UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
               OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       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
  INCORPORATION OR 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
par value

         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 ___

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  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. []

         The aggregate  market value of Common Stock held by  non-affiliates  of
the  registrant  on  March  8,  1999,  was  approximately  $20.7  million.   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.

         On March 8, 1999, the registrant had 12,100,350  shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III  incorporates  information  by reference  from the  definitive
Proxy  Statement for the 1999 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.

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Big  Dog  Holdings,  Inc.  and  its  subsidiaries  ("Big  Dogs"  or the
"Company")  develops,  markets and retails a branded,  lifestyle  collection  of
unique,  high-quality,  popular-priced consumer products,  including activewear,
casual sportswear,  accessories and gifts. BIG DOGS-Registered  Trademark- is an
All-American,  family-oriented brand that the Company believes has established a
unique niche in its  dedication  to providing  quality,  value and fun. Big Dogs
products were first sold in 1983, and operations  remained  limited through 1992
when the  current  controlling  stockholders  acquired  the BIG  DOGS-Registered
Trademark-  brand  and  related  assets.  Following  the  acquisition,  Big Dogs
initiated a strategy of leveraging the brand through  dramatic  expansion of its
product line and rapid growth in its retail stores.  The number of the Company's
stores has grown from 5 in 1993 to 177 as of December 31, 1998.

         The  Company's   collection  is  centered   around  its  signature  BIG
DOGS-Registered  Trademark-  name, logo and "Big Dog" characters and is designed
to appeal to a broad range of  customers  when they are in the "Big Dog state of
mind." The BIG  DOGS-Registered  Trademark-  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 Dog attitude and sense of fun are brought to life through the
Company's  graphic  capabilities that portray the Big Dog characters in a number
of engaging,  positive and  inspiring  situations  and  activities.  The Big Dog
attitude  is further  defined  by a number of slogans  such as "If You Can't Run
with the Big Dogs Stay on the Porch"-Registered  Trademark-,  "Unless You're the
Lead Dog, the Scenery Never Changes," and "Lead,  Follow or Get Out of the Way."
These  graphics  and  slogans  combine  a  bold,  spirited  attitude  with  wry,
lighthearted  humor. The appeal of the brand is further  strengthened  through a
customer's  personal  identification with particular sports and other activities
depicted in these  graphics.  In addition to its focus on fun, Big Dogs develops
customer  loyalty and enhances its brand image by providing a consistently  high
level of quality at moderate price points.  Big Dogs accomplishes this primarily
through (i)  selling  its own brand  directly  to the  consumer,  (ii)  low-cost
product development, and (iii) sourcing  high-volume/low-cost basic apparel with
limited fashion risk.

         The BIG DOGS-Registered  Trademark- brand is designed to appeal to men,
women and children of all ages,  particularly  baby boomers and their kids, when
they are engaged in leisure or recreational activities. Furthermore, the Company
believes that the millions of dog and other pet owners in the United States,  as
well as children,  have a strong natural affinity toward the dog-related  images
and themes in Big Dogs  graphics.  In addition,  the Company  believes  that the
positive  image  the brand  brings to being a "Big Dog" has a special  appeal to
large-size  customers.  The  Company's  apparel  products,  which include a wide
variety of basic apparel and related products, are developed 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-Registered
Trademark-line  of  activewear  and casual  sportswear  for men and  women,  the
Company has  expanded its LITTLE BIG  DOGS-TM-  line of infants' and  children's
apparel and its BIG BIG DOGS-TM- line of big-size apparel.  The Company has also
expanded its non-apparel products,  including plush animals,  stationery and pet
products,  which feature Big Dog graphics and are  developed to  complement  its
apparel.

         The   Company   reinforces   its  brand  image  by   distributing   BIG
DOGS-Registered  Trademark-  products  primarily  through its own retail stores.
This distribution  strategy enables the Company to present a complete  selection
of its merchandise in a creative and fun environment. In addition, this strategy
enables it to more effectively  reach its targeted  customers by locating stores
in  tourist-oriented  and other casual  environments where it believes consumers
are more likely to be in the "Big Dog state of mind." The Company  operates  its
retail stores in both outlet and full-price formats,  depending on the location.
In addition to its retail  stores,  Big Dogs markets its products  through other
channels, including its catalog, better wholesale accounts and the internet.

BUSINESS STRATEGY

         Big Dogs' mission is to build a brand that is recognized throughout the
world for providing high quality, good value and fun and functional products. To
achieve this goal, the Company has adopted the following operating strategies:

         PROMOTE  THE BIG DOG  SPIRIT OF FUN.  A key and  unique  element in the
Company's  brand image is its focus on fun.  This spirit of fun revolves  around
the Company's Big Dog character that has broad appeal to men, women and children
of all ages.  The Company  fosters this spirit by creating  positive,  humorous,
topical and inspiring  graphics and slogans which it applies to its merchandise.
More  than just a logo,  the Big Dog  represents  the  leader,  athlete,  child,
comedian,  musician,  boss, traveler,  parent and dog lover in everyone. Big Dog
products  are fun, not only  because of their  graphics  and  slogans,  but also
because they are designed for  recreational,  sports and leisure  activities and
make ideal  gifts.  Big Dogs'  focus on fun is further  enhanced  by the lively,
enjoyable  atmosphere in its retail stores and is also  reflected in its catalog
and marketing promotions and activities.

         DELIVER  HIGH  QUALITY  AT  A  GOOD  VALUE.   Big  Dogs'  products  are
constructed using high-quality fabrics and other materials. Many of its products
feature unique graphics  characterized by advanced print techniques,  as well as
unique appliques and embroideries on many of its apparel  products.  The Company
believes that this  combination  of quality  fabrics and graphics in its apparel
products  provides the customer with a product that has an exceptional  look and
feel.  Big Dogs is able to deliver  this level of quality at  reasonable  prices
primarily as a result of (i) selling its own brand direct to the consumer,  (ii)
low-cost  product  development,  (iii) sourcing of basic  apparel,  and (iv) low
marketing  costs.  The Company  believes  that  delivering  quality and value is
instrumental  in generating  customer appeal and brand loyalty for its products,
particularly those that do not prominently feature Big Dog graphics.

         ENHANCE FUNCTIONAL PRODUCTS WITH GRAPHICS. Big Dogs develops functional
rather than  fashion-forward  products.  The  Company  believes it has a special
competency  in  creating   distinctive,   popular  graphics  which  it  uses  to
differentiate its products from those of its competitors. Big Dogs has developed
a broad assortment of classic,  functional  clothing  ("basics") in traditional,
less  fashion-forward  colors.  The Company's focus on basics and its ability to
leverage  its  graphics  across  multiple  product  categories  have allowed the
Company to  eliminate  the need for a  traditional  buyer or design  staff,  and
thereby lower its product  development  costs  compared to most fashion  apparel
companies.  Furthermore,  since  its  graphics  are  added in the last  stage of
production,  the Company is able to be more  responsive to customer  preferences
while also lowering its inventory risk.

         TARGET  A BROAD,  DIVERSE  CUSTOMER  BASE.  Big  Dogs  believes  it has
established an All-American,  family-oriented brand featuring products,  graphic
themes,  slogans  and  promotions  that  appeal to a broad  range of  consumers.
Although  its  marketing  focus is on baby  boomers  and their  kids,  Big Dogs'
customers  include men, women and children of all ages, and span a wide range of
geographic areas and income levels.  Furthermore,  the Company believes that the
millions of dog and other pet owners in the United States,  as well as children,
have a strong natural affinity for the dog-related images and themes in Big Dogs
graphics.  In addition,  the Company  believes that the positive image the brand
brings to being a "Big Dog" has a special appeal to big-size customers.

         MAINTAIN CONTROLLED DISTRIBUTION. Big Dogs sells its products primarily
through its own stores and, to a lesser extent, through its catalog and internet
sales.  By selling  direct to its  customers,  Big Dogs is able to  present  its
complete line of merchandise in a creative and fun environment. This also allows
it  to  target  its  customers   more   precisely  by  locating  its  stores  in
tourist-oriented  and  other  high-traffic  areas,  where the  Company  believes
consumers are more likely to be in the "Big Dog state of mind."  Selling  direct
to the consumer  also allows the Company (i) to enhance its margins  while still
providing  customer  value,  (ii) to be more  responsive  to customer  feedback,
especially with regard to new product  development,  (iii) to reduce its need to
build brand awareness through large-scale media advertising, and (iv) to collect
customer names for its catalog through in-store sign-ups.

         CREATE AN ENTERTAINING SHOPPING EXPERIENCE.  Big Dogs seeks to create a
distinctive  and fun shopping  environment  in its stores  through an innovative
display of its graphic art and humor,  including  in-store  "T-shirt  walls" and
other displays that are designed to immediately put the customer in the "Big Dog
state of mind." By showcasing  the  Company's  complete  product line,  Big Dogs
stores offer something for everyone in the family. Effective cross-merchandising
in the stores is designed to add  excitement  and prompt add-on  purchases.  The
Company believes the customer's  shopping  experience is further enhanced by the
Company's knowledgeable and enthusiastic sales staff.

         EMPHASIZE GRASSROOTS MARKETING. The Company believes its most effective
marketing is its products  themselves  and their  presentation  in the Company's
retail stores and catalog.  As a result, the Company has spent relatively little
on advertising.  Also important to Big Dogs' marketing  strategy is its targeted
"grassroots"  marketing  activities.  These activities include local and charity
sponsorships (such as high school sports teams),  community-oriented promotional
events (such as the Company's annual dog parade in Santa Barbara), and corporate
cross-promotions  with leading consumer  product  companies (such as Nabisco and
IAMS).

         The Company's  continued growth will depend to a significant  degree on
its  ability  to open  and  operate  new  stores,  to  increase  net  sales  and
profitability  from the  Company's  existing  stores,  and to  expand  its other
sources of revenue. Big Dogs' primary growth strategy is the continued expansion
of its retail stores.  The Company opened 27 net new stores in 1998. The Company
opens stores in locations  and venues that  management  believes best target its
customers  and can be  obtained  on  terms  that  meet  its  unit  profitability
requirements.  Depending  on the  location,  the Company will open new stores in
either an outlet or full-price format.  Although Big Dogs' traditional  emphasis
has been on outlet malls,  the Company has more recently  increased its focus on
opening  full-price,  stand-alone  stores  in  tourist  and  leisure  locations.
Accordingly, the Company anticipates that the stores it opens in the near future
will be  located in a variety of venues,  including  outlet  malls,  stand-alone
stores in tourist areas, tourist-oriented malls, regional malls and metropolitan
locations.  These new markets and venues  have in the past  presented,  and will
continue to present, competitive and merchandising challenges that are different
from those faced by the Company in its existing markets and venues.

MERCHANDISING

         Big Dogs'  product line  features a branded,  lifestyle  collection  of
unique,  high-quality,  popular-priced consumer products,  including activewear,
casual  sportswear,  accessories and gifts. Big Dogs' apparel lines include full
collections  of classic unisex casual  sportswear and activewear for adults,  as
well as collections for infants and children and the big-size  market.  Big Dogs
has also in recent years further  expanded its product lines to include not only
a wide  variety  of  apparel  accessories,  but  also a  collection  of gift and
consumer products.  The Company continuously  explores  opportunities to further
leverage its brand and graphics into new product lines.

         The Company's  apparel products are  manufactured  from premium cotton,
or,  in  some  instances,   cotton/  synthetic  blends.  Big  Dogs'  apparel  is
characterized  by  quality  fabrics,  construction  and  embellishments,  and is
distinguished   from   other   apparel   lines   by  the   BIG   DOGS-Registered
Trademark-name,  dog logo,  graphics and slogans. In addition to its distinctive
graphics,  the Company believes it has achieved  recognition for the quality and
performance  of its  products.  For example,  the  Company's  solid nylon volley
shorts and madras plaid shorts were  selected by the Atlanta  Committee  for the
Olympic Games to be officially licensed shorts for the 1996 Atlanta Olympics.

         The majority of the Company's  products  range from between $4 and $45.
The following  table sets forth the  approximate  contribution  that each of the
Company's  product  categories  made to total net sales in the Company's  retail
stores for the year ended December 31, 1998: 
<TABLE>
<CAPTION>
                                                                    % OF TOTAL
                                                                   RETAIL STORE*
                                                                     NET SALES
                                                                  -------------
<S>                                                                    <C>
Adult Apparel and Accessories ....................................     56.9%
Infants' and Children's Apparel and Accessories ..................     20.7
Big-size Apparel .................................................     14.8
Non-Apparel Products .............................................      7.6
                                                                     -------
Total ............................................................    100.0%
                                                                     =======
</TABLE>
*Does not include mail order, wholesale and internet sales.

         ADULT APPAREL AND ACCESSORIES.  Big Dogs sells a complete line of adult
unisex activewear and casual sportswear.  The Company offers  screen-printed and
embroidered  T-shirts and sweatshirts,  in a variety of styles and colors,  that
generally  prominently  display the Big Dogs graphics and slogans.  In addition,
the  Company  offers  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-Registered Trademark- name and/or dog logo.
The  Company's  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 Company's  classic,  popular  items and graphics have been in the Big
Dogs line with very little change for over 10 years, the Company  introduces new
apparel and other products  throughout  the year to ensure that the  merchandise
assortments are consistent with the top sellers within its competitive market.

         Big Dogs leverages its trademarks, characters and more popular graphics
by  carefully  translating  them  to a  wide  variety  of  apparel  accessories,
including  caps,  ties,  socks,  sunglasses,  bags,  watches and wallets.  These
products are developed and introduced based on their  consistency with Big Dog's
brand image and whether  they  complement  the  Company's  other  products.  The
Company's introduction of accessories not only provides an opportunity to create
add-on  purchases,  but also minimizes  product  development costs and inventory
risk by utilizing  graphics  and slogans  that have first proven  popular on the
Company's graphic T-shirts.

         INFANTS'  AND  CHILDREN'S  APPAREL  AND  ACCESSORIES.  The  LITTLE  BIG
DOGS-Registered  Trademark-  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.   The   Company   sells  its  LITTLE  BIG   DOGS-Registered
Trademark-line  primarily through its retail stores and catalog,  and wholesales
it to certain specialty and better department stores.
<PAGE>

         BIG-SIZE  APPAREL.  The Company  believes that the BIG  DOGS-Registered
Trademark-image  and the positive  emphasis the brand gives to being a "Big Dog"
have a unique appeal to consumers who wear big sizes. In the spring of 1996, the
Company  significantly  expanded its BIG BIG DOGS-Registered  Trademark-category
targeting big-size customers.  The Company's BIG BIG  DOGS-TM-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  generally  prominently
display the Big Dogs graphic themes and slogans. In addition, the Company offers
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-Registered  Trademark-name  and/or dog logo. The
Company sells its BIG BIG DOGS-TM-line  primarily  through its retail stores and
catalog and also through selected wholesale accounts and the internet.

         NON-APPAREL  PRODUCTS.  Big  Dogs  further  leverages  its  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,  mousepads and screen
savers. 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  the  Company's  other  products.  As with apparel  accessories,  the
graphics  applied to these  products have first proven  popular on the Company's
T-shirts,  resulting in lower product  development  costs and inventory risk. In
general,  non-apparel items have higher gross margins than many of the Company's
other products.

MARKETING

         The Company  strives to maintain a consistent  brand image  through the
coordination of its merchandising,  marketing and sales efforts. The goal of the
Company's marketing efforts is to present a distinctive image of quality,  value
and fun that consumers  will  associate with the Company's  products and thereby
enhance the BIG DOGS-Registered Trademark- brand image. The BIG DOGS brand image
has been developed with relatively little  advertising,  as the Company believes
its most effective  marketing is its products  themselves and their presentation
in the Company's  retail stores and catalog.  The Company's  catalog  serves not
only as a means of product distribution, but also as the key marketing piece for
the Company's retail stores.

         Also  important  to the  Company's  marketing  strategy is its targeted
"grassroots"  marketing  activities.  These activities include local and charity
sponsorships (such as high school sports teams),  community-oriented promotional
events (such as the Company's annual dog parade in Santa Barbara), and corporate
cross-promotions  with leading consumer  product  companies (such as Nabisco and
IAMS).  The  Company  trains and  incentivizes  its store  managers  to actively
involve their stores in local,  grassroots activities.  In addition, the Company
utilizes  billboard  advertising  designed to direct customers to local Big Dogs
retail stores.

RETAIL STORES

         Big Dogs seeks to create a distinctive and fun shopping  environment in
its  stores  through  the  innovative  display  of its  graphic  art and  humor,
including  in-store  "T-shirt walls" and other displays  designed to immediately
put the  customer  in the "Big Dog state of mind." In  addition,  the  Company's
cross-merchandising  and colorful  signage are designed to add excitement in the
stores and prompt  add-on  purchases.  While  maintaining  a consistent  Big Dog
"look"  throughout the chain, many stores  incorporate  graphics and props which
are consistent  with the store's local  environment  (for example,  a car racing
theme in  Indianapolis  and an Old  Spanish  Days  theme in Santa  Barbara).  By
showcasing the Company's  complete product line and broad  assortment,  Big Dogs
stores offer something for everyone in the family and are particularly appealing
to the dedicated Big Dogs customer.

         In 1998, the Company's retail stores  contributed  approximately 91% of
total net sales. As of December 31, 1998, the Company  operated 177 stores in 44
states and three  stores in England  and Canada.  Big Dogs stores are  typically
located in tourist and  recreation-oriented  shopping locations and other casual
environments  where the Company believes  consumers are more likely to be in the
"Big Dog state of mind." In making site selections, the Company also considers 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,  projected  profitability,  store location and visibility within
the  center,  and the  accessibility  and  visibility  of the center from nearby
thoroughfares.
<PAGE>

The table below sets forth the number of stores located in each state or country
as of the end of 1998.
<TABLE>

<CAPTION>
 State          No. of Stores         State              No. of Stores
 -----          -------------         -----              -------------
<S>                        <C>                                      <C>
Alabama                    2         Missouri                       3
Alaska                     1         Nebraska                       1
Arizona                    7         Nevada                         3
California                35         New Hampshire                  2
Colorado                   3         New Jersey                     1
Connecticut                2         New Mexico                     1
Delaware                   2         New York                       8
Florida                   10         North Carolina                 5
Georgia                    4         Ohio                           3
Hawaii                     2         Oklahoma                       1
Idaho                      2         Oregon                         5
Illinois                   3         Pennsylvania                   7
Indiana                    4         South Carolina                 4
Iowa                       1         Tennessee                      6
Kansas                     3         Texas                          6
Louisiana                  1         Utah                           2
Maine                      2         Vermont                        1
Maryland                   4         Virginia                       4
Massachusetts              4         Washington                     5
Michigan                   5         West Virginia                  1
Minnesota                  3         Wisconsin                      2
Mississippi                2         Wyoming                        1


Country         No. of Stores        Country              No. of Stores
-------         -------------        -------              -------------
United Kingdom             1         Canada                         2
</TABLE>

         The Company  operates its retail  stores in both outlet and  full-price
formats,  depending on the location.  Big Dogs' traditional emphasis has been on
outlet malls  because those malls are often located in tourist areas and attract
significant numbers of Big Dogs' targeted customers.  More recently, the Company
has increased its focus on opening full-price, stand-alone stores in tourist and
leisure locations.  The Company anticipates that the stores it opens in the near
future  will be in a variety  of venues,  including  outlet  malls,  stand-alone
stores in tourist areas, tourist-oriented malls, regional malls and metropolitan
locations.

