  Depreciation and amortization of property and equipment
are provided using the straight-line method over the following useful
lives:
 
 Store
      fixtures
              5
      yearsMachinery
      and equipment
              5
      yearsComputer
      equipment
              3
      yearsSoftware
              5
      years
 
 Leasehold
improvements are depreciated over the lesser of the estimated useful life of the
asset or the term of the lease, whichever is shorter.
  F-8
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 IMPAIRMENT
      OF LONG-LIVED ASSETS
 
 The
Company evaluates the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable.  This evaluation is performed
based on the estimated undiscounted future cash flows from operating activities
compared with the carrying value of the related asset.  If the
undiscounted future cash flows are less than the carrying value, an impairment
loss is recognized, measured by the difference between the carrying value and
the estimated fair value of the assets, with such estimated fair values
determined using the best information available generally based on prices for
similar assets for stores recently opened.  The Company’s evaluation
for the years ended 2007, 2006 and 2005, which included all retail locations,
indicated that no asset impairment existed and therefore no write-down of assets
was recorded.
 
 GOODWILL
AND OTHER INTANGIBLE ASSETS
 
 Indefinite
Lived Intangibles
 
 The
Company accounts for indefinite lived intangible assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other
Intangible Assets.  The Company tests trademarks for impairment in the
fourth quarter of each year and more often as circumstances
require.  As of December 31, 2007 and 2006, net trademarks totaled
$300,000 and $299,000, respectively.  Based on its most recent
analysis, management does not believe any impairment of its trademark related
intangible assets existed at December 31, 2007 and 2006,
respectively.
 
 Leasehold
Intangible Assets
 
 In
conjunction with the Footworks acquisition in 2005 (see Note 4), the Company
acquired lease related intangible assets valued at $4,408,000, which are being
amortized over the life of the related leases.  Accumulated
amortization was $1,020,000 and $583,000 at December 31, 2007 and 2006,
respectively.
 
 The
estimate of aggregate amortization expense for the subsequent years is as
follows:
  FOR
      THE YEARS ENDED DECEMBER 31,2008
              
              $
              437,0002009
              
              
              439,0002010
              
              
              435,0002011
              
              
              353,0002012
              
              
              359,000Thereafter
              
              
              1,365,000$
              3,388,000
 
 Goodwill
 
 The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets.  In 2005, the Company recorded $3,131,000 of goodwill in
conjunction with the Footworks acquisition (see Note 4). All of the Company’s
goodwill is allocated to the TWC segment.  The Company tests goodwill
for impairment in the fourth quarter of each year and more often as
circumstances require.  Based on its most recent analysis, management
does not believe any impairment of its goodwill existed at December 31, 2007 and
2006, respectively.
  F-9
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 REVENUE
RECOGNITION
 
 Substantially
all of the Company's revenues are generated by its retail operations, which are
recognized at the time of sale.  The Company also generates revenues
through its corporate sales, Internet and mail order catalog operations, which
are recognized at the time of shipment.  Outbound shipping charges
billed to customers are included in net sales when the products are shipped for
corporate sales, Internet and mail order catalog sales.  Sales tax
charged, when applicable, is not included in net sales.  The Company
records an allowance for estimated returns in the period of sale based on prior
experience.  Gift certificates and gift card sales are recorded as a
liability, until the certificate or card is redeemed.  As the gift
certificates and gift cards do not expire, the Company does not record income
for unused gift certificates or gift cards.  The Company accrues for
estimated sales returns by customers based on historical sales return
results.
 
 INCOME
STATEMENT COMPONENTS
 
 Cost of
goods sold consists of the cost of the product and related overhead costs
related to the product, including purchasing, inbound freight charges, warehouse
receiving costs, quality control inspection costs, internal product development
costs and shipping and other handling costs to our stores or
customers.  Depreciation is not included in the calculation of cost of
goods sold.
 
 Selling,
marketing and distribution expenses consist of expenses associated with
creating, distributing, and selling products through all channels of
distribution, including occupancy, payroll and catalog costs.  The
distribution costs included in selling, marketing and distribution expense were
$5,612,000, $5,329,000 and $3,314,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
 
 General
and administrative expenses consist of administrative salaries, corporate
occupancy costs and other corporate expenses.
 
 VENDOR
ALLOWANCES
 
 Vendor
allowances include allowances, rebates and cooperative advertising funds
received from vendors. The amount of these funds is determined for each fiscal
year and the majority is based on various quantitative contract terms.
Amounts received from vendors relating to the purchase of merchandise
inventories are recognized as a reduction of cost of the inventory. Amounts
that represent a reimbursement of costs incurred, such as advertising, are
recorded as a reduction to the related expense in the period that the related
expense is incurred.
 
 STORE
PREOPENING EXPENSES
 
 The
Company expenses store pre-opening costs as incurred, which totaled $834,000,
$311,000 and $236,000 in 2007, 2006 and 2005, respectively.
 
 ADVERTISING
COSTS
 
 Costs
associated with the production of our mail order catalogs are capitalized and
expensed over the expected revenue stream following the mailing of the
respective catalog, generally three months.  All other advertising
costs are expensed as incurred.  Advertising expense charged to
operations for the years ended December 31, 2007, 2006 and 2005 was $3,858,000,
$3,211,000 and $1,389,000, respectively.  Capitalized advertising
costs related to our mail order catalogs were $278,000 and $295,000 as of
December 31, 2007 and 2006, respectively, and are included in prepaid expenses
and other current assets on the consolidated balance sheets.
  F-10
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 DEFERRED
LEASE INCENTIVES
 
 The
Company accounts for landlord allowances in accordance with SFAS 13, “Accounting
for Leases” and FASB Technical Bulletin 88-1, “Issues Relating to Accounting for
Leases”.  Accordingly, all incentives received from landlords to fund
tenant improvements are recorded as deferred liabilities and then amortized over
the related store’s lease term.
 
 STRAIGHT-LINE
RENT
 
 The
Company accounts for rent expense in accordance with SFAS 13, “Accounting
for Leases,” and FASB Technical Bulletin 85-3, “Accounting for Operating
Leases with Scheduled Rent Increases.” Accordingly, rent expense under the
Company’s store operating leases is recognized on a straight-line basis over the
original term of each store’s lease, inclusive of rent holiday periods during
store construction and excluding any lease renewal options.
 
 MEDICAL
SELF-INSURANCE RESERVE
 
 The
Company is self-insured for medical insurance coverage.  The
self-insurance liability is based on the historical claims rate and is
anticipated to cover reported claims as well as incurred but not reported
claims.  The Company also maintains stop loss insurance coverage which
reimburses the Company for an individual claim in excess of $130,000 and for
company-wide claims in excess of an aggregate amount. The annual aggregate
amount is determined based on a per month, per participant amount which ranges
from $283 to $749.
 
 INCOME
TAXES
 
 The
Company accounts for income taxes using an asset and liability approach for
measuring deferred income taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date.  A valuation allowance is established, when
necessary, to reduce deferred income tax assets to the amount expected to be
realized.  The Company considers a number of factors to determine if a
valuation allowance is necessary, including historical earnings and past
experience with similar timing differences.  For the three years ended
December 31, 2007, the Company determined that a valuation allowance was not
required.
 
 Effective
January 1, 2007 the Company began accounting for uncertain tax provisions under
the provisions of Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes, (“FIN 48”).  FIN 48 prescribes a comprehensive
model for how a company should recognize and measure the impact of uncertain tax
positions on its financial statements.  Determining whether an
uncertain tax position should be recognized and how to measure the amount of the
tax benefit requires significant judgment.  As a result of adoption,
the Company did not record any initial amount for previously unrecognized tax
liabilities, and as of December 31, 2007, the Company did not recognize any
additional estimated liability. (See Note 7).
 