         The Company's  outlet mall stores  average  approximately  2,700 square
feet.  The  Company's  outlet  stores  offer a complete  and current line of the
Company's  products priced  approximately  25% less than the same items are sold
for in the Company's  catalog and the Company's  full-price  stores and by other
retailers.  In addition,  the Company has tested a smaller format store which it
intends  to open in  certain  circumstances.  This  smaller  format  will  carry
substantially all of the Company's product categories,  but will be more densely
merchandised to accommodate  the smaller square  footage.  The Company opened 27
net new stores during 1998. The Company's cost to open a typical  factory outlet
store in 1998, including leasehold  improvements and furniture and fixtures, was
approximately  $67,000 (net of tenant  improvement  allowances),  a reduction of
approximately  $2,000 per store  compared to the prior  year.  Of the 27 net new
stores in 1998, 16 were in regional malls and other  non-outlet  locations.  The
Company's  cost to open these stores was  approximately  $134,000 (net of tenant
improvement  allowance).  The average  per store  initial  inventory  (partially
financed by trade  payables) for the new 1998 stores was  approximately  $67,000
and pre-opening expenses averaged  approximately  $16,000 per store. The average
total cost to build new stores  will vary in the  future,  depending  on various
factors,  including local construction costs, changes in store format and design
and tenant improvement allowances.

         Big  Dogs  store   operations   are  managed  by  an   Executive   Vice
President--Retail,  three regional  managers and  approximately  25 district and
area managers. Each of the stores is managed and operated by a store manager, an
assistant  manager and  full-time and part-time  sales  associates.  The Company
seeks to further  enhance its  customers'  shopping  experience  by developing a
knowledgeable  and  enthusiastic  sales staff to  distinguish  Big Dogs from its
competition.  In this regard, the Company has implemented  employee training and
incentive  programs  and  encourages  its sales  associates  to be friendly  and
courteous  and to guide  customers to graphics and products  that tie into their
individual  interests.  The Company  believes its commitment to customer service
enhances its ability to generate  repeat  business and to attract new customers.
The Company also  believes that the fun nature of its products and the growth of
the Company create employee  enthusiasm and positive morale that in turn enhance
customer service and contribute to the fun shopping experience.
<PAGE>
NON-RETAIL DISTRIBUTION

         Non-retail  channels of distribution,  including catalog and wholesale,
and, to a lesser extent, corporate sales and premium programs, international and
internet sales, contributed approximately 9% of the Company's total net sales in
1998.

         CATALOG.  Introduced  in late  1992,  the  Company's  catalog  is a key
marketing  piece for its products and stores,  and enables it to reach customers
who are not located near a Big Dogs store.  The  Company's  proprietary  mailing
list has been  developed  largely  through  sign-ups by  customers in its retail
stores rather than through active  prospecting.  Big Dogs'  proprietary  mailing
list has over 700,000 active customer names. The Company's catalog sales in 1998
were approximately $4.9 million, or approximately 5% of total net sales.

         WHOLESALE. During 1998, the Company sold to over 600 wholesale accounts
throughout  the  United  States.  The  Company's  wholesale  sales in 1998  were
approximately $2.7 million, or approximately 3% of total net sales.

         INTERNET.  In November 1998, the Company enhanced its corporate website
to offer a few products for sale through  Yahoo  Shopping.  Although  1998 sales
were limited, the Company believes it has significant opportunities for internet
sales  because of the  Company  focus on graphics  and apparel  that is not only
character-driven but basic in design and therefore easy to describe. The Company
also believes the internet will enhance its product  distribution  by increasing
access  to  customers  who do not  generally  visit  outlet  centers  where  the
Company's stores are primarily  located.  The Company is also positive about the
profitability potential on the internet,  especially since Big Dogs owns its own
brand and controls its pricing and distribution.

         INTERNATIONAL.  Big  Dogs'  sales  outside  of the  United  States  are
currently  limited to three retail  stores in England and Canada and  incidental
other   sales.   The  Company   plans  to  expand  the  sale  of  its   products
internationally  through efficient,  profitable and brand-enhancing means, which
may vary by country and may  include  retail  stores,  exporting  to  resellers,
licensing, catalog and internet sales.

         OTHER BRAND  LEVERAGING.  Big Dogs  intends to  carefully  evaluate and
pursue   opportunities  to  leverage  the  power  of  the  BIG   DOGS-Registered
Trademark-brand  through  various  activities that are consistent with the brand
image,  which may include  selective product  licensing,  co-branding (such as a
current  co-branding  program  for ski jackets  with  Columbia  Sportswear)  and
entertainment and media activities.

SOURCING

         DOMESTIC  AND  INTERNATIONAL  SOURCING.  The  Company  does  not own or
operate  any   manufacturing   facilities  and  sources  its  products   through
third-party  contractors  with  manufacturing   facilities  that  are  primarily
overseas.  The Company believes that outsourcing allows it 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 the Company to leverage working  capital,  transfer risk and
focus its energy and resources on merchandising, marketing and sales.

         Big Dogs' domestic  sourcing is primarily  limited to graphic T-shirts.
During the first  quarter of 1998,  the Company  moved  in-house the bulk of its
graphic T-shirt business, that had previously been provided by Fortune Fashions,
a commonly controlled  company.  This includes management of screen printing and
blanks, but not screen- printing operations.

         The  majority of Big Dogs' other  products are  manufactured  overseas,
primarily in Asia. In order to reduce the Company's exposure to production risks
and delays arising from trade  disputes,  political  disruption or other factors
relating to any one vendor or country,  the Company  utilizes a diverse group of
vendors.  Big Dogs sources product from approximately 100 unaffiliated  vendors,
including over 35 foreign  vendors in a number of countries,  with a significant
portion being produced by contractors with manufacturing facilities in China. In
order to enhance its sourcing  flexibility,  the Company uses purchasing  agents
rather than operate its own foreign  sourcing  office.  These agents  assist the
Company in selecting and overseeing  third-party  vendors,  sourcing  fabric and
monitoring quotas and other trade regulations.  The Company does not have supply
contracts with any of its suppliers.  Although the loss of major suppliers could
have a significant  effect on the Company's  immediate  operating  results,  the
Company believes  alternate  sources of merchandise for most product  categories
are  available at comparable  prices and that it could  replace these  suppliers
without any long-term adverse effect on the Company.

         The  Company  forecasts  production  requirements  to secure  necessary
manufacturing  capacity and quota. Since the Company's foreign manufacturers are
located at greater  geographic  distances  from the  Company  than its  domestic
manufacturers,  the Company  generally  allows  greater  lead-times  for foreign
orders.  However,  due to the Company's focus on widely  available basics rather
than  fashion  items,  the  Company  believes  these lead  times do not  present
significant risks.

         QUALITY CONTROL.  The Company's  quality control program is designed to
ensure that all goods bearing BIG DOGS-Registered  Trademark-trademarks meet the
Company's  standards.  With respect to its  products,  the Company,  through its
employees and sourcing agents,  develops and inspects prototypes of each product
prior to manufacture.  For apparel products, the Company,  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.
The Company or its sourcing  agents  inspect the final product prior to shipment
to the Company's warehouse or at the warehouse prior to payment.

MANAGEMENT INFORMATION SYSTEMS

         The  Company is  committed  to  utilizing  technology  to  enhance  its
competitive  position.  The Company has 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 its
stores and customers and improve the  integration and efficiency of its domestic
and foreign sourcing  operations.  Big Dogs' MIS system 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
Novell  server  network and  utilize  Island  Pacific  software.  The  Company's
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 and e-mail 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.
The Company evaluates  information  obtained through daily polling,  including a
daily tracking of gross margin, to implement  merchandising  decisions regarding
reorders,  markdowns  and  allocation  of  merchandise.  Wholesale  and  catalog
operations  are also supported by MIS  applications  from  established  vendors,
designed  specifically to meet the unique  requirements of these segments of the
business.  These  applications  include  customer  service phone  center,  order
processing and mailing list maintenance.

ALLOCATION AND DISTRIBUTION OF MERCHANDISE

         Allocation  and  distribution  of the Company's  inventory is performed
centrally  at  the  store,  merchandise  classification  and  SKU  levels  using
integrated third-party software.  Utilizing its MIS capabilities,  the Company's
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 the Company's retail
stores.  The  Company  is  currently  implementing  fuller  utilization  of  its
merchandising  information systems to capitalize on regional and seasonal trends
and on individual store characteristics.

         In early 1998, Big Dogs maintained two distribution  facilities: a main
facility of approximately 67,000 square feet located in Commerce, California and
a mail order warehouse and fulfillment  facility of approximately  21,000 square
feet in Ventura,  California.  In January 1998, the Company  consolidated  these
operations  into a new  136,000  square-foot  distribution  facility in Santa Fe
Springs,  California.  All  merchandise  is  delivered  by  vendors  to this new
facility, where it is inspected,  entered into the Company's allocation software
system,  picked and boxed for shipment to the stores or  customers.  The Company
ships  merchandise  to its stores at least  weekly,  to provide a steady flow of
merchandise.

TRADEMARKS

         The Company utilizes a variety of trademarks  which it owns,  including
the  U.S.  registered  trademarks  BIG  DOGS-Registered   Trademark-,   BIG  DOG
SPORTSWEAR-Registered  Trademark-and  dog logo and the  trademarks  BIG DOG-TM-,
LITTLE  BIG  DOGS-TM-  and  BIG BIG  DOGS-TM-.  In  addition,  the  Company  has
registered certain of its trademarks or has registration applications pending in
over  14  other  countries.   The  Company  regards  its  trademarks  and  other
proprietary  rights as valuable  assets and believes that they have  significant
value in the marketing of its products.  From time to time the Company discovers
products  in the  marketplace  that  the  Company  believes  infringe  upon  its
trademark  rights.  The  Company  vigorously  protects  its  trademarks  against
infringement,   including   through  the  use  of  cease  and  desist   letters,
administrative proceedings and lawsuits.

COMPETITION

         Although the level and nature of competition differ among the Company's
product  categories,  the Company  competes  primarily on the basis of its brand
image,  offering a unique  combination  of quality,  value and fun, and on other
factors  including product  assortment,  price,  store location and layout,  and
customer  service.  The markets for each of the  Company's  products  are highly
competitive.  The Company believes that its long-term  competitive position will
depend  upon its  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.  Although  the  Company  believes it does not
compete  directly  with any single  company  with respect to its entire range of
merchandise,   within  each  merchandise  category  the  Company  competes  with
well-known  apparel and specialty retail companies such as The GAP, Eddie Bauer,
Warner  Brothers  Stores and The  Disney  Stores,  as well as a large  number of
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.  Many of Big Dogs'
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.

EMPLOYEES

         At March 8, 1999, the Company had  approximately  550 full-time and 650
part-time employees.  The number of part-time employees fluctuates significantly
based  on  seasonal  needs.  None of the  Company's  employees  are  covered  by
collective  bargaining  agreements and the Company  considers its relations with
its employees to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth  below are the  names,  ages,  titles  and  present  and past
positions of persons serving as executive officers of the Company as of March 8,
1999:

       NAME               AGE                            POSITION
------------------        ---               ----------------------------------
Andrew D. Feshbach         38               President, Chief Executive Officer
                                             and Director
Douglas N. Nilsen          50               Executive Vice President-
                                             Merchandising
Anthony J. Wall            43               Executive Vice President-
                                             Business Affairs, General Counsel
                                             and Secretary
Andrew W. Wadhams          38               Executive Vice President - Retail
Roberta J. Morris          39               Chief Financial Officer, Treasurer
                                             and Assistant Secretary

     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 June
1992 until May 1997, Mr. Feshbach also served as Chief Financial  Officer of the
Company. Mr. Feshbach co-founded Fortune Fashions Inc. ("Fortune  Fashions"),  a
custom  manufacturer of embellished  apparel (See Item 1. "Business - Sourcing")
in 1991 and has  served 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  serves as a director of The Right  Start,  Inc.,  an
infant products  retailer and catalog company.  Mr. Feshbach has an M.B.A.  from
Harvard University.

     DOUGLAS  N.  NILSEN  joined the  Company in October  1995 and has served as
Executive Vice  President--Merchandising  since December 1995. From October 1995
until  December  1995, he served as Senior Vice  President of the Company.  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.  From 1976 to 1990,
Mr.  Nilsen  was  employed  by Macy's  California  in various  capacities,  most
recently as Vice President of  Merchandising  in both the  Accessories and Men's
Divisions. Mr. Nilsen has an M.B.A. from New York University.

     ANTHONY J. WALL  joined the  Company  in  September  1994 and has served as
Executive Vice President since March 1996. He has also served as General Counsel
and  Secretary of the Company since  September  1994. He served as a director of
the Company  from  November  1995 until  September  1997 and also as Senior Vice
President from  September 1994 until March 1996.  From 1981 until 1994, Mr. Wall
practiced as an attorney with Gibson, Dunn & Crutcher and, from 1990 until 1994,
was a partner in the corporate  department of that firm. Mr. Wall also serves as
General Counsel of Fortune Fashions and Vice President of Fortune Financial. Mr.
Wall has a J.D. from the University of Southern California.

     ANDREW  W.  WADHAMS  joined  the  Company  in August  1996 as  Senior  Vice
President--Retail  and has  served as  Executive  Vice  President--Retail  since
January,  1999.  From  January  1994 to June 1996,  Mr.  Wadhams  served as Vice
President of Retail  Operations of  Imaginarium,  Inc., a retailer of children's
games and  educational  items.  From 1986 to  November  1993,  Mr.  Wadhams  was
employed  in  various  capacities  by The Gap  Inc.  in its  Gap,  GapKids,  Gap
International  and  Banana  Republic   divisions,   most  recently  as  Regional
Manager--Retail Operations of Banana Republic from 1991 to 1994.
<PAGE>
         ROBERTA J.  MORRIS  joined the Company in August 1993 and has served as
Chief Financial  Officer since March 1, 1998, having previously served as Senior
Vice President--Finance since January 1995 and as Vice President--Finance of the
Company from August 1993 to January 1995.  From 1988 to August 1993,  Ms. Morris
was employed by Deloitte & Touche LLP, a national  accounting firm, serving as a
Senior  Manager from August 1992 until August  1993.  Ms.  Morris is a certified
public accountant.

ITEM 2.  PROPERTIES

         The Company's  corporate  headquarters are in leased offices comprising
approximately  13,897  square  feet in Santa  Barbara,  California,  which lease
expires  July 2004,  with an option to extend for  another 5 years.  The Company
also occupies  additional office and storage space of approximately 9,000 square
feet under a lease that expires July 31, 1999,  and is  negotiating  a lease for
approximately  10,000  square feet in Santa  Barbara into which it will relocate
such  operations.  The  Company's  distribution  facility is located in Santa Fe
Springs,  California in a building comprising  approximately 136,000 square feet
under a lease that expires in January 2008.  The Company has an option to extend
this lease for five years.

         The Company  currently leases all of its store locations.  Store leases
are  typically  for a term of 5 years with a 5-year  option and provide for base
rent  plus  contingent  rent  based  upon a  percentage  of sales in  excess  of
agreed-upon sales levels.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is involved from time to time in  litigation  incidental to
its business.  Management  believes  that the outcome of the current  litigation
will not have a material  adverse  effect upon the  financial  statements of the
Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

         Not applicable.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         SHAREHOLDER MATTERS

         The common stock of the Company is traded on the NASDAQ National Market
under the symbol BDOG. The following  table sets forth,  for the period from the
Company's  initial public offering  through  December 31, 1998, the high and low
"sales"  price of the shares of Common Stock of the Company,  as reported on the
NASDAQ National Market. 
<TABLE>
<CAPTION>
                                           1998                      1997
                                    ----------------         ----------------
                                      High     Low              High      Low
                                    -------  -------         --------    -----
<S>                                 <C> <C>  <C> <C>
First Quarter                       $ 7 1/2  $ 4 1/2            n/a       n/a
Second Quarter                        7 1/2    4 1/2            n/a       n/a
Third Quarter
(commencing September 24, 1997)       5 5/8    2 7/8         $ 15 3/4    $ 14
Fourth Quarter                        6 1/8    2 1/8           14 3/8       5
</TABLE>

         On March 8, 1999,  the last sales price of the Common Stock as reported
on the NASDAQ National Market was $4 13/16 per share. As of March 8, 1999, there
were approximately 149 shareholders of record of the Company's Common Stock.

         The Company paid no dividends in 1997 and 1998. In February  1999,  the
Board  of  Directors  approved  an  annual  discretionary  cash  dividend  to be
determined by the Board each year based on the Company's year-end sales results.
The first such annual dividend was declared in the amount of $0.10 per share and
paid in March 1999.  The future amount and payment of such annual  dividend will
be at the  discretion of the Board and will depend upon the Company's  earnings,
capital requirements,  financial condition and other factors considered relevant
by the Board.

1998 Sales of Unregistered Securities
-------------------------------------

         On April 1 and May 21,  1998,  the Company  sold an aggregate of 24,000
shares  of  common  stock to two  individual  accredited  investors  upon  their
exercise of warrants  that had been issued to them prior to the  Company's  1997
initial  public  offering.  The  purchase  price was $3.00 per share,  for total
consideration  of  $72,000  in  cash.  The  sales  of  the  securities  in  such
transactions were exempt from  registration  under the Securities Act of 1933 by
virtue of Section 4(2). 