 EARNINGS
PER SHARE
 
 Basic
earnings per share is calculated based on the weighted average number of shares
outstanding. Diluted earnings per share is calculated based on the same number
of shares plus additional shares representing stock distributable under
stock-based plans computed using the treasury stock method.
  F-11
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 The
following reconciles the numerator and denominator of the basic and diluted
per-share computations for net (loss) income:
  YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005Net
      (loss) income
              
              $
              (3,456,000
              )
              
              $
              971,000
              
              
              $
              4,723,000Basic
      Weighted Average Shares:Weighted
      average number of shares outstanding
              
              
              9,421,000
              
              
              
              9,180,000
              
              
              
              9,145,000Effect
      of Dilutive Securities:Options
      and warrants
              
              
              --
              
              
              
              351,000
              
              
              
              581,000Diluted
      Weighted Average Shares:Weighted
      average number of shares outstanding andCommon share
      equivalents
              
              
              9,421,000
              
              
              
              9,531,000
              
              
              
              9,726,000Antidilutive
      options and warrants
              
              
              1,425,000
              
              
              
              --
              
              
              
              273,000Antidilutive
      convertible debt
              
              
              1,028,000
              
              
              
              --
              
              
              
              --
 
 Basic
(loss) incomeearnings per share is computed by dividing net (loss) incomeearnings by
the weighted average number of common shares outstanding for the period. Diluted
(loss) incomeearnings per share reflects the potential dilution that could occur if
options were exercised or converted into common stock. Shares
attributable to the exercise of outstanding options or conversion of convertible
notes that are
antidilutive are excluded from the calculation of diluted loss per share.
Antidilutive options, warrants and convertible debt consist of stock options,
warrants and convertible debt for the respective years that had an exercise
price greater than the average market price during the year.
 
 ACCOUNTING
FOR STOCK-BASED COMPENSATION
 
 On
January 1, 2006, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123R, Share-Based Payment (“SFAS
123R”). The statement provides for, and the Company has elected to adopt the
standard using the modified prospective application under which compensation
cost is recognized on or after the required effective date for the fair value of
all future share based award grants and the portion of outstanding awards at the
date of adoption of this statement for which the requisite service has not been
rendered, based on the grant-date fair value of those awards calculated under
Statement 123 for pro forma disclosures.
 
 Prior to
January 1, 2006, the Company accounted for its stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee
compensation cost was reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company recorded a $1,220,000 and
$540,000 tax benefit for the years ended December 31, 2007 and 2006,
respectively, related to the exercise of stock options for which no compensation
expense was recorded.
  F-12
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Stock-based
compensation for the year ended December 31, 2005 was determined using the
intrinsic value method. The following table provides supplemental information
for that period as if stock-based compensation had been recognized under SFAS
123R:
  YEAR ENDED
                DECEMBER 31,2005Net
      income:As
      reported
              
              $
              4,723,000Add:  Stock-based
      employee compensation expense included in reported net income, net of
      related tax effects
              
              
              ---Deduct:  Total
      stock-based employee compensation expense determined under fair value
      method, net of related tax effects
              
              
              (454,000
              )Pro
      forma
              
              $
              4,269,000Net
      income per share:As
      reported:Basic
              
              $
              0.52Diluted
              
              $
              0.49Pro
      forma:Basic
              
              $
              0.47Diluted
              
              $
              0.44
 
 USE
OF ESTIMATES
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 CONCENTRATION
OF CREDIT RISK
 
 The
Company had $199,000, $135,000 and $845,000 of cash on deposit with a high
credit quality financial institution in excess of the Federal Deposit Insurance
Corporation limits as of December 31, 2007, 2006 and 2005,
respectively.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS
 
 The
estimated fair values of receivables, accounts payable and short-term borrowings
approximate their carrying values because of the short-term maturity of these
instruments.
 
 The fair
value of the Company’s debt instruments are based on the amount of future cash
flows associated with each instrument discounted using the Company’s borrowing
rate. At December 31, 2007 and 2006, the carrying value of all financial
instruments was not materially different from fair value, as both the fixed and
variable rate debt approximated rates currently available to the
Company.
 
 RECENTLY
ISSUED ACCOUNTING STANDARDS
 
 In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. In addition, FIN 48 excludes income taxes from SFAS
No. 5, Accounting for
Contingencies. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and provides transitional guidance for treating
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after
adoption. The Company implemented FIN 48 effective January 1,
2007.  The implementation had no impact on the Company’s consolidated
financial statements.
  F-13
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 
 In
July 2006, the Emerging Issues Task Force promulgated Issue No. 06-3
(“Issue”), How Taxes Collected
from Customers and Remitted to Governmental Authorities Should be Presented in
the Income Statement (i.e., Gross Versus Net Presentation). The Task
Force concluded that entities should present these taxes in the income statement
on either a gross or a net basis based upon their accounting policy. However,
this Issue states that if such taxes are significant, and are presented on a
gross basis, the amounts of those taxes should be disclosed. This Issue should
be applied to financial reports for interim and annual reporting periods
beginning after December 15, 2006. Since the Company currently records
taxes on a net basis (i.e., sales tax is not included in sales, but is instead
recorded as a liability under accrued expenses), the adoption of this Issue did
not have a material impact on the Company’s consolidated financial
statements.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement provides guidance for using fair value to measure assets and
liabilities. The statement also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect of
fair value measurements on earnings. The statement applies whenever other
statements require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new circumstances. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. There are numerous previously issued statements dealing with fair values
that are amended by SFAS No. 157. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 157 will have
on the Company’s consolidated financial statements.
 
 In
September 2006, the SEC issued Staff Accounting Bulletin (“SAB”)
No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. SAB No. 108 (a.k.a. SAB Topic 1.N)
addresses quantifying the financial statement effects of misstatements or, more
specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial
statements. SAB No. 108 does not change the SEC staff’s previous positions in
SAB No. 99, Materiality (a.k.a. SAB Topic
1.M) regarding qualitative considerations in assessing the materiality of
misstatements. SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 did not have a material
impact on the Company’s consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.SFAS No. 159 provides companies
with an option to report many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. The FASB believes that SFAS No. 159
helps to mitigate accounting-induced volatility by enabling companies to report
related assets and liabilities at fair value, which would likely reduce the need
for companies to comply with detailed rules for hedge accounting. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities, and would require
entities to display the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance sheet. The new
statement does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157, Fair Value Measurements. This
statement is effective as of the beginning of an entity’s first fiscal year
beginning after November 15, 2007. The Company is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 159 will have
on the Company’s consolidated financial statements.
  F-14
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS No. 141(R)”), which establishes principles and
requirements for how the acquirer of a business is to (i) recognize and
measure in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree;
(ii) recognize and measure the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determine what
information to disclose to enable users of its financial statements to evaluate
the nature and financial effects of the business combination. This statement
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. This replaces the guidance of
SFAS No. 141, “Business Combinations”
(“SFAS No. 141”) which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. In addition, costs incurred by the acquirer to
effect the acquisition and restructuring costs that the acquirer expects to
incur, but is not obligated to incur, are to be recognized separately from the
acquisition. SFAS No. 141(R) applies to all transactions or other
events in which an entity obtains control of one or more businesses. This
statement requires an acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date,
measured at their acquisition-date fair values. An acquirer is required to
recognize assets or liabilities arising from all other contingencies as of the
acquisition date, measured at their acquisition-date fair values, only if it is
more likely than not that they meet the definition of an asset or a liability in
FASB Concepts Statement No. 6, “Elements of Financial Statements.”This Statement requires the acquirer to recognize goodwill as of the
acquisition date, measured as a residual, which generally will be the excess of
the consideration transferred plus the fair value of any noncontrolling interest
in the acquiree at the acquisition date over the fair values of the identifiable
net assets acquired. Contingent consideration should be recognized at the
acquisition date, measured at its fair value at that date.
SFAS No. 141(R) defines a bargain purchase as a business combination
in which the total acquisition-date fair value of the identifiable net assets
acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree, and requires the acquirer to recognize
that excess in earnings as attributable to the acquirer. This statement is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early application is prohibited. The Company is
currently evaluating the effect SFAS No. 141(R) will have on its
accounting for, and reporting of, business combinations consummated on or after
January 1, 2009.
 