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.
<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                  -------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:        1998         1997         1996         1995         1994
                                  ---------    ---------    ---------    ---------    ---------
                                       (in thousands, except per share and operating data)
<S>                               <C>          <C>          <C>          <C>          <C> 
Net sales                         $ 100,677    $  86,181    $  68,683    $  51,541    $  28,404
Cost of goods sold                   41,236       36,328       29,720       21,571       12,857
                                  ---------    ---------    ---------    ---------    ---------
Gross profit                         59,441       49,853       38,963       29,970       15,547
                                  ---------    ---------    ---------    ---------    ---------
 Selling, marketing and
   distribution                      47,809       39,549       32,309       24,814       12,993
 General and administrative           5,276        4,738        3,937        3,167        1,746
                                  ---------    ---------     --------    ---------     --------
   Total operating expenses          53,085       44,287       36,246       27,981       14,739
                                  ---------    ---------     --------    ---------     --------
Operating income                      6,356        5,566        2,717        1,989          808
Interest (income) expense              (350)       1,268        1,647        1,189          397
                                  ---------    ---------     --------    ---------     --------
Income before provision for
 income taxes                         6,706        4,298        1,070          800          411
Provision for income taxes            2,674        1,633          435          162           19
                                  ---------    ---------     --------    ---------     --------
Net income                        $   4,032    $   2,665     $    635    $     638     $    392
                                  =========    =========     ========    =========     ========
Net income per share
 Basic and diluted                $    0.32    $    0.24     $   0.06    $    0.07     $   0.04
                                  =========    =========     ========    =========     ========
Weighted average common shares
 Basic                               12,472       10,965        9,978        9,503        9,000
 Diluted                             12,509       11,187       10,049        9,503        9,000

OPERATING DATA:
Number of stores: (1)
 Stores open at beginning of 
  period                                150          121           91           51           16
 Stores added (net of closures           27           29           30           40           35
                                   --------    ---------      -------     --------     --------
 Stores open at end of period           177          150          121           91           51
Comparable stores sales increase
  (decrease)(2)                         0.6%         6.6%         3.5%         8.2%        (0.9%)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                          YEARS ENDED DECEMBER 31,
                           -----------------------------------------------------
                           1998        1997        1996         1995        1994
                           ----        ----        ----         ----        ----
                                           (amounts in thousands)
BALANCE SHEET DATA:
<S>                     <C>         <C>         <C>           <C>        <C>
Working capital         $30,348     $35,468     $13,742       $8,030     $ 3,072

Total assets             52,994      52,584      25,773       19,011      13,647

Total indebtedness (3)        0           0      15,697       10,732       6,141

Stockholders' equity     43,187      45,541       6,142        4,737       3,094
</TABLE>

   (1) Excludes two temporary  stores open for a portion of 1995, four temporary
   stores open for a portion of 1996, and one temporary store open for a portion
   of 1998.

   (2)  Comparable  store sales  represent net sales of stores open at least one
   full  year.  Effective  December  31,  1997,  the  Company  changed  the  way
   comparable store sales were calculated, and for comparison purposes all prior
   years have been restated.  Stores are considered  comparable beginning on the
   first day of the third 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  change to this  method  did not
   significantly  affect previously reported comparable store sales percentages.
   The Company  believes  this  method  better  reflects  the effect of one-time
   promotional events and is more consistent with industry methods.

   (3) Includes subordinated debt, obligations under the bank line of credit and
   obligations  under  capital  leases.  All  indebtedness  was  paid off with a
   portion  of the  proceeds  from the  Company's  initial  public  offering  in
   September 1997.

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 Dogs develops,  markets and retails a branded, lifestyle collection
of unique, high-quality, popular-priced consumer products, including activewear,
casual sportswear, accessories and gifts. The number of Company stores has grown
from 5 in 1993 to 177 as of December 31, 1998.

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:
<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                         ---------------------------------------
                                          1998             1997            1996
                                         ------           ------          ------
<S>                                      <C>              <C>             <C>
Net sales..........................      100.0%           100.0%          100.0%
Cost of goods sold.................       41.0             42.2            43.3
                                         -----            -----           -----

Gross profit.......................       59.0             57.8            56.7

Selling, marketing and distribution
  expenses.........................       47.5             45.9            47.0
General and administrative expenses        5.2              5.5             5.7
                                         -----            -----           -----

Total operating expenses...........       52.7             51.4            52.8
                                         -----            -----           ------

Income from operations.............        6.3%             6.5%            4.0%
</TABLE>

<PAGE>

YEARS ENDED DECEMBER 31, 1998 AND 1997

         NET  SALES.  Net sales  consist  of sales  from the  Company's  stores,
catalog,  and wholesale accounts,  all net of returns and allowances.  Net sales
increased to $100.7  million in 1998 from $86.2 million for 1997, an increase of
$14.5  million,  or 16.8%.  Of the $14.5  million  increase,  $13.3  million was
attributable to stores not yet qualifying as comparable  stores and $0.5 million
came from the 0.6% comparable store sales increase for the period. Additionally,
non-retail  sales  increased by $0.7  million for the year.  The increase in net
sales in 1998 was  attributable to continued  growth in the number of stores and
in the children's and big-size apparel categories.  The Company's  categories of
children's and big-size apparel products continued to increase to 43.1% of total
retail net sales from 41% of total retail net sales in 1997.

         GROSS  PROFIT.  Gross profit  increased  to $59.4  million in 1998 from
$49.9 million for 1997, an increase of $9.5 million,  or 19.0%.  As a percentage
of net sales,  gross profit  increased to 59.0% in 1998 from 57.8% in 1997. This
increase  as a  percentage  of net sales was  primarily  attributable  to better
sourcing of certain key products.  Also contributing to the percentage  increase
were continued improvements in merchandising, planning and allocation, which led
to better product sell-throughs and less markdowns.

         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 $47.8 million in 1998 from $39.5 million in
1997, an increase of $8.3 million, or 21.0%. As a percentage of net sales, these
expenses  increased  to 47.5% in 1998 from  45.9% in 1997.  In early  1998,  the
Company moved its distribution center to a larger facility in order to build the
infrastructure  necessary  to  accommodate  growth.  During the first and second
quarters of 1998,  the Company did not realize this growth and,  therefore,  the
Company incurred a decrease in operating leverage.  Subsequently,  controls were
put in place and  improvements  were made in the third  quarter.  In the  fourth
quarter of 1998, the Company's selling,  marketing and distribution  expense was
38.3% of net sales as compared to 38.5% for the same period in 1997.

         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 $5.3
million in 1998 from $4.7 million in 1997. As a percentage  of net sales,  these
expenses decreased to 5.2% in 1998 from 5.5% in 1997, reflecting the leverage of
spreading them over a larger revenue base.

         INTEREST INCOME AND EXPENSE.  Interest income increased to $0.4 million
in 1998 from $1.3  million in interest  expense in 1997.  In October  1997,  the
Company's  initial  public  offering  closed  and all  debt  was paid off with a
portion of the net proceeds. Cash was held in a money market fund.

YEARS ENDED DECEMBER 31, 1997 AND 1996

         NET  SALES.  Net sales  increased  to $86.2  million in 1997 from $68.7
million for 1996, an increase of $17.5 million,  or 25.5%.  Of the $17.5 million
increase,  $13.4  million  was  attributable  to stores  not yet  qualifying  as
comparable  stores and $3.8  million came from the 6.5%  comparable  store sales
increase  for the  period.  Additionally,  non-retail  sales  increased  by $0.3
million  for  the  year.  The  increase  in net  sales  in  1997  was  primarily
attributable  to continued  improvements  in store  operations and the Company's
merchandise assortments and in-stock positions as a result of better utilization
of the merchandise  planning and allocation  systems.  In particular,  continued
strong growth in the Company's  recently  introduced  categories of  children's,
big-size apparel and non-apparel  products  increased to 41% of total retail net
sales from 34% of total retail net sales in 1996.

         GROSS  PROFIT.  Gross profit  increased  to $49.9  million in 1997 from
$39.0 million for 1996, an increase of $10.9 million,  or 27.9%. As a percentage
of net sales,  gross profit  increased to 57.8% in 1997 from 56.7% in 1996. This
increase  as a  percentage  of net sales was  primarily  attributable  to better
sourcing of certain key products.  Also contributing to the percentage  increase
were continued improvements in merchandising,  planning and allocation which led
to better product sell-throughs and less markdowns in the fourth quarter 1997 as
compared to the same period in 1996.

         SELLING,  MARKETING AND DISTRIBUTION EXPENSES.  Selling,  marketing and
distribution  expenses  increased to $39.5 million in 1997 from $32.3 million in
1996, an increase of $7.2 million, or 22.3%. As a percentage of net sales, these
expenses decreased to 45.9% in 1997 from 47.0% in 1996, primarily as a result of
operational  efficiencies  gained from previous  infrastructure  investments and
spreading them over a larger revenue base.

         GENERAL  AND  ADMINISTRATIVE   EXPENSES.   General  and  administrative
expenses  increased  to $4.7  million in 1997 from $3.9  million  in 1996.  As a
percentage of net sales,  these expenses  decreased to 5.5% in 1997 from 5.7% in
1996, reflecting the leverage of spreading them over a larger revenue base.

         INTEREST  EXPENSE,  NET.  Interest  expense,  net of  $0.2  million  of
interest income in 1997,  decreased to $1.3 million in 1997 from $1.6 million in
1996,  a  decrease  of  $0.3  million.  The  decrease  is due to the  payoff  of
indebtedness  from a portion of the proceeds from the Company's  initial  public
offering in September 1997.

SEASONALITY AND QUARTERLY RESULTS

         The Company  believes its  seasonality is somewhat  different than many
apparel retailers since a significant number of the Company's 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 the  Company's  annual net sales and
profits. In 1998,  excluding sales generated by stores not open for all of 1998,
substantially  all the Company's  operating income and approximately 28% and 35%
of the Company's net sales were generated  during the third and fourth quarters,
respectively.  In  addition,  the Company has  historically  incurred  operating
losses in its first  quarter  and  anticipates  that it will  continue  to do so
during the first quarter of each year for the foreseeable future.

         The Company's  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.

LIQUIDITY AND CAPITAL RESOURCES

         During 1998, the Company's  primary uses of cash were for the build-out
of  its  new  distribution  facility,   new  stores,   purchase  of  merchandise
inventories,  payment  of income  taxes,  and  stock  repurchases.  The  Company
satisfied its cash  requirements  primarily  from cash flow from  operations and
excess  cash in 1998.  In 1997,  the  Company  satisfied  its cash  requirements
primarily  from  the  proceeds  from the  sale of debt  and  equity  securities,
including  its initial  public  offering that netted  proceeds of  approximately
$35.6  million.  Approximately  $21.5  million of the net proceeds  were used to
repay  subordinated debt,  short-term  borrowings and capital lease obligations.
Remaining proceeds were used for general corporate purposes and working capital.
In March  1998,  the  Company's  Board of  Directors  authorized  the Company to
repurchase up to $10 million of its common stock.  As of December 31, 1998,  the
Company had repurchased 1,083,200 shares for $6,494,000.

         Cash provided by operating activities was $3.1 million and $7.3 million
in 1998 and 1997, respectively.  The $4.2 million decrease in cash provided from
operations is primarily attributable to the increase in inventories. At December
31,  1998  and  1997   inventories   were  $23.3  million  and  $16.7   million,
respectively.  The 1998 increase is  attributable  to opening 27 net new stores,
forward inventory  purchases as well as increased inventory levels purchased for
use  in  the  management  of the  graphic  T-shirt,  mail  order  and  wholesale
businesses.

         Cash used in  investment  activities  in 1998 and 1997 was $6.8 million
and $5.3 million, respectively.  Cash flows used in investment activities during
1998  related  primarily to the  build-out of 27 net new store  openings and the
Company's  new  distribution  facility of  approximately  $3.2  million and $1.6
million,  respectively.  Cash used in financing  activities during 1998 was $6.4
million  compared to cash  provided by  financing  activities  of $20.8  million
during  1997.  In 1998 the Company  repurchased  1,083,200  shares of its common
stock.  In 1997,  the Company  received  approximately  $35.6  million  from its
initial  public  offering,   repaid  subordinated  debt,  its  revolving  credit
facility,  and capital  lease  obligations  and  received  $0.7 million from the
exercise of stock options and warrants.

         The Company has a borrowing arrangement with a bank whereby the Company
may, from time to time and upon approval from the bank, borrow up to $8 million.
Such  borrowings  may be used for cash  advances  and  letters  of  credit.  The
borrowing  arrangement  provides for interest at the bank's prime rate less 3/8%
or 250 basis points over the LIBOR rate and is  collateralized  by substantially
all the assets of the  Company.  As of  December  31,  1998,  the Company had no
advances and $1.1 million of letters of credit outstanding.

         In 1998,  the  Company's  average cost to build a new store,  including
leasehold  improvements,  furniture  and fixtures and landlord  allowances,  was
approximately  $103,000. The average total cost to build new stores will vary in
the future,  depending on various factors,  including square footage, changes in
store design,  local construction costs and landlord  allowances.  The Company's
average  initial  inventory  for new  stores  opened  in 1998 was  approximately
$67,000.  The Company's initial inventory for new stores will vary in the future
depending on various  factors,  including store concept and square footage.  The
Company  believes  that its  existing  cash  balances  and cash  generated  from
operations  will be  sufficient  to fund its  operations  and planned  expansion
through 1999.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure  those  instruments  at fair value.  The Company will adopt
SFAS No. 133 in the year ending December 31, 2000. The Company  anticipates that
the  adoption of SFAS No. 133 will not have a material  impact on the  Company's
financial statements.

YEAR 2000

         The Year 2000 issue is the result of computer programs being written to
use two digits to define year dates.  Computer  programs running  date-sensitive
software  may  recognize a date using "00" as the year 1900 rather than the year
2000.  This  could  result  in  systems  failure  or   miscalculations   causing
disruptions of operations.

         In March  1999,  the  Company  completed  the  upgrading  of its  major
software  systems  to a new  release  which  has  been  certified  as Year  2000
compliant.  The Company has substantially  completed the internal testing of its
information technology systems and will continue to monitor such systems through
the  summer  of  1999.   The  Company   has  also   addressed   internally   its
non-information  technology  related systems and believes that there is expected
to be no significant  operational problems relating to the Year 2000 issues. The
costs of the  Company's  year 2000  compliance  project  are not  expected to be
material to the Company's financial position.

         The Company has requested all third-party  vendors to certify year 2000
compliance.  The  Company  does not expect any  material  adverse  impact on its
business  operations  by the  failure  of any of its  vendors  to  complete  any
required changes related to the year 2000 date conversion.

INFLATION

         The Company does not believe that  inflation has had a material  effect
on  operations  in the past year.  However,  there can be no assurance  that the
Company's business will not be affected by inflation in the future.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

         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 the Company's 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  and costs,  the impact of year 2000  compliance  and  inflation
risks.  Uncertainties  to which the foregoing and other aspects of the Company's
business may be subject  include those discussed below in regard to factors that
may effect quarterly results discussed below, the factors affecting the costs of
building new stores,  and other risks and  uncertainties  discussed  below.  All
forward-looking statements in this document are based upon information available
to the Company on the date  hereof,  and the Company  assumes no  obligation  to
update any such forward-looking statements. Notwithstanding the Company's growth
in sales and profitability  during recent periods, the Company faces significant
risks and, as a result,  there can be no assurance that the Company's historical
growth will be indicative of future performance.

         Other factors that could cause actual results to differ materially from
the forward-looking  statements  contained in this report, as well as affect the
registrant's ability to achieve its financial and other goals,  include, but are
not limited to, the following:

         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 the Company  believes its products
historically  have  not been  significantly  affected  by  fashion  trends,  the
Company's products are subject to changing consumer  preferences.  The Company's
success will depend  significantly on its ability to continue to produce popular
graphics and products that  anticipate,  gauge and respond in a timely manner to
changing  consumer demands and preferences.  In addition,  consumer  preferences
could  shift  away from the  Company's  traditional  graphic  and  logo-oriented
merchandise.

         ABILITY TO ACHIEVE FUTURE GROWTH.  The Company's  continued growth will
depend to a significant degree on its ability to open and operate profitable new
stores,  to  increase  net sales and  profitability  of the  Company's  existing
stores,  and to expand its other  sources of revenue.  There can be no assurance
that new stores will achieve  sales and  profitability  levels  consistent  with
existing  stores.  The  Company's  retail  expansion is dependent on a number of
factors,  including the Company's  ability to locate and obtain  favorable store
sites,  and to negotiate  acceptable  lease terms. In addition,  there can be no
assurance  that the Company's  strategies to increase  other sources of revenue,
which  may  include  expansion  of its  catalog  business,  wholesale  business,
internet business, corporate sales, international sales, licensing,  co-branding
and media and entertainment activities, will be successful or that the Company's
overall sales or profitability  will increase or not be adversely  affected as a
result of any such expansion.

         DEPENDENCE   ON  KEY   PERSONNEL.   The   success  of  the  Company  is
significantly  dependent on the performance of its key management,  particularly
Chief    Executive     Officer    Andrew    Feshbach    and    Executive    Vice
President--Merchandising, Doug Nilsen.

         DEPENDENCE ON THIRD-PARTY AND FOREIGN  MANUFACTURERS.  The Company does
not own or operate any  manufacturing  facilities and is therefore  dependent on
third parties for the manufacture of its products.  The loss of major suppliers,
or the failure of such suppliers to timely delivery the Company's products or to
meet the  Company's  quality  standards,  could  adversely  affect the Company's
ability to deliver products to its customers in a timely manner.

         The majority of the Company's  products are purchased from vendors with
manufacturing  facilities  located outside the United States,  primarily in Asia
and particularly in China. The Company's  operations could be adversely affected
by events that result in disruption of trade from foreign countries in which the
Company's suppliers are located.

         The  Company's  staff or  agents  periodically  visit and  observe  the
operations of its foreign and domestic  manufacturers,  but the Company does not
control  such  manufacturers  or their labor  practices.  Therefore  the Company
cannot  necessarily  prevent  legal or  ethical  violations  by its  independent
manufacturers, and it is uncertain what impact such violations would have on the
Company.

         SUBSTANTIAL COMPETITION. The markets for each of the Company's products
are highly  competitive.  The Company  believes that its  long-term  competitive
position will depend upon its 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.

         FACTORS  AFFECTING  STORE TRAFFIC.  The large majority of the Company's
stores are located in tourist areas, tourist-serving areas and outlet malls, and
the Company's  sales depend on a high level of traffic in these  locations.  The
Company,  therefore,  depends on the ability of these tourist  destinations  and
malls to continue to generate a high volume of consumer  traffic in the vicinity
of the  Company's  stores.  Tourism  and outlet mall  traffic  may be  adversely
affected by domestic and  international  economic  downturns,  adverse  weather,
natural  disasters,  changing  consumer  preferences,  highway or surface street
traffic,  the  closing of  high-profile  stores  near the  Company's  stores and
declines in the desirability of the shopping environment in a particular tourist
destination or mall.

         RELIANCE  ON  INFORMATION   SYSTEMS.  The  Company  relies  on  various
information  systems to manage its operations and regularly makes investments to
upgrade, enhance or replace such systems.  Substantial disruptions affecting the
Company's information systems could have an adverse affect on its business.

         CONTROL BY EXISTING  STOCKHOLDERS AND ANTI-TAKEOVER  PROVISIONS.  As of
March 8,  1999,  the  Chairman  of the Board,  Fred  Kayne,  beneficially  owned
approximately 49.6% of the Company's  outstanding Common Stock and the Company's
current  directors and  executive  officers,  including Mr. Kayne,  collectively
beneficially own over 50%. 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 the Company's stockholders.  This concentration of
ownership,  together with the anti-takeover effects of certain provisions of the
Delaware General Corporation Law and the Company's  Certificate of Incorporation
and Bylaws, may have the effect of delaying or preventing a change in control of
the Company,  may  discourage  bids for the Company's  Common Stock at a premium
over  the  market  price  of the  Common  Stock  and may  adversely  affect  the
prevailing market price of the Common Stock.

         VOLATILITY OF STOCK PRICE.  The price of the  Company's  shares has and
may  continue  to  fluctuate   based  upon  a  number  of  factors,   including,
quarter-to-quarter   variations   in  the  Company's   results  of   operations,
fluctuations in the Company's  comparable  store sales, the performance of other
manufacturers and retailers, and the condition of the overall economy.

         DEPENDENCE ON TRADEMARKS.  The Company uses 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. There can be no assurance, however,
that the Company will not be  restricted  in the future  expansion of its use of
its trademarks to certain new, non-apparel product categories.
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company  does not believe it has  material  exposure to losses from
market-rate  sensitive  instruments.  The Company has not invested in derivative
financial  instruments.  The  Company has a  borrowing  arrangement  with a bank
whereby  the Company may borrow at a floating  rate.  See "Item 7.  Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Liquidity  and Capital  Resources."  The  Company had no  borrowings
under this arrangement as of December 31, 1998 and 1997, respectively.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See "Index to  Consolidated  Financial  Statements" at Item 14(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.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         See  "Executive  Officers"  in Part I,  Item 1 hereof  for  information
regarding the executive officers. 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.

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

         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 AND RELATED TRANSACTIONS

         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.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K

(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.  Financial   statement  schedules  are  omitted  because  they  are  not
applicable or the required  information is shown in the financial  statements or
notes thereto.

     3. Exhibits included or incorporated herein: See "Index to Exhibits."

(b)      

     Reports on Form 8-K.

     There  were no reports  on Form 8-K filed  during  the last  quarter of the
fiscal year covered by this report.
<PAGE>

         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 29, 1999 on its behalf by the undersigned, thereunto duly authorized.

                                           BIG DOG HOLDINGS, INC.

                                           By /s/ANDREW D. FESHBACH
                                              ---------------------  
                                           Andrew D. Feshbach
                                           Chief 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,      March 29, 1999
---------------------                  President and  Director
Andrew D. Feshbach                     (Principal Executive 
                                       Officer)

/s/ROBERTA J. MORRIS                Chief Financial Officer,      March 29, 1999
---------------------                  Treasurer and Assistant
Roberta J. Morris                      Secretary (Principal 
                                       Financial and Accounting
                                       Officer)

/s/FRED KAYNE                       Chairman of the Board         March 29, 1999
---------------------
Fred Kayne

/s/STEVEN C. GOOD                   Director                      March 29, 1999
---------------------
Steven C. Good

/s/ROBERT H. SCHNELL                Director                      March 29, 1999
---------------------
Robert H. Schnell

/s/KENNETH A. SOLOMON               Director                      March 29, 1999
---------------------
Kenneth A. Solomon

/s/DAVID J. WALSH                   Director                      March 29, 1999
---------------------
David J. Walsh
<PAGE>

                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                                            PAGE
                                                                            ----
Independent Auditors' Report...........................................      F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997...........      F-3

Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996....................................................      F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................................      F-5

Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................................      F-6

Notes to the Consolidated Financial Statements.........................      F-7
<PAGE>




                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Big Dog Holdings, Inc.:

         We have audited the accompanying consolidated balance sheets of Big Dog
Holdings,  Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, such consolidated  financial statements present fairly,
in all material respects,  the financial position of Big Dog Holdings,  Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Los Angeles, California
March 3, 1999



<PAGE>

                       BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>

<CAPTION>
                                                                           DECEMBER 31
                                                                 ----------------------------
<S>                                                                   <C>               <C>
                                                                     1998            1997
                                                                 ------------    ------------
                                    ASSETS (Note 3)
CURRENT ASSETS:
 Cash and cash equivalents ...................................   $ 13,458,000    $ 23,508,000
 Receivables
  Trade, net .................................................        592,000         457,000
  Other ......................................................        314,000         294,000
 Inventories (Note 7) ........................................     23,345,000      16,714,000
 Prepaid expenses and other current assets ...................        811,000         744,000
 Deferred income taxes (Note 4) ..............................        872,000         144,000
                                                                 ------------    ------------
Total current assets .........................................     39,392,000      41,861,000
PROPERTY AND EQUIPMENT, Net (Note 2) .........................     12,983,000      10,232,000
INTANGIBLE ASSETS, Net........................................         30,000         131,000
OTHER ASSETS .................................................        589,000         360,000
                                                                 ------------    ------------
TOTAL ........................................................   $ 52,994,000    $ 52,584,000
                                                                 ============    ============

                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable (Note 7) ...................................   $  3,494,000    $  2,767,000
 Income taxes payable (Note 4) ...............................      2,621,000       1,395,000
 Accrued expenses and other current liabilities ..............      2,928,000       2,231,000
                                                                 ------------    ------------
Total current liabilities ....................................      9,043,000       6,393,000
DEFERRED RENT (Note 5) .......................................        764,000         650,000
                                                                 ------------    ------------
  Total liabilities ..........................................      9,807,000       7,043,000
                                                                 ------------    ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Notes 6 and 8):
 Preferred stock, $.01 par value, 3,000,000 shares authorized,
  none issued and outstanding ................................   $       --      $       --
 Common stock $.01 par value, 30,000,000 shares authorized,
  13,183,550 and 13,159,550 shares issued at
  December 31, 1998 and 1997, respectively ...................        132,000         132,000
 Additional paid-in capital ..................................     42,296,000      42,224,000
 Retained earnings ...........................................      7,764,000       3,732,000
 Treasury stock, 1,083,200 shares at
   December 31, 1998 .........................................     (6,494,000)           --
 Notes receivable from common stockholders ...................       (511,000)       (547,000)
                                                                 ------------    ------------
   Total stockholders' equity ................................     43,187,000      45,541,000
                                                                 ------------    ------------
TOTAL ........................................................   $ 52,994,000    $ 52,584,000
                                                                 ============    ============
</TABLE>

                 See notes to consolidated financial statements


<PAGE>


                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>

<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                   -------------------------------------------
                                        1998           1997           1996
                                   -------------   ------------   ------------
<S>                                <C>             <C>            <C>         
NET SALES .......................  $ 100,677,000   $ 86,181,000   $ 68,683,000
COST OF GOODS SOLD (Note 7)......     41,236,000     36,328,000     29,720,000
                         -         -------------   ------------    -----------
GROSS PROFIT ....................     59,441,000     49,853,000     38,963,000
                                   -------------   ------------    -----------
OPERATING EXPENSES:
 Selling, marketing and 
   distribution..................      47,809,000    39,549,000     32,309,000
 General and administrative
   (Note 7)......................       5,276,000     4,738,000      3,937,000
                                     ------------  ------------    -----------
  Total operating expenses.......      53,085,000    44,287,000     36,246,000
                                     ------------  ------------    -----------

INCOME FROM OPERATIONS ..........       6,356,000     5,566,000      2,717,000
INTEREST (INCOME) EXPENSE, NET 
   (Note 3)......................        (350,000)    1,268,000      1,647,000
                                     ------------- ------------    -----------

INCOME BEFORE PROVISION FOR
  INCOME TAXES ..................       6,706,000     4,298,000      1,070,000

PROVISION FOR INCOME TAXES
  (Note 4)                              2,674,000     1,633,000        435,000
                                     ------------   -----------    -----------

NET INCOME ......................    $  4,032,000   $ 2,665,000    $   635,000
                                     ============   ===========    ===========
NET INCOME PER SHARE
 BASIC AND DILUTED ..............    $       0.32   $      0.24    $      0.06
                                     ============   ===========    ===========
</TABLE>

                 See notes to consolidated financial statements
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                 NOTES
                                                                                               RECEIVABLE
                                                                                                 FROM
                              COMMON STOCK       ADDITIONAL                  TREASURY STOCK      COMMON
                         ---------------------    PAID-IN      RETAINED     -----------------    STOCK-
                           SHARES      AMOUNT     CAPITAL      EARNINGS     SHARES     AMOUNT    HOLDERS          TOTAL
                         ---------    --------   ----------    ---------    ------    -------  -----------    ------------
BALANCE,
<S>                     <C>          <C>       <C>            <C>           <C>       <C>        <C>            <C>
 JANUARY 1, 1996........ 9,670,000    $ 97,000  $ 4,208,000    $ 432,000                                 --     $  4,737,000
 Common stock issued
  (Note 6) .............   540,550       5,000    1,395,000                                      $ (855,000)         545,000
 Warrants issued .......        --          --      240,000           --                              --             240,000
 Repurchased common 
  stock (Note 6) .......   (50,000)         --     (138,000)          --                            123,000          (15,000)
 Net income ............        --          --           --      635,000                                --           635,000
                        ----------    --------    ---------    ---------                         ----------     ------------
BALANCE,
 DECEMBER 31, 1996 .... 10,160,550     102,000    5,705,000    1,067,000                           (732,000)       6,142,000
 Common stock issued ..  2,800,000      28,000   35,548,000           --                                          35,576,000
 Options exercised ....     55,000       1,000      170,000           --                                 --          171,000
 Warrants exercised ...    144,000       1,000      551,000           --                                 --          552,000
 Collections of notes
  receivable .........          --          --           --           --                            185,000          185,000
 Tax benefits related
  to exercise of stock
  options (Note 6) ....         --          --      250,000           --                                 --         250,000
 Net income ...........         --          --           --    2,665,000                                 --       2,665,000
                        ----------     -------    ---------    ---------                          ---------     ------------
BALANCE,
 DECEMBER 31, 1997...   13,159,550      132,000  42,224,000    3,732,000                           (547,000)     45,541,000
 Warrants exercised         24,000           --      72,000           --                                 --          72,000
 Repurchased common
  stock (Note 6) ....           --           --          --           --    1,083,200 $(6,494,000)       --      (6,494,000)
 Collections of notes 
  receivable.........           --           --          --           --                             36,000          36,000
 Net income .........           --           --          --    4,032,000           --         --         --       4,032,000
                        ----------    ---------  ----------   ----------    --------- -----------  --------    ------------

BALANCE,
 DECEMBER 31, 1998 ..   13,183,550    $ 132,000 $42,296,000   $7,764,000    1,083,200 $(6,494,000) $(511,000)  $ 43,187,000
                        ==========    ========= ===========   ==========    ========= ===========  =========   ============
</TABLE>
                See notes to consolidated financial statements.
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31
                                                                               ------------------------------------------
                                                                                   1998            1997           1996
CASH FLOWS FROM OPERATING ACTIVITIES:                                          -----------    ------------  -------------
<S>                                                                           <C>             <C>           <C>
  Net income...............................................................   $  4,032,000    $  2,665,000   $    635,000
  Adjustments to reconcile net income to net cash provided by (used in)
    operating activities:
    Depreciation and amortization..........................................      3,752,000       2,620,000      1,931,000
    Provision for losses on receivables....................................         26,000          25,000        174,000
    Loss on disposition of property and equipment..........................        123,000          37,000         35,000
    Deferred income taxes..................................................       (728,000)            ---         80,000
    Changes in operating assets and liabilities:
      Receivables..........................................................       (181,000)        194,000       (387,000)
      Inventories..........................................................     (6,631,000)     (1,311,000)    (4,577,000)
      Prepaid expenses and other assets....................................        (67,000)       (266,000)       (45,000)
      Accounts payable.....................................................        727,000       1,532,000       (641,000)
      Income taxes payable.................................................      1,226,000       1,245,000         35,000
      Accrued expenses and other current liabilities.......................        697,000         420,000        740,000
      Deferred rent........................................................        114,000         162,000        258,000
                                                                               -----------      ----------    -----------
        Net cash provided by (used in) operating activities................      3,090,000       7,323,000     (1,762,000)
                                                                               -----------      ----------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures.....................................................     (6,508,000)     (5,285,000)    (3,377,000)
  Proceeds from sale of property and equipment.............................         13,000             ---            ---
  Other....................................................................       (259,000)        (23,000)      (108,000)
                                                                               ------------    -----------    ------------
        Net cash used in investing activities..............................     (6,754,000)     (5,308,000)    (3,485,000)
                                                                               ------------    -----------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock...................................            ---      35,576,000        545,000
  Repurchase of common stock...............................................     (6,494,000)            ---        (15,000)
  Proceeds from issuance of warrants.......................................            ---             ---        114,000
  Proceeds from exercise of options........................................            ---         171,000            ---
  Proceeds from exercise of warrants.......................................         72,000         552,000            ---
  Collection of notes receivable...........................................         36,000         185,000            ---
  Proceeds from subordinated debt..........................................            ---             ---      7,900,000
  Principal repayments of subordinated debt................................            ---      14,400,000)    (1,774,000)
  Principal repayments under capital lease obligations.....................            ---      (1,314,000)      (344,000)
  Short-term borrowings, net...............................................            ---             ---     (1,225,000)
                                                                               -----------      ----------    -----------
        Net cash (used in) provided by financing activities................     (6,386,000)     20,770,000      5,201,000
                                                                               -----------      ----------    -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                           (10,050,000)     22,785,000        (46,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...............................     23,508,000         723,000        769,000
                                                                                ----------      ----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.....................................    $13,458,000     $23,508,000    $   723,000
                                                                               ===========     ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for:
    Interest...............................................................   $     42,000      $ 1,659,000   $ 1,521,000
    Income taxes...........................................................   $  2,176,000      $   388,000   $   367,000
</TABLE>

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

         The Company  entered  into  capital  lease  obligations  of $18,000 and
$533,000 for equipment for the years ended 1997 and 1996, respectively.

         In 1997 the Company recorded an increase to additional  paid-in-capital
of  $250,000   related  to  tax  benefits   associated   with  the  exercise  of
non-qualified stock options (see Note 6).

         In 1996, the Company refinanced $138,000 of capital lease obligations.

         In 1996, a stockholder converted $2,226,000 of short-term  subordinated
debt to  $2,100,000  of  long-term  subordinated  debt and  warrants  valued  at
$126,000.

         In July  1996,  certain  key  employees  and other  individuals  issued
$855,000  of  long-term  notes  receivable  to the Company as payment for common
stock (see Note 6).

         In December 1996, the Company repurchased 50,000 shares of common stock
for $138,000,  $123,000 of which was by the  retirement  of a related  long-term
note receivable (see Note 6).

                See notes to consolidated financial statements.



                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                   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  wholly  owned  subsidiary,  Big  Dog  USA,  Inc.  (the
"Company").  All significant  intercompany  accounts and transactions  have been
eliminated.

     The Company  principally  develops and markets  apparel and other  consumer
products  through  Company-operated  retail  stores,  wholesale  accounts  and a
catalog.

     On September 25, 1997, the Company's $56,000,000 initial public offering of
4,000,000 shares of common stock at $14.00 per share was declared effective.  Of
the 4,000,000 shares, the Company sold 2,800,000 shares and certain stockholders
sold 1,200,000 shares. The Company's net proceeds,  after underwriting discounts
and expenses associated with the offering were approximately $35,600,000.

USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

     The Company has  $9,672,000  of cash on deposit with a high credit  quality
financial  institution  which is in  excess  of the  Federal  Deposit  Insurance
Corporation limit.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair values of receivables and accounts  payable  approximate
their carrying values because of the short-term maturity of these instruments.

CASH & CASH EQUIVALENTS

     The Company considers all highly liquid investments with a maturity of less
than three months when purchased to be cash equivalents.

INVENTORIES

     Inventories,  consisting substantially of finished goods, are stated at the
lower of cost (first-in, first-out method) or market.

PROPERTY AND EQUIPMENT

     Property  and  equipment  are  stated  at cost and  depreciated  using  the
straight-line  method over their estimated useful lives, ranging from two to ten
years.   Amortization   of  leasehold   improvements   is  computed   using  the
straight-line  method based upon the life of the  improvement or the term of the
lease, whichever is shorter.

INTANGIBLE ASSETS

     Intangible  assets are stated at cost and amortized using the straight-line
method over five years.  Accumulated  amortization was $665,000, and $534,000 at
December 31, 1998 and 1997, respectively.

OTHER ASSETS

     Other  assets  include  long-term  deposits  of  $233,000  and  $353,000 at
December  31, 1998 and 1997,  respectively,  which  relate  primarily  to leased
facilities, including retail stores.

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.  If the estimated  future
cash flows  (undiscounted and without interest charges) from the use of an asset
are less than the carrying  value, a write-down  would be recorded to reduce the
related asset to its estimated fair value.
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SELLING, MARKETING AND DISTRIBUTION EXPENSES

     Included in this classification are approximately  $474,000,  $547,000, and
$439,000 in 1998, 1997 and 1996,  respectively,  of store  preopening  expenses,
which are expensed as incurred.

INCOME TAXES

     Deferred  income  taxes  reflect  the income tax  effects of (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  (b) net
operating loss and tax credit carryforwards,  and (c) valuation allowances, when
necessary,  to reduce  deferred  income tax assets to the amount  expected to be
realized (see Note 4).

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.

     The following  reconciles  the numerator and  denominator  of the basic and
diluted per-share computations for net income:
<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                               -------------------------------------------
<S>                                                                  <C>            <C>            <C>
                                                                    1998           1997            1996
                                                               ------------   ------------     -----------

Net income ...............................................     $  4,032,000   $  2,665,000     $   635,000
                                                               ============   ============     ===========
Basic Weighted Average Shares:
 Weighted average number of shares outstanding............       12,472,000     10,965,000       9,978,000
Effect of Dilutive Securities:
 Options and warrants.....................................           37,000        222,000          71,000
                                                               ------------   ------------     -----------
Diluted Weighted Average Shares:
 Weighted average number of shares outstanding and
 common share equivalents.................................       12,509,000     11,187,000      10,049,000
                                                               ============   ============     ===========

Antidilutive options......................................        1,615,000            ---             ---
</TABLE>

     Antidilutive  options consist of the weighted  average of stock options for
the respective  years that had an exercise price greater than the average market
price during the year. Such options are therefore  excluded from the computation
of diluted shares.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure  those  instruments  at fair value.  The Company will adopt
SFAS No. 133 in the year ending December 31, 2000. The Company  anticipates that
the  adoption of SFAS No. 133 will not have a material  impact on the  Company's
financial statements.


<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. PROPERTY AND EQUIPMENT

      Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                               ------------------------------
                                                                     1998           1997
                                                               ------------     -------------
<S>                                                            <C>              <C>
         Leasehold improvements...........................     $  8,400,000      $  5,866,000
         Equipment and fixtures...........................       13,413,000         9,792,000
                                                               ------------      ------------
                                                                 21,813,000        15,658,000
         Less accumulated depreciation and amortization...        8,830,000         5,426,000
                                                               ------------      ------------
         Property and equipment, net......................     $ 12,983,000      $ 10,232,000
                                                               ============      ============

</TABLE>

     Depreciation  and  amortization  expense on property and equipment  totaled
$3,621,000, $2,479,000, and $1,794,000, in 1998, 1997 and 1996, respectively.