 RECLASSIFICATIONS
 
 Certain amounts in the prior year’s
consolidated financial statements have been reclassified to conform to the
current year’s presentation.
  F-15
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 2.
PROPERTY AND EQUIPMENT
 
 Property
and equipment consist of the following:
  DECEMBER 31,2007
              
              
              2006Leasehold
      improvements
              
              $
              33,435,000
              
              
              $
              22,411,000Store
      fixtures
              
              
              19,660,000
              
              
              
              19,585,000Machinery
      and equipment
              
              
              5,436,000
              
              
              
              7,181,000Computer
      equipment and software
              
              
              9,802,000
              
              
              
              9,006,000Land
              
              
              63,000
              
              
              
              63,00068,396,000
              
              
              
              58,246,000Less
      accumulated depreciation and amortization
              
              
              32,754,000
              
              
              
              34,072,000Property
      and equipment, net
              
              $
              35,642,000
              
              
              $
              24,174,000
 
 Depreciation
and amortization expense of property and equipment totaled $7,177,000,
$6,174,000 and $3,940,000 in 2007, 2006 and 2005, respectively.
 
 In May
1999, the Company purchased the building which houses its downtown Santa Barbara
retail store for $1,600,000. In August 1999, the Company sold this building for
$2,119,000 and simultaneously entered into a 10-year lease. The $527,000 gain
related to the sale of this building is being deferred over the life of the
lease.
 
 3.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
 Accrued
expenses and other current liabilities consist of the following:
  DECEMBER 31,2007
              
              
              2006Accrued
      compensation and benefits
              
              $
              4,260,000
              
              
              $
              4,092,000Sales
      tax payable
              
              
              1,609,000
              
              
              
              1,880,000Store
      credits
              
              
              618,000
              
              
              
              576,000Sales
      return reserve
              
              
              619,000
              
              
              
              499,000Gift
      certificates
              
              
              730,000
              
              
              
              514,000Other
      current liabilities
              
              
              857,000
              
              
              
              774,000Total
      accrued expenses and other current liabilities
              
              $
              8,693,000
              
              
              $
              8,335,000
 
 4.
ACQUISITIONS
 
 FOOTWORKS
ACQUISITION
 
 On August
31, 2005, the Company acquired substantially all of the assets of Footworks, a
division of a privately held shoe retailer.  The total purchase price
was approximately $10.1 million which included the payment and issuance of cash
and notes by the Company pursuant to the definitive agreement.  The
acquisition included a chain of 7 retail stores selling comfort shoes and
accessories.  Footworks’ operations have historically focused on
high-visibility stores in Las Vegas, Nevada.  The Company has
converted the majority of the acquired stores into “The Walking Company”
stores.  Through an independent valuation, intangibles related to
below market leases acquired were valued at approximately $4.4 million and
acquired trademark intangibles were valued at approximately $0.1
million.  Intangibles related to below market leases are amortized
over the remaining lease term.  Goodwill recorded in connection with
the acquisition is approximately $3.1 million.  The results of the
Company’s operations for the Footworks stores have been included in the
Company’s consolidated financial statements since the acquisition
date.  Pro forma results of operations are not presented as the
acquisition is not considered material to the Company’s consolidated financial
statements.
  F-16
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 4.
ACQUISITIONS (continued)
 
 STEVE’S
SHOES ACQUISITION
 
 On
January 31, 2006, the Company acquired, through bankruptcy court, substantially
all of the assets and assumed certain liabilities of Steve’s Shoes, Inc.,
pursuant to an asset purchase agreement for a purchase price of approximately
$4.2 million.  The Company also incurred acquisition related costs of
$0.4 million.  Of this amount $2.1 million was allocated to fixed
assets, $2.6 million was allocated to inventory and $0.1 million was allocated
to liabilities. The Company assumed liabilities for $65,000 in accrued vacation,
$39,000 in outstanding sales returns and $30,000 in gift
certificates.  The purchase price allocation is subject to adjustment
related to additional acquisition related costs and assumed liabilities and is
expected to be finalized in the first quarter 2007.
 
 Under the terms of the asset purchase
agreement, TWC acquired substantially all of the assets of Steve’s Shoes, Inc.
including, but not limited to, the inventory and fixed assets of 37
stores.  The primary reason for the acquisition was to continue the
growth of TWC by acquiring stores in strategic locations.  During 2006
and 2007, the Company has or will be converting the majority of the acquired
stores into “The Walking Company” stores.  The transaction was
accounted for under the purchase method of accounting, and accordingly the
results of operations have been consolidated in the Company’s financial
statements since acquisition on January 31, 2006.
 
 The
Company funded the purchase price by drawing upon existing lines of credit, and
from available cash.  No goodwill was recorded in connection with the
acquisition.  Pro forma results of operations will not be presented as
the acquisition is not considered material (either individually or combined with
Footworks) to the Company’s consolidated financial statements.
 
 5.
SHORT-TERM BORROWINGS
 
 In
October 2001, the Company entered into a credit facility with Wells Fargo Retail
Finance (“WFRF”), which was most recently amended in March, 2008 (the “Amended
Credit Agreement”) and previously amended in November,
2006.  Subsequent to the November 2006 amendment, the Amended Credit
Agreement provides for a total commitment of $60,000,000 with the ability for
the Company to issue documentary and standby letters of credit of up to
$3,000,000.  Prior to the amendment, the agreement provided for a
total commitment of $47,000,000.  The Company’s ability to borrow
under the facility was determined using an availability formula based on
eligible assets.  The facility was collateralized by substantially all
of the Company’s assets and requires daily, weekly and monthly financial
reporting as well as compliance with financial, affirmative and negative
covenants.  The most significant of the amended financial covenants,
most recently amended in March 2008, includes compliance with a pre-defined
annual maximum capital expenditure amount and a restriction on the payment of
dividends.  At December 31, 2007, the Company was not in compliance
with one of its covenants and subsequently obtained a waiver from the
WFRF.  For all other periods presented, the Company was in compliance
with all covenants, as amended.  This credit agreement provides for a
performance-pricing structured interest charge which was based on excess
availability levels.  The interest rate ranged from the bank’s base
rate (7.25% as of December 31, 2007) or a LIBOR loan rate plus a margin ranging
up to 1.75% (6.43% as of December 31, 2007).  The Company had
$2,203,000 in borrowings based on the bank’s base rate and $21,000,000 in LIBOR
loans outstanding at December 31, 2007.  The Amended Credit Agreement
expires in October 2011.  At December 31, 2007, the Company had
approximately $1,733,000 of outstanding letters of credit expiring through
October 2008, which includes a $1,000,000 stand-by letter of credit related to a
promissory note entered in conjunction with the acquisition of Footworks in
2005.
  F-17
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 6.
DEBT
 
 Debt
consists of the following as of December 31, 2007 and 2006:
  DECEMBER 31,2007
              
              
              2006Convertible
      debt, net of debt issuance costs of $1,155,000
              
              $
              17,345,000
              
              
              
              ---Note
      payable, related party
              
              
              1,965,000
              
              
              
              ---Wells
      Fargo Retail Finance 4-year term facility
              
              
              1,778,000
              
              
              
              2,444,000Bianca
      of Nevada, Inc. 3-year promissory note
              
              
              1,000,000
              
              
              
              2,000,000Priority
      tax claim notes
              
              
              55,000
              
              
              
              112,00022,143,000
              
              
              
              4,556,000Less
      current installments
              
              
              (2,700,000
              )
              
              
              (1,727,000
              )Notes
      payable, excluding current installments
              
              $
              19,443,000
              
              
              $
              2,829,000
 
 The
aggregate annual principal repayments required in respect of debt as of
December 31, 2007 are as follows:
  Years
      Ending December 31,2008
              