3. SHORT-TERM BORROWINGS

     The  Company has a borrowing  arrangement  with a bank  whereby the Company
may, from time to time and upon approval from the bank, borrow up to $8,000,000.
Such  borrowings  may be used for cash  advances  and  letters  of  credit.  The
borrowing  arrangement  provides for  interest at the bank's prime  lending rate
less 3/8% or 250 basis  points over the LIBOR  rate,  and is  collateralized  by
substantially all assets of the Company.

     The Company has  outstanding  commitments  under letters of credit totaling
$1,071,000,  at December 31, 1998.  The letters of credit expire  through May 1,
1999.

4. INCOME TAXES

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------
<S>                                                           <C>            <C>            <C>
                                                           1998           1997           1996
                                                       -----------    -----------   -------------
         Current:
            Federal                                    $ 2,978,000    $ 1,438,000      $  321,000
            State                                          424,000        195,000          34,000
                                                       -----------    -----------      ----------
         Total                                           3,402,000      1,633,000         355,000
                                                       -----------    -----------      ----------
         Deferred:
            Federal                                       (664,000)         5,000         102,000
            State                                          (64,000)        (5,000)        (22,000)
                                                       -----------    -----------      ----------
         Total                                            (728,000)           ---          80,000
                                                       -----------    -----------      ----------
         Total income tax provision                    $ 2,674,000    $ 1,633,000      $  435,000
                                                       ===========    ===========      ==========
</TABLE>
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. INCOME TAXES (continued)

    The Company's  effective income tax rate differs from the federal statutory
rate due to the following:
<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                  ------------------------------------
<S>                                                                <C>            <C>             <C>
                                                                   1998           1997           1996
                                                                  ------         ------         ------
         Federal statutory income tax rate                        34.0%          34.0%          34.0%
         State taxes, net of federal benefit                       3.4%           3.2%           2.4%
         Other, net                                                2.5%           0.8%           4.3%
                                                                   ---            ---            ---
         Total                                                    39.9%          38.0%          40.7%
                                                                  ====           ====           ====
</TABLE>

     Significant components of the Company's net deferred income tax assets are 
as follows:
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                             --------------------------
<S>                                                                            <C>              <C>
                                                                                1998             1997
                                                                            ----------       ----------
         Deferred income tax assets:
            Allowance for doubtful receivables and sales returns            $   27,000       $  40,000
            Accrued vacation                                                    40,000          30,000
            Inventory uniform capitalization                                   714,000         324,000
            Intangible assets                                                  168,000         148,000
            State income taxes                                                 114,000          39,000
            Alternative minimum tax credits                                        ---          26,000
            Deferred rent                                                      298,000             ---
            Reserve liabilities                                                 82,000          58,000
            Other                                                               10,000          12,000
                                                                            ----------       ---------
         Total deferred income tax assets                                    1,453,000         677,000
                                                                            ----------       ---------
         Deferred income tax liabilities:
            Prepaid expenses                                                  (108,000)        (92,000)
            Depreciation                                                      (473,000)       (441,000)
                                                                             ---------       ---------
         Total deferred income tax liabilities                                (581,000)       (533,000)
                                                                             ---------       ---------
         Deferred income tax asset                                          $  872,000       $ 144,000
                                                                            ==========       =========
</TABLE>

5. COMMITMENTS AND CONTINGENCIES

LEASES

     The Company  leases retail  stores,  office  buildings and warehouse  space
under lease  agreements that expire through 2009.  Future minimum lease payments
under noncancelable operating leases are as follows: 
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S>                                                                 <C>
     1999......................................................     $ 13,860,000
     2000 .....................................................       12,080,000
     2001......................................................        9,342,000
     2002......................................................        6,572,000
     2003......................................................        4,729,000
     Thereafter................................................       13,189,000
                                                                    ------------
     Total.....................................................     $ 59,772,000
                                                                    ============
</TABLE>
     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 and common area charges.  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.
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. COMMITMENTS AND CONTINGENCIES (continued)

     Rent expense for the years ended December 31, 1998,  1997, and 1996 totaled
$13,962,000,  $11,333,000, and $8,431,000, respectively, and includes contingent
rentals of  $336,000,  $149,000,  and $79,000 for the years ended  December  31,
1998, 1997 and 1996, respectively.

LITIGATION

     The Company is not  involved in any legal  proceedings  other than  certain
actions  arising in the ordinary  course of its  business.  While the outcome of
such proceedings and threatened  proceedings cannot be predicted with certainty,
in  the  opinion  of  management,  the  ultimate  resolution  of  these  matters
individually or in the aggregate will not have a material  adverse effect on the
Company's business, financial condition or results of operations.

6. STOCKHOLDERS' EQUITY

COMMON STOCK

     In March 1998,  the Board of Directors  authorized  the repurchase of up to
$10,000,000  of its common  stock.  The  Company  repurchased  1,083,200  shares
totaling $6,494,000 as of December 31, 1998.

     As of December 31, 1998,  1997 and 1996,  there were  unexercised  warrants
outstanding of 72,000, 96,000 and 240,000, respectively.

1996 STOCK INCENTIVE PLAN

     In July 1996,  the Company  issued 347,500 shares of common stock under the
1996  Stock  Incentive  Plan (the "1996  Plan").  The 1996 Plan  authorized  the
issuance of up to 500,000 shares of the Company's  common stock to key employees
and other persons.  The shares were sold at $2.59 per share,  which the Board of
Directors  determined to be at or above the fair market value,  with proceeds to
the  Company  consisting  of $45,000  in cash and the  balance  of  $855,000  in
recourse  notes  receivable.  The notes  receivable are due ten years from their
date of issuance or upon termination of employment, bear interest at the rate of
7% per annum,  are secured by the common  stock  acquired  and are included as a
component of stockholders' equity in the consolidated financial statements.  The
1996 Plan was  terminated on December 31, 1996. The stock vested over a two-year
period,  with  one-third of the shares vesting at the purchase date. On December
31, 1996, the Company reacquired 50,000 shares at an average of $2.76 per share.

STOCK OPTIONS

     In March 1996,  the Company  issued a five-year  option to its  chairman to
acquire  35,000  shares of the  Company's  common stock at an exercise  price of
$2.59 per share.  In August 1996,  the Company  issued an  additional  five-year
option to the  chairman to acquire an  additional  20,000  shares at an exercise
price of $4.00. The exercise prices were determined by the board of directors to
be equal to or greater than the fair value of the Company's  common stock at the
date of grant.  During  1997,  these  options  were  exercised,  and the Company
recognized  tax  benefits  of  $250,000  resulting  from the  exercise  of these
nonqualified  stock options which were recorded as additional paid-in capital in
the consolidated financial statements.

     In January 1997, the Company adopted the 1997 Stock Option Plan authorizing
the issuance of nonqualified  stock options to directors,  officers,  employees,
consultants  and others to  purchase  common  stock at prices  equal to the fair
value of the Company's  shares at the grant dates.  Such options vest  one-third
each year, beginning the year after the grant date and expire ten years from the
date of grant. The 1997 Stock Option Plan was eliminated on August 1, 1997.

     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.
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.
Options  granted in 1997 vested at 20% each year,  beginning  one year after the
grant date and expire seven to ten years from the date of grant.

     In April 1998, the Company  re-priced (by canceling and reissuing)  444,750
options  granted under the Plan. The re-priced  options have a ten-year life and
either (i) have an exercise price of $6.50 per share (fair market value at grant
date) and vest in equal  installments  on each  anniversary of the April 7 grant
date over the next  five  years or (ii) as to  officers,  have  exercise  prices
ranging from $6.50 to $10.00 and vest at varying rates of 10% to 20% per year on
each anniversary of the April 7 grant date over the next seven years.
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. STOCKHOLDERS EQUITY (continued)

     The following summarizes stock option activity for the periods presented:
<TABLE>
<CAPTION>
                                                                               WEIGHTED
                                                             NUMBER            AVERAGE
                                                            OF SHARES       EXERCISE PRICE
                                                            ----------      --------------
Balance at January 1, 1996...........................             ---                ---
<S>                                                            <C>               <C>
 Options granted.....................................          55,000            $  3.10
                                                            ----------           --------
Balance at December 31, 1996.........................          55,000               3.10
 Options granted ....................................         482,000              11.14
 Options exercised...................................         (55,000)             (3.10)
 Options cancelled...................................         (13,250)            (12.04)
                                                           -----------           --------
Balance at December 31, 1997.........................         468,750              11.11
 Options granted.....................................       1,970,150               6.92
 Options cancelled...................................      (1,197,450)             (9.19)
                                                           -----------           --------
Balance at December 31, 1998.........................       1,241,450            $  6.32
                                                           ===========           ========
</TABLE>
     The following table summarizes  information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
       -----------------------------------------------------------------------------   ------------------------------
                                               WEIGHTED-AVERAGE
       RANGE OF EXERCISE       OPTIONS             REMAINING        WEIGHTED-AVERAGE     OPTIONS     WEIGHTED-AVERAGE
            PRICES           OUTSTANDING       CONTRACTUAL LIFE      EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
       -----------------     -----------       ----------------     ----------------   -----------   ----------------
<S>         <C>                <C>                <C>                   <C>                          <C>
            $3.50              292,500            10.0 years            $  3.50              ---         $  ---
         5.00 - 6.50           662,950             9.2 years               6.39           16,667           5.00
             8.00              137,500             9.3 years               8.00              ---            ---
        10.00 - 14.00          148,500             9.0 years              10.04            2,200          10.59
                             ---------                                                    ------
         3.50 - 14.00        1,241,450             9.4 years               6.32           18,867           5.65
                             =========                                                    ======
</TABLE>
     The Company  accounts for its stock-based  awards using the intrinsic value
method  in  accordance  with  Accounting   Principles   Board  Opinion  No.  25,
"Accounting  for Stock  Issued to  Employees"  and its related  interpretations.
Accordingly,  no  compensation  expense  has been  recognized  in the  financial
statements for employee stock arrangements.

     SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  requires  the
disclosure  of pro forma net income  and net  income  per share had the  Company
adopted the fair value method as of the  beginning of 1995.  Under SFAS No. 123,
the fair value of stock-based  awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the
fair  value of freely  tradable,  fully  transferable  options  without  vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective  assumptions,  including future stock price
volatility  and expected time to exercise,  which greatly  affect the calculated
values.  The Company's  calculations  were made using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
1998, 1997 and 1996, respectively: no dividends during the expected term for all
years; expected volatility of 259%, 7% and 0%, risk-free interest rates of 5.4%,
6.4% and 6.0%;  and expected  lives of 9.9, 7.7 and 5.0 years.  Forfeitures  are
recognized as they occur. If the computed fair values of the 1998, 1997 and 1996
awards had been amortized to expense over the vesting period of the awards,  pro
forma net income  would have been  reduced  to the pro forma  amounts  indicated
below. There were no stock options granted prior to 1996.
<PAGE>
                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. STOCKHOLDERS EQUITY (continued)
<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                   -----------------------------------------------
<S>                                                                      <C>               <C>            <C>
                                                                         1998              1997           1996
                                                                   -------------     ------------    -------------
Net income:
 As reported..............................................         $   4,032,000     $  2,665,000    $     635,000
 Pro forma................................................             3,586,000        2,567,000          584,000
Net income per share:
 As reported:
 Basic and diluted........................................         $        0.32     $       0.24    $        0.06
 Pro forma:
 Basic and diluted........................................         $        0.29     $       0.23    $        0.06

Weighted-average fair value of options granted during the year     $        5.04     $       4.37    $        1.55
</TABLE>

7. RELATED PARTY TRANSACTIONS

         Two of the Company's stockholders and directors had ownership interests
in  two  former  merchandise  vendors  to  the  Company.  Merchandise  inventory
purchased  from  these  related  vendors  totaled  $2,182,000,  $8,636,000,  and
$8,030,000 for the years ended December 31, 1998,  1997 and 1996,  respectively.
Included in accounts  payable are $5,000 and  $412,000  due to these  vendors at
December 31, 1998 and 1997, respectively.

         The Company also received  consulting  services from related parties in
1997 and 1996. Such expenses  incurred for the years ended December 31, 1997 and
1996 were  $90,000 and  $208,000  respectively,  and are included in general and
administrative expenses in the consolidated statements of operations.

         The  Company  engaged a related  party to perform  retail  construction
services.  Construction  services  provided to the Company totaled  $871,000 and
$371,000 for the years ended December 31, 1998 and 1997, respectively.

8. SUBSEQUENT EVENT

         In February 1999, the Company  declared an annual dividend of $0.10 per
share  payable  on March 4,  1999,  to  stockholders  of  record at the close of
business on February 22, 1999.

9. QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
                                                          FIRST      SECOND       THIRD       FOURTH
                                                         QUARTER     QUARTER     QUARTER      QUARTER
                                                        --------    --------     --------    --------
                                                               (in thousands, except per share)
Year ended December 31, 1998:
<S>                                                       <C>         <C>          <C>         <C>
  Net sales..................................           $ 14,212    $ 22,389     $ 28,354    $ 35,722
  Gross profit...............................              7,650      13,573       17,088      21,130
  Selling, marketing and distribution expenses            10,450      11,766       11,895      13,698
  General and administrative expenses.........             1,150       1,332        1,330       1,464
  Total operating expenses....................            11,600      13,098       13,225      15,162
  (Loss) income from operations...............            (3,950)        475        3,863       5,968
  Net (loss) income...........................            (2,279)        327        2,400       3,584
  Net (loss) income per share
    Basic and diluted.........................          $  (0.17)    $  0.03     $   0.20     $  0.30
  Weighted average shares outstanding
    Basic.....................................            13,150      12,476       12,183      12,100
    Diluted...................................            13,150      12,532       12,204      12,110

Year ended December 31, 1997:
  Net sales...................................          $ 12,265    $ 18,878     $ 24,129    $ 30,909
  Gross profit................................             6,670      11,265       14,107      17,811
  Selling, marketing and distribution expenses             8,454       9,310        9,879      11,906
  General and administrative expenses.........             1,035       1,076        1,118       1,509
  Total operating expenses....................             9,489      10,386       10,997      13,415
 (Loss) income from operations................            (2,819)        879        3,110       4,396
  Net (loss) income...........................            (2,031)        228        1,607       2,861
  Net (loss) income per share
    Basic.....................................           $ (0.20)     $ 0.02       $ 0.16      $ 0.22
    Diluted...................................             (0.20)       0.02         0.15        0.22
  Weighted average shares outstanding
    Basic.....................................            10,161      10,161       10,355      13,157
    Diluted...................................            10,161      10,421       10,652      13,271
</TABLE>




                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
             Exhibit No.            Description

<S>                                                               <C>
              3.1         Amended and Restated Certificate of Incorporation1
              3.1A        Certificate of Correction1
              3.2         Amended and Restated Bylaws (2)
              4.1         Reference is hereby made to Exhibits 3.1, 3.1A and 3.2
              4.2         Specimen  Stock Certificate (1)
             10.1         Grid Promissory Note of Company to Israel Discount
                              Bank dated 2/19/98
             10.3         Form of Warrants issued November 4, 19961
             10.10        Amended and Restated 1997 Performance Award Plan
             10.10A       Form of Employee Nonqualified 1997 Performance Award
                              Plan (1)
             10.10B       Terms and Conditions for Non-Qualified Options
                              Granted under the Amended and Restated 1997
                              Performance Award Plan
             10.10C       Form of Eligible Director Non-Qualified Stock Option
                              Agreement
             10.11        Lease between Big Dog USA, Inc. and The Prudential
                              Insurance Company of America dated November 4,
                              1997 (2)
             10.12        Lease Agreement between Big Dog Holdings, Inc. and
                              S.V.B. Properties dated as of June 1, 1994, as
                              amended by Lease  Agreement dated as of
                              December 1, 1994, Second Lease Amendment dated as
                              of March 1, 1996, Third Lease Amendment  between
                              Big Dog Holdings and Freeland  Realty LLC dated as
                              of July 22, 1996, (1) and Fourth Lease Amendment
                              dated December 18, 1998
             10.14         Form of Indemnification Agreement (1)
             21.1          List of Subsidiaries of Big Dog Holdings, Inc. (1)
             24.1          Power of Attorney (included in signature page)
             27.1          Financial data schedule
</TABLE>


(1) Incorporated by reference from the Company's S-1 Registration Statement (No.
    333-33027), as amended, which became effective September 25, 1997

(2) Incorporated by reference from the  Registrant's  Annual Report on Form 10-K
    for the year ended December 31, 1997.
<PAGE>

                                                                    Exhibit 10.1

                           GRID PROMISSORY NOTE

$ 8,000,000.00                                                 February 19, 1998


         FOR VALUE  RECEIVED,  the  undersigned  promises to pay to the order of
ISRAEL DISCOUNT BANK LIMITED, LOS ANGELES AGENCY (hereinafter the "Bank") at its
principal office,  located at 206 North Beverly Drive,  Beverly Hills, CA 90210,
the principal amount of EIGHT MILLION DOLLARS  ($8,000.000.00)  or, if less, the
aggregate  unpaid  principal  amount of each advance (the "Advance") made by the
Bank, in its sole discretion,  to the undersigned from time to time, endorsed on
the schedule attached hereto and made a part of this Note,  including additional
pages,  if any,  attached  hereto (the  "Schedule") on the maturity date of each
such Advance as shown in the  Schedule.  The  undersigned  shall also pay to the
Bank  interest  monthly  in  arrears  commencing  on the first day of each month
beginning with the month immediately  following the date of the Advance,  as set
forth in the Schedule,  and continuing on the same day of each month  thereafter
until maturity  (whether as stated or by  acceleration)  computed on each unpaid
Advance at the rate  endorsed  on the  Schedule.  Interest  shall be paid at the
option of the  undersigned  at a rate of either  (a) the prime  loan rate of the
Bank, as  determined  by the Bank from time to time,  minus three eighths of one
percent (3/8%) on the Interest  Adjustment Date (as hereinafter  defined) for an
Interest Period (as hereinafter  defined), or (b) 250 basis points over LIBOR as
determined by the Bank from time to time in its sole  discretion for amounts and
time  comparable  to  the  amount  of any  Advance  hereunder  on  the  Interest
Adjustment  Date for an Interest  Period of 30, 60 or 90 days as selected by the
undersigned on the Interest Adjustment Date (the "Interest Rate").

         Interest  shall be calculated on the basis of a 360-day year and actual
number of days elapsed (but in no event in excess of the maximum rate  permitted
by  applicable  law).  Any change in  Interest  Rate shall be  effective  on the
Interest Adjustment Date.

         Payment of interest or principal  more than ten days after such payment
is due shall be subject to an  additional  late payment fee of five (5%) percent
of such  payment.  Interest  from and after  maturity  (whether  as stated or by
acceleration)  shall be at the rate per annum equal to five (5%)  percent  above
the rate charged  hereunder  on the date of such  maturity or if such rate shall
not be lawful with respect to the  undersigned,  at the highest lawful rate then
in effect.