              $
              2,700,0002009
              
              
              2,098,0002010
              
              
              ---2011
              
              
              ---2012
              
              
              18,500,000$
              23,298,000
 
 CONVERTIBLE
DEBT
 
 On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes (“Note” or
“Notes”) due March 31, 2012, interest payable quarterly. $3.0 million of the
Notes were sold to management. The Notes are convertible into fully paid and
nonassessable shares of the Company’s common stock to an aggregate of up to
1,027,777 shares at any time after the issuance date, at an initial conversion
price of $18.00 per share.  Any time after the eighteen month
anniversary of the issuance date, the Company has the right to require the
holder of a Note to convert any remaining amount under a Note into common stock
if: (i) (x) the closing sale price of the common stock exceeds 175% of the
conversion price on the issuance date for each of any 20 consecutive trading
days or (y) following the consummation of a bona fide firm commitment
underwritten public offering of the common stock resulting in gross proceeds to
the Registrant in excess of $30 million, the closing sale price of the common
stock exceeds 150% of the conversion price on the issuance date for each of any
20 consecutive trading days and (ii) certain equity conditions have been met. In
circumstances where Notes are being converted either in connection with a
voluntary conversion or an exercise of the Company’s right to force conversion,
the Company has the option to settle such conversion by a net share settlement,
for some or all of the Notes. If it exercises such right, the Company is to pay
the outstanding principal amount of a Note in cash and settle the amount of
equity in such Investor’s conversion right by delivery of shares of common stock
of equal value.  If the Notes are not converted before its maturity,
the Notes will be redeemed by the Company on the maturity date at a redemption
price equal to 100% of the principal amount of the notes then outstanding, plus
any accrued and unpaid interest. The offer and sale of the Notes were made in
accordance with Rule 506 of Regulation D of the Securities Act of
1933.  The net proceeds from the sale of the Notes were $17,141,000
after $1,359,000 of debt issuance costs.  Debt issuance costs are
being amortized over the term of the note.  Amortization of debt
issuance costs totaling $204,000 is included in interest expense for the year
ended December 31, 2007 on the accompanying statements of
operations.  As of December 31, 2007, the convertible note payable
balance includes unamortized debt issuance costs of $1,155,000 in the
accompanying consolidated balance sheet.  The net proceeds of this
offering were used to reduce the outstanding balance of Company’s line of
credit.  On June 21, 2007, the Company filed an S-3 Registration
Statement to register the 1,027,777 shares of common stock which are convertible
under the agreement and it became effective in September 2007.  As of
December 31, 2007, the Company’s stock price was $14.45, which was less than the
conversion price of $18.00.  Accordingly, the Company anticipates the
Notes will be settled in cash at maturity.
  F-18
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 6. DEBT
(continued)
 
 NOTES
PAYABLE, RELATED PARTY
 
 On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO).  The purchase
price was $16.00 per share, less the exercise price of the options, which ranged
from $6.50 to $10.00 per share.  The $16.00 price represents a
discount of approximately 5% from the May 9, 2007 closing price of
$16.80.  The net purchase price was $1,965,000.  The Company
paid for the options by delivery of notes bearing interest at 7% per annum and
payable in two equal installments on April 10, 2008 and April 10,
2009.  At December 31, 2007, $982,000 of the notes is classified as
current portion of long-term debt to related parties in the accompanying
consolidated balance sheet.
 
 NOTES
PAYABLE
 
 In
conjunction with the Company’s acquisition of Footworks in 2005, Wells Fargo
Retail Finance issued a $3,000,000 four-year term loan
facility.  Monthly payments of $55,555 were due beginning in March of
2006 with the balance due at the maturity date of the loan, October
2009.  The term loan interest charge is Prime plus .5% or LIBOR plus
2.75% (7.25% at December 31, 2007).  At December 31, 2007, $667,000 of
the term loan facility is classified as current and is included in current
portion of long-term debt in the accompanying consolidated balance
sheet.
 
 Additionally,
in conjunction with the acquisition of Footworks, the Company also entered into
a $3,000,000 three-year promissory note with the seller, Bianca of Nevada,
Inc.  The principal on this note is payable in three annual
installments beginning August 31, 2006.  The note bears an interest
rate of 5.0% and accrued interest is payable quarterly beginning December
2005.  The note is partially secured by a $1,000,000 stand-by letter
of credit as the second principal installment was paid in August
2007.  At December 31, 2007, $1,000,000 of the promissory note is
classified as current and is included in current portion of long-term debt in
the accompanying consolidated balance sheet.
 
 As part
of the acquisition of The Walking Company, TWC assumed priority tax claims
totaling approximately $627,000.  The Bankruptcy Code requires that
each holder of a priority tax claim will be paid in full with interest at the
rate of six percent per year with annual payments for a period of six
years.  At December 31, 2007 and 2006, $51,000 and $60,000,
respectively, of the priority tax claim note is classified as current and is
included in current portion of long-term debt in the accompanying consolidated
balance sheet.  As of December 31, 2007 and 2006, the remaining notes
had a long-term balance of $4,000 and $52,000, respectively.
  F-19
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 7. INCOME
TAXES
 
 The
(benefit from) provision for income taxes consists of the
following:
  YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              (2,919,000
              )
              
              $
              2,271,000
              
              
              $
              2,520,000State
              
              
              (539,000
              )
              
              
              406,000
              
              
              
              509,000Total
              
              
              (3,458,000
              )
              
              
              2,677,000
              
              
              
              3,029,000Deferred:Federal
              
              
              1,241,000
              
              
              
              (1,806,000
              )
              
              
              (114,000
              )State
              
              
              53,000
              
              
              
              (288,000
              )
              
              
              (21,000
              )Total
              
              
              1,294,000
              
              
              
              (2,094,000
              )
              
              
              (135,000
              )Total
      (benefit from) provision for income tax
              
              $
              (2,164,000
              )
              
              $
              583,000
              
              
              $
              2,894,000
 
 
 The
Company's effective income tax rate differs from the federal statutory rate due
to the following:
  YEARS ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005Federal
      statutory income tax rate
              
              
              34.0
              %
              
              
              34.0
              %
              
              
              34.0
              %State
      taxes, net of federal benefit
              
              
              4.3
              
              
              
              3.6
              
              
              
              3.9Other,
      net
              
              
              0.2
              
              
              
              (0.1
              )
              
              
              0.1Total
              
              
              38.5
              %
              
              
              37.5
              %
              
              
              38.0
              %
 
 Significant
components of the Company's net deferred income tax assets are as
follows:
  DECEMBER 31,Deferred
      income tax assets:Allowance
      for doubtful receivables and sales returns
              
              $
              252,000
              
              
              $
              199,000Accrued
      vacation
              
              
              206,000
              
              
              
              171,000Inventory
      uniform capitalization
              
              
              864,000
              
              
              
              1,760,000Inventory
      reserve
              
              
              442,000
              
              
              
              346,000Depreciation
              
              
              ---
              
              
              
              455,000Deferred
      rent
              
              
              3,157,000
              
              
              
              1,781,000Deferred
      gain on sale of building
              
              
              36,000
              
              
              
              56,000Stock-based
      compensation
              
              
              123,000
              
              
              
              69,000Charitable
      contribution carryover
              
              
              662,000
              
              
              
              374,000Reserve
      liabilities
              
              
              93,000
              
              
              
              81,000Total
      deferred income tax assets
              
              
              5,835,000
              
              
              
              5,292,000Deferred
      income tax liabilities:Depreciation
              
              
              (1,142,000
              )
              
              
              ---Intangible
      assets
              
              
              (188,000
              )
              
              
              (71,000
              )State
      income taxes
              
              
              (424,000
              )
              
              
              (134,000
              )Prepaid
      expenses
              
              
              (413,000
              )
              
              
              (125,000
              )Total
      deferred income tax liabilities
              
              
              (2,167,000
              )
              
              
              (330,000
              )Deferred
      income tax asset, net
              
              $
              3,668,000
              
              
              $
              4,962,000
 F-20
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 7. INCOME
TAXES (continued)
 
 Implementation of
FIN 48
 
 On
January 1, 2007, the Company adopted the provisions of FIN 48 (see
Note 1). As a result of
adoption, the Company did not record any initial amount for previously
unrecognized tax liabilities. The Company does not expect the amounts of
unrecognized benefits to change significantly in the next
12 months.
  As of
December 31, 2007, the Company did not recognize any additional estimated
liability.
 
 Although
no adjustments were recorded as of December 31, 2007, effective with the
adoption of FIN 48, the Company will record any future accrued interest
resulting from unrecognized tax benefits as a component of interest expense and
accrued penalties resulting from unrecognized tax benefits as a component of
income tax expense.
 
 The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state jurisdictions. The Company’s Federal and State
income tax returns remain subject to examination for all tax years ended on or
after December 31, 2000, with regard to all tax positions and the results
reported.
 
 On March
14, 2006, the Company received a notice of proposed adjustments from the
Internal Revenue Service ("IRS”) related to its audit of the Company’s 2002 Tax
Year.  The IRS had proposed adjustments to increase the Company’s
income tax payable for the 2002 year that was under examination.  The
adjustments related to the tax accounting for two short bond transactions
recorded in 2002.  The Company disagreed with the audit findings and
obtained expert legal tax counsel to assist in its appeal.  In
September 2007, the Company received a notice from the IRS Appeals Office
stating that they agreed with the Company’s appeal and there is no deficiency or
over-assessment with regard to the audited year.  The Company had not
recorded a reduction in tax benefits in accordance with FIN 48 related to this
audit.  Since the audit is now resolved as such, no further analysis
or adjustment is needed.
 
 8.
COMMITMENTS AND CONTINGENCIES
 
 LEASES
 
 The
Company leases retail stores, office buildings and warehouse space under lease
agreements that expire through 2019.  Future minimum lease payments
under noncancelable operating and capital leases are as follows:
  Operating
              
              
              CapitalYEARS ENDING DECEMBER
      31,
              
              Leases
              
              
              Leases2008
              
              $
              37,728,000
              
              
              $
              841,0002009
              
              
              34,411,000
              
              
              
              916,0002010
              
              
              29,823,000
              
              
              
              915,0002011
              
              
              26,609,000
              
              
              
              230,0002012
              
              
              24,832,000
              
              
              
              ---Thereafter
              
              
              135,315,000
              
              
              
              ---Total
      minimum
      obligations
              
              $
              288,718,000
              
              
              
              2,902,000Less
      amount representing
      interest
              
              
              
              
              
              
              458,000Present
      value of minimum lease payments
              
              
              
              
              
              
              2,444,000Less
      current
      portion
              
              
              
              
              
              
              683,000Long-term
      portion
              
              
              
              
              
              $
              1,761,000
 F-21
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 8.
COMMITMENTS AND CONTINGENCIES (continued)
 
 The above
amounts do not include contingent rentals based on sales in excess of the
stipulated minimum that may be paid under certain leases on retail stores.
Additionally, certain leases contain future adjustments in rental payments based
on changes in a specified inflation index. The effective annual rent expense for
the Company is the total rent paid over the term of the lease, amortized on a
straight-line basis. The difference between the actual rent paid and the
effective rent recognized for financial statement purposes is reported as
deferred rent.
 
 Rent
expense for 2007, 2006 and 2005, totaled $37,702,000, $33,659,000 and
$26,478,000, respectively, and includes a lease termination fee of $491,000
recorded in 2007 related to the relocation of the Company’s distribution center
(described below) and contingent rentals of $787,000, $681,000 and $586,000 for
2007, 2006, and 2005, respectively, which are included in operating expenses in
the consolidated statements of income.  The cost of equipment under
capital leases at December 31, 2007 and 2006 was $3,044,000 and $432,000,
respectively, and accumulated depreciation for such equipment at December 31,
2007 and 2006 was $363,000 and $210,000, respectively.
 
 In the
first quarter 2007, the Company entered into a $2,973,000 four-year capital
lease agreement to finance equipment purchased for the Company’s new
distribution center located in North Carolina.  The capital lease
agreement requires monthly payments of approximately $75,000 through March 2011
and includes a dollar purchase option at the end of the
term.  Depreciation expense of equipment purchased under this capital
lease is included in selling, marketing and distribution expense in the
accompanying consolidated statement of operations.
 
 In
January 2007, the Company terminated their lease of a 143,000 square foot
facility in Santa Fe Springs, California and as a result paid a $491,000
termination fee.  The Company’s distribution center was housed in this
facility prior to its relocation to a larger facility in Charlotte, North
Carolina.  The termination of the lease was recorded in accordance
with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities”.  Under SFAS 146, liabilities arising from exit or
disposal activities are recognized only when incurred, and measured at their
fair value.
 
 LITIGATION
 
 In
Marlene Korman v. The Walking Company,  TWC was sued in the Eastern
District of Pennsylvania in a purported class action lawsuit under the Fair and
Accurate Credit Transactions Act (“FACTA”) because the plaintiff received a
receipt with the expiration date from her debit credit card on it. The plaintif
alleges that that was a “willful” violation of FACTA, entitling her and the
other members of the class to statutory damages of $100 to $1,000 per
person.  The Company has denied the complaint and is defending the
action.  The Company cannot predict the likelihood of a favorable or
unfavorable outcome in this matter, but at this time does not believe that the
outcome of such litigation will have a material adverse impact on our operations
or financial condition.
 
 From time
to time the Company is involved in other pending or threatened litigation
incidental to its business.  The Company believes that the outcome of such
litigation will not have a material adverse impact on its consolidated
operations or financial condition.
  F-22
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 9.
STOCKHOLDERS' EQUITY
 
 COMMON
STOCK
 
 The
Company is authorized to issue 30,000,000 shares of common stock.  As
of December 31, 2007 and 2006, the Company had 11,187,608 and 10,973,264 of
common stock issued, respectively.
 
 In March
1998, the Board of Directors authorized the repurchase of up to $10,000,000 of
its common stock. The Company has repurchased 1,710,598 shares totaling
$9,446,000 as of December 31, 2007 and 2006.
 
 On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes due March
31, 2012, interest payable quarterly. The Notes are convertible into fully paid
and nonassessable shares of the Company’s common stock to an aggregate of up to
1,027,777 shares at any time after the issuance date, at an initial conversion
price of $18.00 per share.   On June 21, 2007, the Company filed
an S-3 Registration Statement to register the 1,027,777 shares of common stock
which are convertible under the agreement and it became effective in September
2007.  As of December 31, 2007, the Company’s stock price was $14.45,
which was less than the conversion price of $18.00.  Accordingly, the
Company anticipates the Notes will be settled in cash at
maturity.  See Note 6. Debt.
 
 The
Company’s credit agreement prohibits the payment of dividends. The Company did
not pay a dividend in 2007 and 2006, and does not expect to pay dividends in the
future.
 
 PREFERRED
STOCK
 
 The
Company is authorized to issue 3,000,000 shares of preferred
stock.  As of December 31, 2007 and 2006, the Company did not have any
preferred stock issued or outstanding.  Under the Company’s
Certificate of Incorporation, the Board of Directors is authorized to fix the
terms of the preferred stock provided for in such Certificate.
 
 STOCK
OPTIONS
 
 In August
1997, the Company adopted the 1997 Performance Award Plan to attract, reward and
retain officers and employees. The maximum number of shares reserved for
issuance under this plan was 1,000,000. In February 1998, the Company amended
the 1997 Performance Award Plan (the “Plan”) to increase the maximum number of
shares reserved for issuance under the Plan to 2,000,000.  The Company
amended the Plan again in April 2002 to increase the maximum number of shares
reserved for issuance under the Plan to 3,000,000. Awards under this Plan may be
in the form of nonqualified stock options, incentive stock options, stock
appreciation rights, restricted stock, performance shares, stock bonuses, or
cash bonuses based upon performance.
 
 On
January 1, 2006, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 123R, Share-Based Payment (“SFAS
123R”). This statement establishes standards surrounding the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. The statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions,
such as the options issued under the Company’s Stock Option Plans. The statement
provides for, and the Company has elected to adopt the standard using the
modified prospective application under which compensation cost is recognized on
or after the required effective date for the fair value of all future share
based award grants and the portion of outstanding awards at the date of adoption
of this statement for which the requisite service has not been rendered, based
on the grant-date fair value of those awards calculated under Statement 123 for
pro forma disclosures. The Company’s stock option compensation expense was
$167,000 and $211,000 for years ended December 31, 2007 and 2006,
respectively, and is included in operating expenses in the accompanying
consolidated statements of income. The Company also recorded a related tax
benefit of $64,000 and $79,000 in 2007 and 2006, respectively, and a deferred
tax asset of $123,000 and $69,000 is recorded for years ended December 31, 2007
and 2006, respectively.  In addition, the Company recorded a tax
benefit of $1,220,000 and $540,000 related to options for which no compensation
expense was recorded.
  F-23
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 9.
STOCKHOLDERS’ EQUITY (continued)
 