         Subject to the provisions set forth below in this paragraph, all unpaid
Advances  and  interest  accruing  at the Prime Loan Rate under this Note may be
prepaid in whole or in part, without premium or penalty.  Upon any prepayment of
all or a part of an  Advance  wherein  interest  is  accruing  based  upon LIBOR
(hereinafter  the  "Prepaid  Amount"),  at any time  other  than on an  Interest
Adjustment  Date, for any reason,  whether  voluntary or  involuntary,  or after
acceleration of the maturity  hereof,  the  undersigned  shall pay to the Bank a
prepayment  premium  equal to the amount of  interest  which the Bank would have
earned on the Prepaid Amount at the then current  Interest Rate from the date of
such prepayment to the next Interest  Adjustment Date occurring  hereunder.  The
Bank  shall  not  be  obligated  to  accept  any  Prepaid  Amount  unless  it is
accompanied by the prepayment premium, if any, due in connection  therewith,  as
calculated pursuant to this paragraph.

         The  undersigned  shall  request each  Advance,  and choose an Interest
Period for each Advance  based on LIBOR,  on each Interest  Adjustment  Date, by
giving the Bank telephonic notice not later than twelve-thirty p.m.,  California
time, (which telephonic notice shall be followed by prompt written  confirmation
thereof  delivered  to the Bank).  The Bank shall be  entitled to rely upon such
telephonic  notice  and the  undersigned  hereby  agrees to  indemnify  the Bank
against any claims, liabilities, losses and expenses ensuing from such reliance.
In the event the undersigned fails to notify the Bank as provided above, then in
that event,  the Bank has the option in its sole  discretion to choose on behalf
of the undersigned an Interest Rate based upon a 30 day Interest Period.

         The undersigned  hereby expressly  authorizes the Bank to record on the
attached  Schedule the  applicable  Rate of interest,  the  applicable  Interest
Period,  the amount and date of each Advance made  hereunder,  the maturity date
thereof and the date and amount of each payment of an Advance. Bank shall render
to the  undersigned a monthly  statement  (the Loan Billing  Statement)  setting
forth the  transactions  arising  hereunder.  Each  statement hall be considered
correct and binding upon the  undersigned  as an account  stated,  except to the
extent that Bank receives,  within 60 days after the mailing of such  statement,
written  notice  from  the  undersigned  of  any  specific   exceptions  by  the
undersigned to that  statement.  All payments  hereunder shall be made in lawful
money of the United States and in immediately  available funds. Any extension of
time for the payment of any Advances made pursuant to this Note  resulting  from
the due date falling on a Saturday, Sunday or legal holiday shall be included in
the computation of interest.

         "Interest  Period"  shall  mean  a  period  of  time  selected  by  the
undersigned for which a particular rate of interest shall apply under this Note.

         "Interest  Adjustment  Date"  shall mean the last date of the  Interest
Period,  provided  that if such date falls on a day which is not a business day,
the Interest  Adjustment  Date shall be next  succeeding  business day. The term
"business  day"  shall mean any day other than a  Saturday,  Sunday or  business
holiday in the State of California.

         If any amount  payable on any  Liabilities  (as  defined  below) of the
undersigned  to the Bank shall not be paid within 5 days of written  notice that
the same is due,  then this Note and the  principal  of and accrued  interest on
each Advance  evidenced  hereby shall,  unless the Bank shall  otherwise  elect,
become forthwith due and payable in full, without protest,  presentment,  notice
or demand, all of which are expressly waived by the undersigned.

         The  term   "Liabilities"   shall  include  this  Note  and  all  other
indebtedness,  obligations and liabilities of any kind of the undersigned to the
Bank or another or others of whatsoever nature and howsoever evidenced,  whether
now existing or hereafter incurred,  originally  contracted with the Bank and/or
another or others and now or  hereafter  owing to or acquired in any manner,  in
whole or in part, by the Bank, or in which the Bank may acquire a participation,
whether  contracted by the  undersigned  alone or jointly and/or  severally with
another or others, whether direct or indirect,  absolute or contingent,  secured
or not secured, matured or not matured,  contractual or tortious,  liquidated or
unliquidated,  or arising by  operation  of law or  otherwise,  including  other
indebtedness,  obligations  and  liabilities to the Bank of the undersigned as a
member of any  partnership,  syndicate,  association or other group, and whether
incurred  by  the  undersigned  as  principal,   surety,  indorser,   guarantor,
accommodation party or otherwise.

         The term "Security" shall include the following property:  all personal
property and fixtures of the undersigned  wherever located and whether now owned
or in existence or hereafter  acquired or created,  including goods,  documents,
instruments,  general intangibles,  chattel paper, accounts and contract rights,
such terms having the meaning ascribed by the Uniform Commercial Code;  products
and proceeds;  and the balance of every deposit account of the undersigned  with
the Bank and any  other  claim  of the  undersigned  against  the  Bank,  now or
hereafter existing, and all money, instruments,  securities,  documents, chattel
paper, credits,  claims, demands and any other property,  rights and interest of
the  undersigned  which at any time shall come into the possession or custody or
under  the   control  of  the  Bank  or  any  of  its  agents,   associates   or
correspondents,  for any purpose, and shall include the proceeds of any thereof,
and the Bank  shall be  deemed  to have  possession  of any of the  Security  in
transit  to  or  set  apart  for  it  or  any  of  its  agents,   associates  or
correspondents.

         As security for the payment of this Note and all other Liabilities, the
undersigned  hereby grant to the Bank a security interest in, and a general lien
upon and/or right of set-off, the Security.

         The right is  expressly  granted  to the Bank,  at its  discretion  and
without notice to or containing the signature of the undersigned, to file one or
more  financing   statements  under  the  Uniform  Commercial  Code  naming  the
undersigned as debtor and the Bank as secured party and  indicating  therein the
type or describing  the items of Security  herein  specified.  Without the prior
written consent of the Bank the undersigned will not file or authorize to permit
to be filed in any  jurisdiction  any such  financing or like statement in which
the Bank is not named as the sole secured party.

         The Bank, at its discretion may, whether any of the Liabilities be due,
in its name or in the name of the  undersigned  or otherwise,  demand,  sue for,
collect or receive any money or property at any time  payable or  receivable  on
account of or in  exchange  for, or make any  compromise  or  settlement  deemed
desirable with respect to, any of the Security, but shall be under no obligation
so to do, or the Bank may extend the time of  payment,  arrange  for  payment in
installments, or otherwise modify the terms of, or release, any of the Security,
without  thereby  incurring  responsibility  to,  or  discharging  or  otherwise
affecting any liability of, the  undersigned.  The Bank shall not be required to
take any steps  necessary to preserve any rights against prior parties to any of
the  Security.  Upon  default  hereunder  or  in  connection  with  any  of  the
Liabilities  (whether  such default be that of the  undersigned  or of any party
obligated thereon), the Bank shall have the rights and remedies provided by law;
and the  Bank  may  sell or  cause  to be sold  in the  county  of Los  Angeles,
California,  or elsewhere, in one or more sales or parcels, at such price as the
Bank may deem best,  and for cash or on credit or for future  delivery,  without
assumption  of any  credit  risk,  all or any of the  Security  at any public or
private sale, without demand of performance or notice of intention to sell or of
time or place of sale (except such notice as is required by  applicable  statute
and cannot be waived),  and the Bank or anyone else may be the  purchaser of any
or all of the Security so sold and  thereafter  hold the same  absolutely,  free
from any claim or right of whatsoever kind,  including any equity of redemption,
of the  undersigned,  any such  demand,  notice or right and equity being hereby
waived  and  released.  The  undersigned  will  pay to  the  Bank  all  expenses
(including  expense for legal  services of every kind) of, or  incidental to the
enforcement of any of the provisions hereof or of any of the Liabilities, or any
actual or attempted sale or any exchange enforcement,  collection, compromise or
settlement  of any of the Security or receipt of the proceeds  thereof,  and for
the care of the Security and defending or asserting the rights and claims of the
Bank in respect  thereof,  by  litigation  or  otherwise,  including  expense or
insurance, and all such expenses, shall be indebtedness within the terms of this
Note.

         The  undersigned  represents and warrants that: (1) it is a corporation
duly organized and existing under the laws of the State of its incorporation and
is duly  qualified to do business  and is in good  standing in every State where
the failure to qualify  would  materially  and  adversely  affect the  financial
condition of the undersigned;  (2) the execution,  issuance and delivery of this
Note by the  undersigned  are  within  its  corporate  powers and have been duly
authorized,  and the Note is valid,  binding and  enforceable in accordance with
its terms,  and is not in violation of law or of the terms of the  undersigned's
Certificate of  Incorporation or By-Laws and does not result in the breach of or
constitute a default under any indenture,  agreement or undertaking to which the
undersigned  is a party or by which it or its property may be bound or affected;
(3) the financial  statements of the  undersigned  dated as of December 31, 1997
heretofore  furnished to the Bank are complete and correct and fairly  represent
the  financial  condition of the  undersigned  as of December 31, 1997,  and the
result of its  operations  for the period  ending on December 31, 1997 and since
December 31, 1997 no material  adverse change in the financial  condition of the
undersigned has occurred;  (4) no Event of Default (as hereinafter  defined) has
occurred and no event has occurred  which with the giving of notice or the lapse
of time or both would constitute an Event of Default;  (5) the undersigned shall
not use any part of the  proceeds of any Advance  hereunder to purchase or carry
any margin stock within the meaning of Regulation U of the Board of Governors of
the  Federal  Reserve  System or to extend  credit to others for the  purpose of
purchasing  or carrying  any margin  stock;  (6) on the occasion of each Advance
hereunder all representations and warranties  contained herein or otherwise made
in writing in  connection  herewith  shall be true and correct and with the same
force and effect as though such  representations and warranties had been made on
and as of the date of the making of each such Advance.

         Upon the occurrence of any of the following specified events of default
(each an "Event of  Default"):  (1)  default  by the  undersigned  in making any
payment of  principal,  interest,  or any other amount  payable  under this Note
within 5 days of written notice that the same is due; or (2) the undersigned, or
any maker, drawer, acceptor, indorser, guarantor, surety, accommodation party or
other  person  liable  upon  or for any of the  Liabilities  or  Security  (each
hereinafter  called  an "other  liable  party"),  shall  die,  become  insolvent
(however such  insolvency may be  evidenced),  fail to pay any debt in excess of
$200,000 as such debt becomes due including any grace period,  or make a general
assignment for the benefit of creditors,;  or (3) the undersigned  shall suspend
the  transaction  of his, its or their usual  business,  or be expelled  from or
suspended  by any  stock  or  securities  exchange  or  other  exchange,  or any
proceeding, procedure or remedy supplementary to or in enforcement of a judgment
in excess of $200,000 shall be resorted to or commenced against, or with respect
to any property of, the  undersigned or other liable party; or (4) a petition in
bankruptcy  or for any relief  under any law  relating to the relief of debtors,
readjustment of indebtedness,  reorganization, composition or extension shall be
filed, or any proceeding  shall be instituted  under any such law, by or against
the undersigned or other liable party; or (5) any governmental  authority or any
court at the instance  thereof shall take possession of any substantial  part of
the  property  of, or assume  control  over the affairs or  operations  of, or a
trustee or receiver  shall be  appointed  for, or if a  substantial  part of the
property of, or a writ or order of attachment or garnishment or similar  process
shall be issued or made  against any  substantial  part of the  property of, the
undersigned;  or (6) default by the undersigned or other liable party in the due
payment of any  indebtedness  for borrowed money in excess of $200,000 or in the
observance  or  performance  of  any  covenant  or  condition  contained  in any
agreement  or  instrument   evidencing,   securing,  or  relating  to  any  such
indebtedness,  and  continuance  of any such default for a period  sufficient to
cause or permit the acceleration of the maturity thereof: or (7) the undersigned
or any other  liable  party  conceals,  removes or permits  to be  concealed  or
removed any part of the undersigned's  property with intent to hinder,  delay or
defraud any of its creditors;  or (8) the making or suffering by the undersigned
or any other liable  party of a transfer of any  property,  which is  fraudulent
under the law of any applicable jurisdiction; or (9) any material representation
or warranty made by the  undersigned or any other liable party to the Bank under
this Note or in any other instrument or document delivered by the undersigned or
any other liable party to the Bank should prove to be false or misleading in any
material way; or (10) the Security shall,  in the sole reasonable  discretion of
the Bank, have become  unsatisfactory  and the undersigned  fails upon demand of
the Bank to furnish such  further  security or to make payment on account of any
of the  Liabilities  as would be  satisfactory  to the Bank;  or (11) if any sum
payable under any of the Liabilities be not paid within 5 days of written notice
that the same is due; or (12) default in the  observance or  performance  of any
other  agreement of the  undersigned set forth herein that is not covered within
30 days of written notice;  THEN, and at any time thereafter,  unless and to the
extent that the Bank shall otherwise elect, all of the Liabilities  shall become
and be due and payable forthwith; without presentment,  demand, protest or other
notice of any kind, all of which are expressly waived by the undersigned.

         No  delay  on the part of the  Bank in  exercising  any  power or right
hereunder  shall  operate as a waiver  thereof;  nor shall any single or partial
exercise  of any power or right  hereunder  preclude  other or further  exercise
thereof or the exercise of any other power or right. The rights,  remedies,  and
benefits  herein  expressly  specified are  cumulative  and not exclusive of any
rights,  remedies or benefits which the Bank may otherwise have. The undersigned
hereby  waives  demand,  presentment,  notice of  dishonor  and  protest  of all
instruments  included in or  evidencing  the  Liabilities  and any and all other
notices and demands whatsoever, whether or not relating to any such instrument.

         THE  UNDERSIGNED  IN ANY  LITIGATION  (WHETHER OR NOT ARISING OUT OF OR
RELATING TO THIS NOTE OR ANY OTHER LIABILITIES) IN WHICH THE UNDERSIGNED AND THE
BANK SHALL BE ADVERSE PARTIES,  HEREBY WAIVES THE RIGHT TO TRIAL BY JURY AND THE
RIGHT TO  INTERPOSE  ANY  DEFENSE,  SET-OFF  OR  COUNTERCLAIM  OF ANY  NATURE OR
DESCRIPTION, EXCEPT THE DEFENSE OF PAYMENT.

         The  undersigned  agrees to pay on demand all of the Bank's  reasonable
out of  pocket  costs  and  expenses,  including  reasonable  counsel  fees,  in
connection with collection of any amounts due to the Bank and enforcement of its
rights under this Note.

         No provision  hereof  shall be modified or limited  except by a written
instrument signed by the Bank expressly referring hereto and to the provision so
modified or limited.  The  undersigned,  if more than one,  shall be jointly and
severally liable  hereunder and all provisions  hereof regarding the Liabilities
of the undersigned shall apply to any liability of any or all of them. This Note
and  the  provisions  hereof  are  to be  binding  upon  the  heirs,  executors,
administrators, assigns or successors of the undersigned.

         The undersigned hereby consents to the in personam  jurisdiction of the
courts of  California  and the United  States  District  Court for the  Southern
District of California in connection with any claim arising with respect to this
Note or any of the Liabilities. In the event any such action is commenced in any
such court,  service of process may be made on the undersigned by mailing a copy
thereof to it at the address then  reflected in the Bank's  records by certified
mail,  return receipt  requested.  Such mailing shall be deemed personal service
and shall be legal and binding upon the undersigned in any such action or claim.
         This Note and the  provisions  hereof are to be construed  according to
and governed by the laws of the State of California.

         This Note replaces the note issued by the undersigned to the Bank dated
June 30, 1995 (the "Prior Note");  and all advances  outstanding under the Prior
Note, as of the date of this Note, shall be deemed  outstanding  under this Note
as of the date of this Note.


                                                   BIG DOG HOLDINGS, INC.


[SEAL]                                             By:/s/ANTHONY J. WALL
                                                   Name:Anthony J. Wall
                                                   Title:Executive Vice
                                                         President

                                                   BIG DOG USA, INC.