 The fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model. This model incorporates certain assumptions for inputs
including a risk-free market interest rate, expected dividend yield of the
underlying common stock, expected option life and expected volatility in the
market value of the underlying common stock. The Company used the following
assumptions for options granted in the years ended December 31, 2005. There were
no options granted in the years ended December 31, 2006 and 2007.
  Expected
      volatility
              
              
              35
              %Expected
      lives
              
              7 yrs.Risk-free
      interest rate – high
              
              
              4.28
              %Risk-free
      interest rate – low
              
              
              3.95
              %Expected
      dividend yield
              
              none
 
 Expected
volatilities are based on the historical volatility of the Company’s common
stock.  The risk free interest rate is based upon quoted market yields
for United States Treasury debt securities. The expected dividend yield is zero
as the Company is subject to a debt covenant prohibiting the payment of
dividends.  Expected term is derived from the historical option
exercise behavior.
  F-24
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 9.
STOCKHOLDERS’ EQUITY (continued)
 
 The
following table summarizes stock option activity during the years ended
December 31, 2005, 2006 and 2007:
  Options
                
                Shares
                
                
                Weighted-
                  Average
                  Exercise
                  Price
                
                
                Weighted-
                  Average
                  Remaining
                  Contractual
                  Term
                
                
                Aggregate
                  Intrinsic
                  ValueBalance
      at January 1, 2005
                
                
                2,081,650
                
                
                
                4.98Granted
                
                
                112,250
                
                
                
                6.93Exercised
                
                
                (75,250
                )
                
                
                4.30Forfeited
                
                
                (33,150
                )
                
                
                5.35Outstanding
      at December 31, 2005
                
                
                2,085,500
                
                
                $
                5.10Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (188,984
                )
                
                
                5.07Forfeited
                
                
                (4,650
                )
                
                
                4.48Outstanding
      at December 31, 2006
                
                
                1,891,866
                
                
                $
                5.39Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (214,344
                )
                
                
                5.53Forfeited
                
                
                (252,666
                )
                
                
                7.90Outstanding
      at December 31, 2007
                
                
                1,424,856
                
                
                $
                4.55
                
                
                
                4.33
                
                
                $
                14,111,000Vested
      and expected to vest at December 31, 2007
                
                
                1,408,336
                
                
                $
                4.55
                
                
                
                4.30
                
                
                $
                13,946,000Exercisable
      at December 31, 2007
                
                
                1,259,656
                
                
                $
                4.56
                
                
                
                4.06
                
                
                $
                12,459,000
 F-25
 BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 9.
STOCKHOLDERS’ EQUITY (continued)
 
 The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2005 was $2.73.  No options were granted in the
years ended December 31, 2006 and 2007.  The total intrinsic value of
options exercised during the year ended December 31, 2007, 2006 and 2005
was $2,296,000, $1,487,000, $200,000, respectively, determined as of the date of
each option exercised. The intrinsic value is the amount by which the current
market value exceeds the exercise price of the stock option.
  As of
December 31, 2007, there was $199,000 of total unrecognized compensation
cost, net of a 10% expected forfeiture rate, related to unvested options granted
under the Company’s option plans. That cost is expected to be recognized on a
straight-line basis over a weighted average period of 1 year. The total grant
date fair value of shares vested during the year ended December 31, 2007
was $196,000.
  Cash
received from option exercise under share-based payment arrangements for the
years ended December 31, 2007, 2006 and 2005 was $1,186,000, $959,000 and
$322,000, respectively.
 
 On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO).  The purchase
price was $16.00 per share, less the exercise price of the options, which ranged
from $6.50 to $10.00 per share.  The $16.00 price represents a
discount of approximately 5% from the May 9, 2007 closing price of
$16.80.  The net purchase price was $1,965,000.  The Company
paid for the options by delivery of notes bearing interest at 7% per annum and
payable in two equal installments on April 10, 2008 and April 10,
2009.  See Note 6. Debt.
 
 The
following table summarizes information about stock options outstanding at
December 31, 2007:
  OPTIONS OUTSTANDING
                
                
                OPTIONS EXERCISABLERANGE
      OF EXERCISE PRICES
                
                
                OPTIONS
      OUT­STANDING
                
                WEIGHTED-AVERAGE
      REMAINING CONTRACTUAL LIFE
                
                WEIGHTED-AVERAGE
      EXERCISE PRICE
                
                
                OPTIONS
      EXERCIS­ABLE
                
                
                WEIGHTED-AVERAGE
      EXERCISE PRICE$
                2.90
      - 3.60
                
                
                
                450,524
                
                4.6
      years
                
                $
                3.47
                
                
                
                363,924
                
                
                $
                3.464.00
      - 4.85
                
                
                
                607,682
                
                3.5
      years
                
                
                4.28
                
                
                
                600,482
                
                
                
                4.285.00
      - 6.50
                
                
                
                341,650
                
                5.9
      years
                
                
                6.12
                
                
                
                270,250
                
                
                
                6.268.00
                
                
                
                12,500
                
                3.1
      years
                
                
                8.00
                
                
                
                12,500
                
                
                
                8.0010.00
                
                
                
                12,500
                
                3.1
      years
                
                
                10.00
                
                
                
                12,500
                
                
                
                10.002.90
      - 10.00
                
                
                
                1,424,856
                
                4.3
      years
                
                
                4.55
                
                
                
                1,259,656
                
                
                
                4.56
 
 10.
SEGMENT INFORMATION
 
 For the
years ended December 31, 2007, 2006 and 2005, the Company operated its business
under two reportable segments: (i) Big Dog Sportswear business, and (ii) TWC
business. The Big Dog Sportswear business includes the Company’s 115 Big Dog
retail stores (primarily located in outlet malls), corporate sales, and its
catalog and internet business selling quality sportswear. The TWC business
includes the Company’s 186 The Walking Company stores located primarily in
leading retail malls selling comfort footwear.  These two retail
chains are managed separately.
  F-26
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 10.
SEGMENT INFORMATION (continued)
 
 The
accounting policies of the reportable segments are consistent with the
consolidated financial statements of the Company.  The Company
evaluates individual store profitability in terms of a store’s contribution
which is defined as gross margin less direct selling, occupancy, and certain
indirect selling costs.  Below are the results of operations on a
segment basis for the years ended December 31, 2007, 2006 and 2005:
 
 Big Dog Sportswear
              
              
              The Walking Company
              
              
              TotalYear Ended December31,
      2007 Statementsof
      Operations:Sales
              
              $
              71,133,000
              
              
              $
              162,135,000
              
              
              $
              233,268,000Gross
      margin
              
              
              39,266,000
              
              
              
              83,182,000
              
              
              
              122,448,000Depreciation
      and amortization
              
              
              1,609,000
              
              
              
              6,005,000
              
              
              
              7,614,000Interest
      income
              
              
              (6,000
              )
              
              
              (4,000
              )
              
              
              (10,000
              )Interest
      expense
              
              
              1,402,000
              
              
              
              2,853,000
              
              
              
              4,255,000Benefit
      from provision for income taxes
              
              
              (1,669,000
              )
              
              
              (495,000
              )
              
              
              (2,164,000
              )Net
      loss
              
              
              (2,665,000
              )
              
              
              (791,000
              )
              
              
              (3,456,000
              )Balance
      Sheet:Total
      assets
              
              $
              34,611,000
              
              
              $
              89,011,000
              
              
              $
              123,622,000(Decreases)
      increases in long-term assets
              
              
              (1,459,000
              )
              
              
              12,174,000
              
              
              
              10,715,000Year Ended December 31, 2006 Statements
      ofIncome:Sales
              
              $
              82,923,000
              
              
              $
              135,681,000
              
              
              $
              218,604,000Gross
      margin
              
              
              46,696,000
              
              
              
              70,185,000
              
              
              
              116,881,000Depreciation
      and amortization
              
              
              1,518,000
              
              
              
              5,006,000
              
              
              
              6,524,000Interest
      income
              
              
              (3,000
              )
              
              
              (5,000
              )
              
              
              (8,000
              )Interest
      expense
              
              
              765,000
              
              
              
              1,319,000
              
              
              
              2,084,000(Benefit
      from) provision for income taxes
              
              
              (770,000
              )
              
              
              1,353,000
              
              
              
              583,000Net
      (loss) income
              
              
              (1,284,000
              )
              
              
              2,255,000
              
              
              
              971,000Balance
      Sheet:Total
      assets
              
              $
              35,336,000
              
              
              $
              67,325,000
              
              
              $
              102,661,000Increases
      in long-term assets
              
              
              3,770,000
              
              
              
              9,190,000
              
              
              
              12,960,000Year Ended December 31, 2005 Statements
      of Income:Sales
              
              $
              92,104,000
              
              
              $
              87,011,000
              
              
              $
              179,115,000Gross
      margin
              
              
              53,755,000
              
              
              
              45,049,000
              
              
              
              98,804,000Depreciation
      and amortization
              
              
              1,363,000
              
              
              
              2,810,000
              
              
              
              4,173,000Interest
      income
              
              
              (40,000
              )
              
              
              (4,000
              )
              
              
              (44,000
              )Interest
      expense
              
              
              463,000
              
              
              
              513,000
              
              
              
              976,000Provision
      for income taxes
              
              
              1,225,000
              
              
              
              1,669,000
              
              
              
              2,894,000Net
      income
              
              
              2,000,000
              
              
              
              2,723,000
              
              
              
              4,723,000Balance
      Sheet:Total
      assets
              
              $
              31,692,000
              
              
              $
              41,061,000
              
              
              $
              72,753,000(Decreases)
      increases in long-term assets
              
              
              (714,000
              )
              
              
              10,248,000
              
              
              
              9,534,000
  F-27
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
 11.
EMPLOYEE BENEFIT PLAN
 
 The
Company has a Retirement Savings Plan (the “Plan”), a defined contribution plan
adopted pursuant to Section 401(k) of the Internal Revenue Code.  The
Plan is available to substantially all of the Company’s employees. The Company
amended the Plan in November 2000 to match each dollar deferred up to 3% of
compensation, which is limited to $1,000 annually, per
participant.  Participants vest in the Company’s contribution at
varying rates of 0% to 20% per year over six years.  The Company
contributed approximately $278,000, $188,000 and $187,000 in 2007, 2006 and
2005, respectively.
 
 12.
RELATED PARTY TRANSACTIONS
 
 On April
3, 2007, the Company entered into a Convertible Note Purchase Agreement with
certain purchasers, including some officers of the Company, pursuant to which
the Company issued and sold $18.5 million of 8.375% Convertible Notes due March
31, 2012, interest payable quarterly. $3.0 million of the Notes were sold to
management. The Notes are convertible into fully paid and nonassessable shares
of the Company’s common stock to an aggregate of up to 1,027,777 shares at any
time after the issuance date, at an initial conversion price of $18.00 per
share.  As of December 31, 2007, the Company’s stock price was $14.45,
which was less than the conversion price of $18.00.  Accordingly, the
Company anticipates the Notes will be settled in cash at
maturity.  See Note 6. Debt.
 
 On May 9,
2007, the Company purchased from the officers of the Company all of the vested
employee stock options held by them that would otherwise have expired on or
before May 9, 2008. Options for a total of 245,000 shares were purchased from
five officers (no options were purchased from the CEO).  The purchase
price was $16.00 per share, less the exercise price of the options, which ranged
from $6.50 to $10.00 per share.  The $16.00 price represents a
discount of approximately 5% from the May 9, 2007 closing price of
$16.80.  The net purchase price was $1,965,000.  The Company
paid for the options by delivery of notes bearing interest at 7% per annum and
payable in two equal installments on April 10, 2008 and April 10,
2009.  See Note 6. Debt.
 
 Two of
the Company's stockholders and directors have ownership interests in two former
merchandise vendors to the Company. Merchandise inventory purchased from these
related vendors totaled $35,000, $3,000 and $135,000 in 2007, 2006 and 2005,
respectively.
 
 The
Company engaged a related party to perform retail construction
services.  Construction services provided to the Company totaled
$203,000 in 2005.  No construction services were provided in 2007 or
2006.
 
 In the
normal course of business, one of the Company's officers pays for certain
operating expenses which are reimbursed by the Company.  At December 31,
2007 and 2006, the related outstanding payable was $63,000 and $70,000,
respectively.
 
 From time
to time, the Company rents a plane for its own corporate travel use from a
company where a majority stockholder and director is also the majority owner of
the Company.  The Company has no obligation to use such plane for any
minimum amount, and to the extent it does use it, the Company pays for such use
on terms at least as favorable to the Company as could be obtained from an
independent third party.  Costs associated with the use of such plane
totaled $268,000, $215,000 and $189,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
 
 13.
SUBSEQUENT EVENTS
 
 On
January 15, 2008, The Walking Company purchased substantially all of the assets
of Natural Comfort Footwear, Inc. net of certain liabilities for approximately
$3.6 million.  The purchase price was funded in part through existing
working capital.  Additionally, the Company entered into a $1.7
million three-year promissory note with the seller of Natural Comfort Footwear,
Inc.  The entire principal on this note is payable on January 15,
2011.  The note bears an interest rate of 7% and accrued interest is
payable quarterly beginning March 31, 2008.  The assets include 8
store locations, inventory, trademarks, tangible personal property, and
goodwill.  Proforma results of operations will not be presented as the
acquisition is not considered material to the Company’s consolidated financial
statements.
  F-28
  BIG
DOG HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
  14.
QUARTERLY FINANCIAL DATA (unaudited)
 
 FIRST
      QUARTER
              
              
              SECOND
      QUARTER
              
              
              THIRD
      QUARTER
              
              
              FOURTH
      QUARTER(in
      thousands, except per share)Year
      ended December 31, 2007:Net
      sales
              
              $
              44,224
              
              
              $
              55,854
              
              
              $
              56,554
              
              
              $
              76,636Gross
      profit
              
              
              23,300
              
              
              
              30,498
              
              
              
              30,195
              
              
              
              38,455Selling,
      marketing and distribution expenses
              
              
              26,849
              
              
              
              26,933
              
              
              
              26,886
              
              
              
              32,356General
      and administrative expenses
              
              
              2,361
              
              
              
              2,737
              
              
              
              2,365
              
              
              
              3,336Total
      operating expenses
              
              
              29,210
              
              
              
              29,670
              
              
              
              29,251
              
              
              
              35,692(Loss)
      income from operations
              
              
              (5,910
              )
              
              
              828
              
              
              
              944
              
              
              
              2,763Net
      (loss) income
              
              
              (4,135
              )
              
              
              (188
              )
              
              
              (140
              )
              
              
              1,007Net
      (loss) income per shareBasic
              
              $
              (0.44
              )
              
              $
              (0.02
              )
              
              $
              (0.01
              )
              
              $
              0.11Diluted
              
              $
              (0.44
              )
              
              $
              (0.02
              )
              
              $
              (0.01
              )
              
              $
              0.10Weighted
      average shares outstandingBasic
              
              
              9,336
              
              
              
              9,415
              
              
              
              9,457
              
              
              
              9,475Diluted
              
              
              9,336
              
              
              
              9,415
              
              
              
              9,457
              
              
              
              10,089Year
      ended December 31, 2006:Net
      sales
              
              $
              38,671
              
              
              $
              53,178
              
              
              $
              54,127
              
              
              $
              72,628Gross
      profit
              
              
              20,097
              
              
              
              29,383
              
              
              
              28,982
              
              
              
              38,419Selling,
      marketing and distribution expenses
              
              
              22,639
              
              
              
              25,497
              
              
              
              25,355
              
              
              
              29,937General
      and administrative expenses
              
              
              2,247
              
              
              
              2,346
              
              
              
              2,301
              
              
              
              2,930Total
      operating expenses
              
              
              24,886
              
              
              
              27,843
              
              
              
              27,656
              
              
              
              32,866(Loss)
      income from operations
              
              
              (4,789
              )
              
              
              1,540
              
              
              
              1,326
              
              
              
              5,553Net
      (loss) income
              
              
              (3,160
              )
              
              
              641
              
              
              
              471
              
              
              
              3,019Net
      (loss) income per shareBasic
              
              $
              (0.35
              )
              
              $
              0.07
              
              
              $
              0.05
              
              
              $
              0.33Diluted
              
              $
              (0.35
              )
              
              $
              0.06
              
              
              $
              0.05
              
              
              $
              0.31Weighted
      average shares outstandingBasic
              
              
              9,092
              
              
              