[SEAL]                                             By:/s/ANTHONY J. WALL
                                                   Name:Anthony J. Wall
                                                   Title:Executive Vice
                                                         President

<PAGE>

                                                                   EXHIBIT 10.10
                             BIG DOG HOLDINGS, INC.
                              AMENDED AND RESTATED
                          1997 PERFORMANCE AWARD PLAN
                            (AS OF FEBRUARY 5, 1998)


1 . The Plan..................................................................10
    1.1 Purpose...............................................................10
    1.2 Administration and Authorization; Power and Procedure.................10
        1.2.1 Committee.......................................................10
        1.2.2 Plan Awards; Interpretation; Powers of Committee................10
        1.2.3 Binding Determinations.......................... ...............10
        1.2.4 Reliance on Experts.............................................11
        1.2.5 Bifurcation of Plan Administration; Delegation..................11
    1.3 Participation.........................................................11
    1.4 Shares Available for Awards; Share Limits.............................11
        1.4.1 Shares Available................................................11
        1.4.2 Share Limits....................................................11
        1.4.3 Share Reservation; Replenishment and Reissue of Unvested Awards.11
    1.5 Grant of Awards.......................................................11
    1.6 Award Period..........................................................11
    1.7 Limitations on Exercise and Vesting of Awards.........................12
        1.7.1 Provisions for Exercise.........................................12
        1.7.2 Procedure.......................................................12
        1.7.3 Fractional Shares/Minimum Issue.................................12
    1.8 Acceptance of Notes to Finance Exercise...............................12
        1.8.1 Principal.......................................................12
        1.8.2 Term............................................................12
        1.8.3 Recourse; Security..............................................12
        1.8.4 Termination of Employment.......................................12
    1.9 No Transferability; Limited Exception to Transfer Restrictions........12
        1.9.1 Limit On Exercise and Transfer..................................13
        1.9.3 Further Exceptions to Limits On Transfer........................13
2. Options....................................................................13
   2.1 Grants.................................................................13
   2.2 Option Price...........................................................13
       2.2.1 Pricing Limits...................................................13
       2.2.2 Payment Provisions...............................................13
   2.3 Limitations on Grant and Terms of Incentive Stock Options..............14
       2.3.1 $100,000 Limit...................................................14
       2.3.2 Option Period....................................................14
       2.3.3 Other Code Limits................................................14
   2.4 Limits on 10% Holders..................................................14
   2.5 Option Repricing/Cancellation and Regrant/Waiver of Restrictions.......14
   2.6 Effects of Termination of Employment; Termination of Subsidiary Status;
         Discretionary Provisions.............................................14
       2.6.1 Options - Resignation or Dismissal...............................14
       2.6.2 Options - Death or Disability....................................15
       2.6.3 Options - Retirement.............................................15
       2.6.4 Certain SARs.....................................................15
       2.6.5 Other Awards.....................................................15
       2.6.6 Committee Discretion.............................................15
   2.7 Options and Rights in Substitution for Stock Options Granted by Other
         Corporations.........................................................15
3. Stock Appreciation Rights..................................................15
   3.1 Grants.................................................................15
   3.2 Exercise of Stock Appreciation Rights..................................15
       3.2.1 Exercisability...................................................15
       3.2.2 Effect on Available Shares.......................................15
       3.2.3 Stand-Alone SARs.................................................16
       3.2.4 Proportionate Reduction..........................................16
   3.3 Payment................................................................16
       3.3.1 Amount...........................................................16
       3.3.2 Form of Payment..................................................16
   3.4 Limited Stock Appreciation Rights......................................16
4. Restricted Stock Awards....................................................16
   4.1 Grants.................................................................16
   4.2 Restrictions...........................................................17
       4.2.1 Pre-Vesting Restraints...........................................17
       4.2.2 Dividend and Voting Rights.......................................17
       4.2.3 Cash Payments....................................................17
   4.3 Return to the Corporation..............................................17
5. Performance Share Awards and Stock Bonuses.................................17
   5.1 Grants of Performance Share Awards.....................................17
   5.2 Special Performance-Based Share Awards.................................17
       5.2.1 Eligible Class...................................................18
       5.2.2 Maximum Award....................................................18
       5.2.3 Committee Certification..........................................18
       5.2.4 Terms and Conditions of Awards...................................18
       5.2.5 Stock Payout Features............................................18
       5.2.6 Adjustments for Material Changes.................................18
   5.3 Grants of Stock Bonuses................................................18
   5.4 Deferred Payments......................................................18
   5.5 Cash Bonus Awards......................................................19
       5.5.1 Performance Goals................................................19
       5.5.2 Payment in Restricted Stock......................................19
6. Other Provisions...........................................................19
   6.1 Rights of Eligible Persons, Participants and Beneficiaries.............19
       6.1.1 Employment Status................................................19
       6.1.2 No Employment Contract...........................................19
       6.1.3 Plan Not Funded..................................................19
   6.2 Adjustments; Acceleration..............................................19
       6.2.1 Adjustments......................................................19
       6.2.2 Acceleration of Awards Upon Change in Control....................20
       6.2.3 Possible Early Termination of Accelerated Awards.................20
       6.2.4 Golden Parachute Limitations.....................................21
   6.3 Effect of Termination of Employment....................................21
   6.4 Compliance with Laws...................................................21
   6.5 Tax Withholding........................................................21
       6.5.1 Provision for Tax Withholding Offset.............................21
       6.5.2 Tax Loans........................................................21
   6.6 Plan Amendment, Termination and Suspension.............................21
       6.6.1 Board Authorization..............................................21
       6.6.2 Stockholder Approval.............................................22
       6.6.3 Amendments to Awards.............................................22
       6.6.4 Limitations on Amendments to Plan and Awards.....................22
       6.6.5 Amendments to Formula Awards.....................................22
   6.7 Privileges of Stock Ownership..........................................22
   6.8 Effective Date of the Plan.............................................22
   6.9 Term of the Plan.......................................................22
   6.10 Governing Law/Construction/Severability...............................22
        6.10.1 Choice of Law..................................................22
        6.10.2 Severability...................................................23
        6.10.3 Plan Construction..............................................23
   6.11 Captions..............................................................23
   6.12 Effect of Change of Subsidiary Status.................................23
   6.13 Non-Exclusivity of Plan...............................................23
7. Definitions................................................................23


<PAGE>


1. The Plan

     1.1  Purpose.  The  purpose of this Plan is to promote  the  success of the
Company  and  the  interests  of its  stockholders  by  attracting,  motivating,
retaining  and  rewarding  directors,  officers,  employees  and other  eligible
persons with awards and incentives for high levels of individual performance and
improved  financial  performance  of the  Company.  "Corporation"  means Big Dog
Holdings,  Inc.  and  "Company"  means  the  Corporation  and its  Subsidiaries,
collectively. These terms and other capitalized terms are defined in Section 7.

1.2  Administration and Authorization; Power and Procedure1.

     1.2.1  Committee1.This  Plan will be administered by and all Awards will be
authorized  by the  Committee.  Action  of the  Committee  with  respect  to the
administration  of this Plan will be taken  pursuant  to a  majority  vote or by
written consent of its members.

     1.2.2 Plan  Awards;  Interpretation;  Powers of  Committee.  Subject to the
express  provisions  of this Plan and any express  limitations  on the delegated
authority of a Committee, the Committee will have the authority to:

     (a) determine  eligibility  and the  particular  Eligible  Persons who will
receive Awards;

     (b)  grant  Awards  to  Eligible  Persons,  determine  the  price  at which
securities will be offered or awarded and the amount of securities to be offered
or awarded to any of such persons,  and determine the other  specific  terms and
conditions of such Awards  consistent  with the express limits of this Plan, and
establish the installments (if any) in which such Awards will become exercisable
or will  vest,  or  determine  that no  delayed  exercisability  or  vesting  is
required, and establish the events of termination or reversion of such Awards;

     (c) approve  the forms of Award  Agreements  (which  need not be  identical
either as to type of Award or among Participants);

     (d) construe and interpret this Plan and any agreements defining the rights
and  obligations  of the  Company  and  Employee  Participants  under this Plan,
further  define the terms used in this Plan,  and  prescribe,  amend and rescind
rules and regulations relating to the administration of this Plan;

     (e) cancel,  modify, or waive the Corporation's  rights with respect to, or
modify, discontinue, suspend, or terminate any or all outstanding Awards held by
Eligible Persons, subject to any required consent under Section 6.6;

     (f)  accelerate or extend the  exercisability  or extend the term of any or
all such  outstanding  Awards  within the maximum  ten-year term of Awards under
Section 1.6; and

     (g)  make  all  other   determinations   and  take  such  other  action  as
contemplated  by  this  Plan  or as  may  be  necessary  or  advisable  for  the
administration of this Plan and the effectuation of its purposes.

     1.2.3  Binding  Determinations.  Any action  taken by, or inaction  of, the
Corporation,  any Subsidiary, the Board or the Committee relating or pursuant to
this Plan will be within the absolute discretion of that entity or body and will
be conclusive and binding upon all persons. No member of the Board or Committee,
or officer of the  Corporation  or any  Subsidiary,  will be liable for any such
action or  inaction  of the  entity or body,  of another  person  or,  except in
circumstances  involving  bad  faith,  of himself or  herself.  Subject  only to
compliance with the express  provisions  hereof, the Board and Committee may act
in their absolute  discretion in matters within their authority  related to this
Plan.

     1.2.4 Reliance on Experts.  In making any determination or in taking or not
taking any action under this Plan,  the Committee or the Board,  as the case may
be, may obtain and may rely upon the advice of experts,  including  professional
advisors to the Corporation.  No director,  officer or agent of the Company will
be liable for any such action or determination  taken or made or omitted in good
faith.

     1.2.5 Bifurcation of Plan Administration; Delegation. Subject to the limits
of Section 7, the Board may delegate  different levels of authority to different
Committees with  administration  and grant  authority under this Plan,  provided
that each  designated  Committee  granting any Awards  hereunder  shall  consist
exclusively  of a member or members of the Board.  A majority  of the members of
the acting  Committee  shall  constitute  a quorum.  The vote of a majority of a
quorum or the unanimous written consent of the Committee shall constitute action
by the  Committee.  A  Committee  may  delegate  ministerial,  non-discretionary
functions to individuals who are officers or employees of the Company.

     1.3  Participation1.Discretionary  Awards may be  granted by the  Committee
only to those persons that the Committee  determines to be Eligible Persons.  An
Eligible  Person who has been  granted an Award may, if otherwise  eligible,  be
granted additional Awards if the Committee so determines.

1.4  Shares Available for Awards; Share Limits

     1.4.1  Shares  Available.  Subject to the  provisions  of Section  6.2, the
capital  stock  that may be  delivered  under  this  Plan  will be shares of the
Corporation's  authorized but unissued Common Stock and any shares of its Common
Stock  held as  treasury  shares.  The shares  may be  delivered  for any lawful
consideration.

     1.4.2 Share Limits.  The maximum  number of shares of Common Stock that may
be delivered pursuant to Awards granted to Eligible Persons under this Plan will
not exceed two  million  (2,000,000)  shares (the  "Share  Limit").  The maximum
number of shares subject to those options and Stock Appreciation Rights that are
granted during any calendar year to any one individual  will be limited to three
hundred  thousand  (300,000) and the maximum  individual  limit on the number of
shares in the aggregate  subject to all Awards that during any calendar year are
granted under this Plan to any one  individual  will be three  hundred  thousand
(300,000).  Each of the foregoing numerical limits will be subject to adjustment
as contemplated by this Section 1.4 and Section 6.2.

     1.4.3 Share  Reservation;  Replenishment and Reissue of Unvested Awards. No
Award may be granted  under this Plan unless,  on the date of grant,  the sum of
(a) the maximum  number of shares  issuable at any time  pursuant to such Award,
plus (b) the number of shares  that have  previously  been  issued  pursuant  to
Awards  granted  under this Plan,  other than  reacquired  shares  available for
reissue consistent with any applicable legal  limitations,  plus (c) the maximum
number  of  shares  that may be  issued  at any time  after  such  date of grant
pursuant to Awards that are  outstanding on such date, does not exceed the Share
Limit.  Shares  that are  subject to or  underlie  Awards that expire or for any
reason are canceled or terminated, are forfeited, fail to vest, or for any other
reason are not paid or delivered under this Plan, as well as reacquired  shares,
will again,  except to the extent prohibited by law, be available for subsequent
Awards  under  the  Plan.  Except as  limited  by law,  if an Award is or may be
settled only in cash,  such Award need not be counted  against any of the limits
under this Section 1.4.

     1.5 Grant of Awards.  Subject to the express  provisions of this Plan,  the
Committee  will  determine  the number of shares of Common Stock subject to each
Award,  the price (if any) to be paid for the  shares or the Award  and,  in the
case of performance  share awards,  in addition to matters  addressed in Section
1.2.2,  the specific  objectives,  goals and  performance  criteria  (such as an
increase in sales, market value,  earnings or book value over a base period, the
years of service before  vesting,  the relevant job  classification  or level of
responsibility   or  other  factors)  that  further  define  the  terms  of  the
performance  share award.  Each Award will be  evidenced  by an Award  Agreement
signed by the Corporation and, if required by the Committee, by the Participant.

     1.6 Award Period.  Any Option,  SAR,  warrant or similar right shall expire
and any other Award shall  either  vest or be  forfeited  not more than 10 years
after the date of grant; provided, however, that any payment of cash or delivery
of stock pursuant to an Award may be delayed until a future date if specifically
authorized by the Committee in writing.

1.7  Limitations  on Exercise and Vesting of Awards

     1.7.1 Provisions for Exercise1.  Unless the Committee  otherwise  expressly
provides,  no Award will be  exercisable  or will vest until at least six months
after  the  initial  Award  Date,  and once  exercisable  an Award  will  remain
exercisable until the expiration or earlier termination of the Award.

     1.7.2 Procedure.  Any exercisable Award will be deemed to be exercised when
the Corporation  receives  written notice of such exercise from the Participant,
together with any required  payment made in accordance with Section 2.2.2 or the
applicable Award Agreement.

     1.7.3 Fractional  Shares/Minimum Issue.  Fractional share interests will be
disregarded,  but may be accumulated.  The Committee,  however, may determine in
the case of Eligible Persons that cash, other securities, or other property will
be paid or transferred in lieu of any fractional share interests.  No fewer than
100 shares may be  purchased  on  exercise  of any Award at one time  unless the
number  purchased is the total number at the time  available for purchase  under
the Award.

     1.8 Acceptance of Notes to Finance Exercise.  The Corporation may, with the
Committee's express approval,  accept one or more notes from any Eligible Person
in connection  with the exercise or receipt of any  outstanding  Award;  but any
such note will be subject to the following terms and conditions:

     1.8.1  Principal.  The  principal  of the note will not  exceed  the amount
required to be paid to the  Corporation  upon the  exercise or receipt of one or
more  Awards  under  the Plan and the note  will be  delivered  directly  to the
Corporation in consideration of such exercise or receipt.

     1.8.2  Term.  The  initial  term  of the  note  will be  determined  by the
Committee;  but the term of the note,  including  extensions,  will not exceed a
period of five years.

     1.8.3  Recourse;  Security.  The note will provide for full recourse to the
Participant and will bear interest at a rate determined by the Committee but not
less than the interest rate  necessary to avoid the imputation of interest under
the Code. If required by the  Committee or by  applicable  law, the note will be
secured by a pledge of any shares or rights financed  thereby in compliance with
applicable  law.  The  terms,  repayment  provisions,   and  collateral  release
provisions  of the note and the  pledge  securing  the note  will  conform  with
applicable rules and regulations of the Federal Reserve Board as then in effect.

     1.8.4  Termination of  Employment.  If the employment or term of service of
the Participant terminates, the unpaid principal balance of the note will become
due and payable on the 10th business day after such  termination;  but if a sale
of such shares would cause such  Participant  to incur  liability  under Section
16(b) of the Exchange Act, the unpaid balance will become due and payable on the
10th  business day after the first day on which a sale of such shares could have
been made without  incurring  such  liability  assuming for these  purposes that
there are no other  transactions  (or deemed  transactions in securities of this
Corporation) by the Participant after such termination.

1.9  No  Transferability;  Limited  Exception  to  Transfer  Restrictions

     1.9.1 Limit On Exercise and Transfer.  Unless otherwise  expressly provided
in (or  pursuant  to) this  Section  1.9,  by  applicable  law and by the  Award
Agreement,  as the same may be amended,  (a) all Awards are non-transferable and
will not be subject in any manner to sale, transfer,  anticipation,  alienation,
assignment,  pledge, encumbrance or charge; Awards will be exercised only by the
Participant;  and (b) amounts  payable or shares  issuable  pursuant to an Award
will be delivered only to (or for the account of) the Participant.

     1.9.2  Exceptions.  The  Committee may permit Awards to be exercised by and
paid only to certain persons or entities related to the Participant  pursuant to
such  conditions and  procedures as the Committee may  establish.  Any permitted
transfer will be subject to the condition  that the Committee  receive  evidence
satisfactory  to it that the  transfer  is  being  made for  estate  and/or  tax
planning purposes and without consideration (other than nominal  consideration).
ISOs and  Restricted  Stock  Awards,  however,  will be  subject  to any and all
additional transfer restrictions under the Code.

     1.9.3 Further  Exceptions to Limits On Transfer.  The exercise and transfer
restrictions in Section 1.9.1 will not apply to:

                    (a) transfers to the Corporation,

                    (b) the designation of a beneficiary to receive  benefits if
               the Participant  dies or, if the Participant has died,  transfers
               to or  exercise  by the  Participant's  beneficiary,  or,  in the
               absence of a validly designated beneficiary, transfers by will or
               the laws of descent and distribution,

                    (c) transfers  pursuant to a QDRO if approved or ratified by
               the Committee,

                    (d) if the Participant has suffered a disability,  permitted
               transfers  or  exercises  on  behalf  of the  Participant  by the
               Participant's legal representative, or

                    (e)  the   authorization   by  the  Committee  of  "cashless
               exercise" procedures with third parties who provide financing for
               the  purpose of (or who  otherwise  facilitate)  the  exercise of
               Awards   consistent   with   applicable   laws  and  the  express
               authorization of the Committee.

2.  Options

     2.1 Grants One or more  Options  may be granted  under this  Section to any
Eligible Person.  Each Option granted will be designated in the applicable Award
Agreement,  by the  Committee as either an Incentive  Stock  Option,  subject to
Section 2.3, or a Non-Qualified Stock Option.

     2.2 Option Price

     2.2.1  Pricing  Limits.  The  purchase  price per share of the Common Stock
covered by each Option will be  determined  by the  Committee at the time of the
Award,  but in the case of  Incentive  Stock  Options will not be less than 100%
(110% in the case of a Participant  described in Section 2.4) of the Fair Market
Value of the Common Stock on the date of grant and in all cases will not be less
than the par value thereof.

     2.2.2 Payment Provisions2.2.2 Payment Provisions. The purchase price of any
shares  purchased  on exercise of an Option  granted  under this Section will be
paid in  full  at the  time of  each  purchase  in one or a  combination  of the
following methods: (a) in cash or by electronic funds transfer; (b) by certified
or cashier's check payable to the order of the Corporation; (c) if authorized by
the Committee or specified in the applicable  Award  Agreement,  by a promissory
note of the Participant  consistent with the requirements of Section 1.8; (d) by
notice  and third  party  payment  in such  manner as may be  authorized  by the
Committee;  or (e) by the delivery of shares of Common Stock of the  Corporation
already  owned  by the  Participant,  but  the  Committee  may  in its  absolute
discretion  limit the  Participant's  ability to exercise an Award by delivering
such shares, and any shares delivered that were initially acquired upon exercise
of a stock option must have been owned by the Participant at least six months as
of the date of  delivery.  Shares of Common  Stock used to satisfy the  exercise
price of an  Option  will be valued at their  Fair  Market  Value on the date of
exercise.  Without  limiting the generality of the foregoing,  the Committee may
provide  that the Option can be  exercised  and  payment  made by  delivering  a
properly  executed  exercise notice together with irrevocable  instructions to a
broker to  promptly  deliver  to the  Corporation  the  amount of sale  proceeds
necessary to pay the exercise  price and,  unless  otherwise  prohibited  by the
Committee or applicable law, any applicable tax  withholding  under Section 6.5.
The  Corporation  will not be obligated to deliver  certificates  for the shares
unless and until it receives full payment of the exercise price therefor and any
related withholding obligations have been satisfied.

2.3  Limitations on Grant and Terms of Incentive Stock Options

     2.3.1 $100,000  Limit To the extent that the aggregate  "Fair Market Value"
of stock with respect to which incentive stock options first become  exercisable
by a Participant in any calendar year exceeds $100,000, taking into account both
Common  Stock  subject  to  Incentive  Stock  Options  under this Plan and stock
subject to incentive  stock  options under all other plans of the Company or any
parent corporation,  such options will be treated as Nonqualified Stock Options.
For this  purpose,  the "Fair Market Value" of the stock subject to options will
be determined as of the date the options were awarded. In reducing the number of
options treated as incentive stock options to meet the $100,000 limit,  the most
recently  granted  options will be reduced  first.  To the extent a reduction of
simultaneously  granted  options is necessary to meet the  $100,000  limit,  the
Committee may, in the manner and to the extent permitted by law, designate which
shares of Common  Stock are to be treated  as shares  acquired  pursuant  to the
exercise of an Incentive Stock Option.

     2.3.2 Option  Period.  Subject to Section  1.6,  each Option and all rights
thereunder will expire no later than 10 years after the Award Date.