              9,177
              
              
              
              9,211
              
              
              
              9,236Diluted
              
              
              9,092
              
              
              
              9,509
              
              
              
              9,476
              
              
              
              9,885
 F-29
  SCHEDULE
II
 VALUATION
AND QUALIFYING ACCOUNTS
 FOR
THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 
 Balance at Beginning of
Year
              
              
              Additions Charged to Costs and
      Expenses
              
              
              Write-offs, Net of
    Recoveries
              
              
              Balance at End of YearYear
      ended December 31, 2005Reserves
      and allowances deducted from asset accounts:Allowance
      for uncollectible accounts receivable
              
              $
              3,000
              
              
              $
              1,000
              
              
              $
              (2,000
              )
              
              $
              2,000Self-insurance
      reserves
              
              $
              442,000
              
              
              $
              2,731,000
              
              
              $
              (2,695,000
              )
              
              $
              478,000Sales
      returns
              
              $
              285,000
              
              
              $
              50,000
              
              
              $
              ---
              
              
              $
              335,000Obsolete
      inventory reserves
              
              $
              385,000
              
              
              $
              22,000
              
              
              $
              (150,000
              )
              
              $
              257,000Year
      ended December 31, 2006Reserves
      and allowances deducted from asset accounts:Allowance
      for uncollectible accounts receivable
              
              $
              2,000
              
              
              $
              2,000
              
              
              $
              ---
              
              
              $
              4,000Self-insurance
      reserves
              
              $
              478,000
              
              
              $
              4,202,000
              
              
              $
              (4,006,000
              )
              
              $
              674,000Sales
      returns
              
              $
              335,000
              
              
              $
              164,000
              
              
              $
              ---
              
              
              $
              499,000Obsolete
      inventory reserves
              
              $
              257,000
              
              
              $
              267,000
              
              
              $
              (54,000
              )
              
              $
              470,000Year
      ended December 31, 2007Reserves
      and allowances deducted from asset accounts:Allowance
      for uncollectible accounts receivable
              
              $
              4,000
              
              
              $
              2,000
              
              
              $
              (4,000
              )
              
              $
              2,000Self-insurance
      reserves
              
              $
              674,000
              
              
              $
              3,808,000
              
              
              $
              (3,792,000
              )
              
              $
              690,000Sales
      returns
              
              $
              499,000
              
              
              $
              149,000
              
              
              $
              (29,000
              )
              
              $
              619,000Obsolete
      inventory reserves
              
              $
              470,000
              
              
              $
              564,000
              
              
              $
              (5,000
              )
              
              $
              1,029,000
  F-30




INDEX TO
EXHIBITS
 
 Exhibit
      Number
                Description2.1
                Second
      Amended Plan of Reorganization of Shoes Liquidation Co. (formerly The
      Walking Company) and Alan’s Shoes, Inc., confirmed on March 2, 2004.
      (1)2.2
                Order
      of the United States Bankruptcy Court for the Central District of
      California confirming the Second Amended Plan of Reorganization of Shoes
      Liquidation Co. (formerly The Walking Company) and Alan’s Shoes, Inc.,
      entered on March 2, 2004.(1)2.3
                Asset
      Purchase Agreement, dated May 20, 2005, by and among The Walking
      Company, as buyer, Bianca of Nevada, Inc., a Nevada corporation, as
      seller, and Sal Palermo, as shareholder. (7)2.4
                Asset
      Purchase Agreement, dated January 31, 2006, by and among The Walking
      Company, as buyer, and Steve’s Shoes, Inc., Debtor in Possession, as
      seller. (9)3.1
                Amended
      and Restated Certificate of Incorporation (2)3.1A
                Certificate
      of Correction (3)3.2
                Amended
      and Reinstated Bylaws (3)4.1
                Reference
      is hereby made to Exhibits 3.1, 3.1A, and 3.24.2
                Specimen
      Stock Certificate (2)10.1
                Term
      Loan Note, dated August 31, 2005, among the lenders signatory thereto,
      Wells Fargo Retail Finance II, LLC, as agent, and Big Dog USA, Inc. and
      The Walking Company, as borrowers. (8)10.2
                Promissory
      Note Secured by Letter of Credit, dated August 31, 2005, among the lenders
      signatory thereto, Bianca of Nevada, Inc., as payee, and The Walking
      Company, as maker. (8)10.10
                Amended
      and Restated 1997 Performance Award Plan (5)10.10A
                Form
      of Employee Nonqualified 1997 Performance Award Plan
(2)10.10B
                Terms
      and Conditions for Non-Qualified Options Granted under the Amended and
      Restated 1997 Performance Award Plan (4)10.10C
                Form
      of Eligible Director Non-Qualified Stock Option  Agreement
      (4)10.11
                Lease
      between Big Dog USA, Inc. and The Prudential  Insurance Company
      of America dated November 4, 1997 (3)10.12
                Form
      of Indemnification Agreement (1)10.13
                Lease
      between Big Dog Holdings, Inc. and TKC XCIX, LLC dated March 13, 2006
      (10)21.1
                List
      of Subsidiaries of Big Dog Holdings, Inc. (6)23
                Consent
      of Independent Registered Public Accounting Firm24.1
                Power
      of Attorney (included in signature page)
 
 
 
 31.1
                Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
                Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200299.1
                Loan
      and Security Agreement, dated March 3, 2004, among the lenders signatory
      thereto, Wells Fargo Retail Finance II, LLC, as agent, and The Walking
      Company (formerly TWC Acquisition Corp.), as
  borrower.(1)99.2
                Third
      Amendment to Loan and Security Agreement, dated March 3, 2004, among the
      lenders signatory thereto, Wells Fargo Retail Finance II, LLC, as agent,
      and Big Dog Holdings, Inc., Big Dog USA, Inc. and CSI Acquisition
      Corporation, as borrowers.(1)99.3
                First
      Amended, Restated and Consolidated Loan and Security Agreement, dated July
      7, 2005, among the lenders signatory thereto, Wells Fargo Retail Finance
      II, LLC, as agent, and Big Dog Holdings, Inc., Big Dog USA, Inc., and The
      Walking Company, as borrowers. (7)99.4
                Third
      Amendment to First Amended, Restated, and Consolidated Loan and Security
      Agreement, dated November 28, 2006, among the lenders signatory thereto,
      Wells Fargo Retail Finance II, LLC, as agent, and Big Dog Holdings, Inc.,
      Big Dog USA, Inc., and The Walking Company, as borrowers.
    (11)99.5
                Sixth
      Amendment to First Amended, Restated, and Consolidated Loan and Security
      Agreement, dated March 24, 2008, among the lenders signatory thereto,
      Wells Fargo Retail Finance II, LLC, as agent, and Big Dog Holdings, Inc.,
      Big Dog USA, Inc., and The Walking Company, as
  borrowers.
 
 
 (1)
                Incorporated
      by reference from the Company’s Current Report on Form 8-K filed as of
      March 3, 2004.  The exhibits and schedules to the Plan have been
      omitted from this filing pursuant to Item 601(b)(2) of Regulation
      S-K.  Big Dog Holdings, Inc. will furnish copies of any of such
      exhibits and schedules to the Securities and Exchange Commission upon
      request.
 (2)
                Incorporated
      by reference from the Company’s S-1 Registration Statement (No. 333-33027)
      as amended , which became effective September 25,
  1997.
 (3)
                Incorporated
      by reference from the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1997.
 (4)
                Incorporated
      by reference from the Company’s Schedule TO filed July 31,
      2000.
 (5)
                Incorporated
      by reference from the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1998.
 (6)
                Incorporated
      by reference from the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2003.
 (7)
                Incorporated
      by reference from the Company’s Quarterly Report on Form 10-Q for the
      period ended June 30, 2005.
 (8)
                Incorporated
      by reference from the Company’s Quarterly Report on Form 10-Q for the
      period ended September 30, 2005.
 (9)
                Incorporated
      by reference from the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005.
 (10)
                Incorporated
      by reference from the Company’s Current Report on Form 8-K filed as of May
      4, 2006.
 (11)
                Incorporated
      by reference from the Company’s Current Report on Form 8-K filed as of
      December 20, 2006.