     2.3.3 Other Code  Limits.  Incentive  Stock  Options may only be granted to
Eligible  Employees of the  Corporation or a Subsidiary that satisfies the other
eligibility  requirements  of the  Code.  There  will be  imposed  in any  Award
Agreement relating to Incentive Stock Options such other terms and conditions as
from time to time are required in order that the Option be an  "incentive  stock
option" as that term is defined in Section 422 of the Code.

2.4  Limits on 10%  Holders.

     No Incentive Stock Option may be granted to any person who, at the time the
Option is granted,  owns (or is deemed to own under Section  424(d) of the Code)
shares  of  outstanding  Common  Stock  possessing  more  than 10% of the  total
combined  voting  power of all classes of stock of the  Corporation,  unless the
exercise  price of such Option is at least 110% of the Fair Market  Value of the
stock  subject  to the Option  and such  Option by its terms is not  exercisable
after the expiration of five years from the date such Option is granted.

2.5  Option  Repricing/Cancellation  and Regrant/Waiver of Restrictions

     Subject to Section  1.4 and  Section 6.6 and the  specific  limitations  on
Awards  contained in this Plan,  the Committee  from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible  Person any
adjustment in the exercise or purchase price, the vesting  schedule,  the number
of shares  subject to, the  restrictions  upon or the term of, an Award  granted
under this  Section by  cancellation  of an  outstanding  Award and a subsequent
regranting of an Award, by amendment,  by substitution of an outstanding  Award,
by waiver or by other  legally valid means.  Such  amendment or other action may
result  among other  changes in an exercise or purchase  price that is higher or
lower than the  exercise  or  purchase  price of the  original  or prior  Award,
provide  for a greater  or lesser  number of shares  subject  to the  Award,  or
provide for a longer or shorter vesting or exercise period.

2.6  Effects of Termination  of Employment;  Termination of Subsidiary
     Status;  Discretionary Provisions.

     2.6.1 Options - Resignation or Dismissal.  If the Participant's  employment
by (or other service specified in the Award Agreement to) the Company terminates
for any reason (the date of such termination being referred to as the "Severance
Date") other than  Retirement,  Total  Disability  or death,  or "for cause" (as
determined  in the  discretion of the  Committee),  the  Participant  will have,
unless  otherwise  provided  in the  Award  Agreement  and  subject  to  earlier
termination  pursuant to or as  contemplated by Section 1.6 or 6.2, three months
after the  Severance  Date to  exercise  any  Option to the extent it has become
exercisable on the Severance Date. In the case of a termination "for cause", the
Option will terminate on the Severance Date. In other cases, the Option,  to the
extent not exercisable on the Severance Date, will terminate.

     2.6.2 Options - Death or Disability. If the Participant's employment by (or
specified service to) the Company  terminates as a result of Total Disability or
death,   the  Participant,   Participant's   Personal   Representative   or  the
Participant's  Beneficiary,  as the case may be,  will  have,  unless  otherwise
provided in the Award Agreement and subject to earlier  termination  pursuant to
or as  contemplated  by Section 1.6 or 6.2,  until 12 months after the Severance
Date to exercise any Option to the extent it will have become exercisable by the
Severance  Date. Any Option to the extent not  exercisable on the Severance Date
will terminate.

     2.6.3  Options  -  Retirement.  If  the  Participant's  employment  by  (or
specified  service to) the Company  terminates  as a result of  Retirement,  the
Participant,   Participant's   Personal   Representative  or  the  Participant's
Beneficiary,  as the case may be, will have,  unless  otherwise  provided in the
Award  Agreement  and  subject  to  earlier   termination   pursuant  to  or  as
contemplated  by Section 1.6 or 6.2, until 12 months after the Severance Date to
exercise any Nonqualified Stock Option (three months after the Severance Date in
the case of an  Incentive  Stock  Option)  to the  extent  it will  have  become
exercisable by the Severance Date. The Option,  to the extent not exercisable on
the Severance Date, will terminate.

     2.6.4  Certain  SARs.  Any SAR  granted  concurrently  or in tandem with an
Option will have the same post-termination provisions and exercisability periods
as the Option to which it relates, unless the Committee otherwise provides.

     2.6.5 Other Awards.  The Committee  will establish in respect of each other
Award granted  hereunder the  Participant's  rights and benefits (if any) if the
Participant's  employment  is terminated  and in so doing may make  distinctions
based upon the cause of termination and the nature of the Award.

     2.6.6 Committee  Discretion.  Notwithstanding  the foregoing  provisions of
this  Section  2.6, in the event of, or in  anticipation  of, a  termination  of
employment with the Company for any reason,  other than discharge for cause, the
Committee may increase the portion of the  Participant's  Award available to the
Participant,  or Participant's  Beneficiary or Personal  Representative,  as the
case  may  be,  or,  subject  to the  provisions  of  Section  1.6,  extend  the
exercisability  period upon such terms as the Committee determines and expressly
sets forth in or by amendment to the Award Agreement.

2.7  Options and Rights in Substitution for Stock Options Granted by Other
     Corporations

     Rights may be granted to Eligible  Persons under this Plan in  substitution
for employee  stock options  granted by other entities to persons who are or who
will become  Eligible  Persons in respect of the Company,  in connection  with a
distribution,  merger or  reorganization  by or with the  granting  entity or an
affiliated entity, or the acquisition by the Company, directly or indirectly, of
all or a substantial part of the stock or assets of the employing entity.

3.   Stock Appreciation Rights (Including Limited Stock Appreciation Rights)

     3.1  Grants.   The  Committee  may  grant  to  any  Eligible  Person  Stock
Appreciation  Rights either  concurrently  with the grant of another Award or in
respect of an outstanding  Award, in whole or in part, or  independently  of any
other  Award.  Any  Stock  Appreciation  Right  granted  in  connection  with an
Incentive Stock Option will contain such terms as may be required to comply with
the  provisions  of  Section  422 of the  Code and the  regulations  promulgated
thereunder, unless the holder otherwise agrees.

3.2  Exercise of Stock Appreciation Rights

     3.2.1 Exercisability. Unless the Award Agreement or the Committee otherwise
provides,   a  Stock  Appreciation  Right  related  to  another  Award  will  be
exercisable  at such time or times,  and to the extent,  that the related  Award
will be exercisable.

     3.2.2 Effect on Available Shares.  To the extent that a Stock  Appreciation
Right is exercised,  only the actual number of delivered  shares of Common Stock
will be charged against the maximum amount of Common Stock that may be delivered
pursuant to Awards  under this Plan.  The number of shares  subject to the Stock
Appreciation Right and the related Option of the Participant will,  however,  be
reduced by the number of  underlying  shares as to which the  exercise  related,
unless the Award Agreement otherwise provides.

     3.2.3 Stand-Alone SARs. A Stock Appreciation Right granted independently of
any other Award will be exercisable pursuant to the terms of the Award Agreement
but in no event earlier than six months after the Award Date, except in the case
of death or Total Disability.

     3.2.4 Proportionate Reduction If an SAR extends to less than all the shares
covered by the related Award and if a portion of the related Award is thereafter
exercised,  the number of shares subject to the unexercised SAR shall be reduced
only if and to the extent that the  remaining  number of shares  covered by such
related Award is less than the remaining number of shares subject to such SAR.

3.3      Payment

     3.3.1 Amount.  Unless the Committee otherwise provides,  upon exercise of a
Stock Appreciation Right and the attendant  surrender of an exercisable  portion
of any related Award,  the  Participant  will be entitled to receive  subject to
Section 6.5 payment of an amount determined by multiplying

     (a) the difference  obtained by subtracting the exercise price per share of
Common Stock under the related Award (if  applicable) or the initial share value
specified  in the Award from the Fair Market Value of a share of Common Stock on
the date of exercise of the Stock Appreciation Right, by

     (b) the number of shares with respect to which the Stock Appreciation Right
has been exercised.  3.3.2 Form of Payment3.3.2 Form of Payment.  The Committee,
in its sole discretion, will determine the form in which payment will be made of
the amount  determined under Section 3.3.1 above,  either solely in cash, solely
in shares of Common  Stock  (valued at Fair Market Value on the date of exercise
of the Stock  Appreciation  Right), or partly in such shares and partly in cash,
but the  Committee  will have  determined  that such  exercise  and  payment are
consistent  with  applicable  law. If the Committee  permits the  Participant to
elect to receive cash or shares (or a combination thereof) on such exercise, any
such election will be subject to such conditions as the Committee may impose.

     3.4 Limited  Stock  Appreciation  Rights.  The  Committee  may grant to any
Eligible Person Stock Appreciation Rights exercisable only upon or in respect of
a change in  control  or any other  specified  event  ("Limited  SARs") and such
Limited  SARs  may  relate  to or  operate  in  tandem  or  combination  with or
substitution  for  Options,  other  SARs or  other  Awards  (or any  combination
thereof),  and may be payable in cash or shares based on the spread  between the
base price of the SAR and a price based upon or equal to the Fair  Market  Value
of the  Shares  during  a  specified  period  or at a  specified  time  within a
specified period before, after or including the date of such event.


4. Restricted Stock Awards

     4.1 Grants.  The Committee may grant one or more Restricted Stock Awards to
any Eligible  Person.  Each  Restricted  Stock Award  Agreement will specify the
number of shares of Common  Stock to be issued to the  Participant,  the date of
such issuance,  the consideration for such shares (but not less than the minimum
lawful consideration under applicable state law) by the Participant,  the extent
(if any) to  which  and the time (if  ever)  at which  the  Participant  will be
entitled to dividends, voting and other rights in respect of the shares prior to
vesting,  and the  restrictions  (which  may be based on  performance  criteria,
passage of time or other  factors or any  combination  thereof)  imposed on such
shares  and the  conditions  of  release  or  lapse of such  restrictions.  Such
restrictions will not lapse earlier than six months after the Award Date, except
to the extent the Committee may otherwise provide. Stock certificates evidencing
shares of Restricted  Stock pending the lapse of the  restrictions  ("Restricted
Shares") will bear a legend  making  appropriate  reference to the  restrictions
imposed  hereunder  and  will  be held by the  Corporation  or by a third  party
designated by the Committee  until the  restrictions  on such shares have lapsed
and the shares have vested in  accordance  with the  provisions of the Award and
Section 1.7. Upon issuance of the Restricted Stock Award, the Participant may be
required to provide such further  assurance  and  documents as the Committee may
require to enforce the restrictions.

4.2      Restrictions

     4.2.1  Pre-Vesting  Restraints  Except as provided in Sections 4.1 and 1.9,
restricted  shares  comprising  any  Restricted  Stock  Award  may not be  sold,
assigned,  transferred,  pledged or otherwise disposed of or encumbered,  either
voluntarily or involuntarily,  until the restrictions on such shares have lapsed
and the shares have become vested.

     4.2.2  Dividend  and  Voting  Rights  Unless  otherwise   provided  in  the
applicable  Award  Agreement,  a Participant  receiving a Restricted Stock Award
will be entitled to cash  dividend and voting  rights for all shares issued even
though they are not vested, but such rights will terminate immediately as to any
Restricted Shares which cease to be eligible for vesting.

     4.2.3 Cash  Payments  If the  Participant  has been paid or  received  cash
(including any dividends) in connection  with the  Restricted  Stock Award,  the
Award  Agreement  will  specify  whether  and to what  extent  such cash will be
returned (with or without an earnings  factor) as to any restricted  shares that
cease to be eligible for vesting.

4.3 Return to the Corporation.

     Unless the Committee otherwise  expressly provides,  Restricted Shares that
remain subject to  restrictions  at the time of termination of employment or are
subject to other  conditions to vesting that have not been satisfied by the time
specified in the applicable  Award  Agreement will not vest and will be returned
to the Corporation in such manner and on such terms as the Committee provides.

5. Performance Share Awards and Stock Bonuses

     5.1 Grants of Performance Share Awards. The Committee may grant Performance
Share  Awards to Eligible  Employees  based upon such  factors as the  Committee
deems  relevant in light of the specific  type and terms of the award.  An Award
Agreement  will  specify the maximum  number of shares of Common  Stock (if any)
subject to the Performance Share Award, the consideration (but not less than the
minimum lawful  consideration) to be paid for any such shares as may be issuable
to the  Participant,  the  duration of the Award and the  conditions  upon which
delivery of any shares or cash to the Participant  will be based.  The amount of
cash or shares or other property that may be deliverable  pursuant to such Award
will be based upon the degree of attainment over a specified  period of not more
than 10 years (a "performance  cycle") as may be established by the Committee of
such  measure(s) of the  performance of the Company (or any part thereof) or the
Participant as may be  established  by the Committee.  The Committee may provide
for full or partial credit, prior to completion of such performance cycle or the
attainment of the performance  achievement  specified in the Award, in the event
of the Participant's death, Retirement, or Total Disability, a Change in Control
Event or in such other  circumstances as the Committee  (consistent with Section
6.10.3(b), if applicable) may determine.

     5.2 Special  Performance-Based  Share Awards. Options or SAR's granted with
an exercise  price not less than Fair  Market  Value at the  applicable  date of
grant for Section 162(m) purposes to Eligible  Employees which otherwise satisfy
the  conditions to  deductibility  under  Section  162(m) of the Code are deemed
"Qualifying  Awards".  Without limiting the generality of the foregoing,  and in
addition to Qualifying Awards granted under other provisions of this Plan, other
performance-based  awards  within  the  meaning  of  Section  162(m) of the Code
("Performance-Based   Awards"),   whether  in  the  form  of  restricted  stock,
performance  stock,  phantom stock or other rights, the vesting of which depends
on the performance of the Company on a  consolidated,  segment,  subsidiary,  or
division basis, with reference to revenue growth,  net earnings (before or after
taxes or before or after taxes,  interest,  depreciation,  and/or amortization),
cash  flow,  return  on  equity  or on  assets  or on net  investment,  or  cost
containment or reduction,  or any combination thereof (the "business  criteria")
relative to preestablished performance goals, may be granted under this Plan. To
the extent so defined,  these terms are used as applied under generally accepted
accounting  principles and in the Company's financial reporting.  The applicable
business  criterion  or  criteria  and the  specific  performance  goals must be
approved by the Committee in advance of applicable  deadlines under the Code and
while the performance  relating to such goals remains  substantially  uncertain.
The applicable performance  measurement period may be not less than one nor more
than 10 years  (except as provided in Section 1.6).  Other types of  performance
and  non-performance  awards may also be granted  under the other  provisions of
this Plan.  The  following  provisions  relate to all  Performance-Based  Awards
(other than Qualifying Awards) granted under this Plan:

     5.2.1 Eligible  Class.  The eligible class of persons for Awards under this
Section is executive officers of the Corporation.

     5.2.2 Maximum Award.  Subject to Section 1.4.2,  in no event will grants in
any calendar  year to any one  individual  under this Section 5.2 relate to more
than three hundred  thousand  (300,000) shares or, (if payable solely in cash) a
cash amount of more than one million dollars ($1,000,000).

     5.2.3  Committee  Certification.  To the extent required by Section 162(m),
before any Performance-Based Award under this Section 5.2 is paid, the Committee
must  certify  that the  material  terms  of the  Performance-Based  Award  were
satisfied.

     5.2.4 Terms and Conditions of Awards. The Committee will have discretion to
determine the restrictions or other  limitations of the individual  Awards under
this Section 5.2 (including  the authority to reduce Awards,  payouts or vesting
or to pay no Awards,  in its sole  discretion,  if the Committee  preserves such
authority  at the time of grant by language  to this  effect in its  authorizing
resolutions or otherwise).

     5.2.5  Stock  Payout  Features.  In lieu of cash  payment of an Award,  the
Committee  may  require or allow all or a portion of the Award to be paid in the
form of stock, Restricted Shares, an Option, or another Award.

     5.2.6 Adjustments for Material Changes. Performance goals or other features
of an Award under this  Section 5.2 may provide  that they (a) shall be adjusted
to reflect a change in corporate  capitalization,  a corporate transaction (such
as a  reorganization,  combination,  separation,  or merger)  or a  complete  or
partial corporate liquidation,  or (b) shall be calculated either without regard
for or to reflect any change in accounting  policies or practices  affecting the
Company  and/or the business  criteria or performance  goals or targets,  or (c)
shall be adjusted for any other circumstance or event, or (d) any combination of
(a) through  (c),  but only to the extent in each case that such  adjustment  or
determination  in respect of  Performance-Based  Awards would be consistent with
the requirements of Section 162(m) to qualify as performance-based compensation.

     5.3 Grants of Stock  Bonuses.  The Committee may grant a Stock Bonus to any
Eligible  Person to reward  exceptional or special  services,  contributions  or
achievements  in the  manner  and on such terms and  conditions  (including  any
restrictions  on such shares) as determined  from time to time by the Committee.
The number of shares so awarded will be determined by the  Committee.  The Award
may be granted independently or in lieu of a cash bonus.

     5.4 Deferred  Payments.  The Committee may authorize for the benefit of any
Eligible  Person the  deferral  of any payment of cash or shares that may become
due or of cash  otherwise  payable under this Plan,  and provide for  accredited
benefits thereon based upon such deferment, at the election or at the request of
such Participant, subject to the other terms of this Plan. Such deferral will be
subject  to  such  further  conditions,  restrictions  or  requirements  as  the
Committee may impose, subject to any then vested rights of Participants.

5.5 Cash Bonus Awards.

     5.5.1  Performance  Goals.  The Committee may establish a program of annual
incentive  awards that are payable in cash to  Eligible  Persons  based upon the
extent to which  performance  goals are met during the performance  period.  The
performance  goals  may  depend  upon  the  performance  of  the  Company  on  a
consolidated, subsidiary division basis with reference to revenues, net earnings
(before or after interest,  taxes,  depreciation,  or amortization),  cash flow,
return on equity or on assets or net investment,  cost containment or reduction,
or achievement  of strategic  goals (or any  combination  of such  factors).  In
addition,   the  award  may  depend  upon  the  Eligible  Employee's  individual
performance.

     5.5.2 Payment in Restricted Stock. In lieu of cash payment of an Award, the
Committee  may  require or allow all or a portion of the Award to be paid in the
form of stock, Restricted Stock, an Option or other Award.

6. Other Provisions6. Other Provisions

     6.1  Rights of  Eligible  Persons,  Participants  and  Beneficiaries

     6.1.1 Employment Status. Status as an Eligible Person will not be construed
as a  commitment  that any Award  will be made  under  this Plan to an  Eligible
Person or to Eligible Persons generally.

     6.1.2 No  Employment  Contract.  Nothing  contained in this Plan (or in any
other  documents  related to this Plan or to any  Award)  will  confer  upon any
Eligible  Person or other  Participant  any right to  continue  in the employ or
other  service  of the  Company or  constitute  any  contract  or  agreement  of
employment or other service, nor will interfere in any way with the right of the
Company to otherwise  change such person's  compensation or other benefits or to
terminate the  employment  of such person,  with or without  cause,  but nothing
contained  in this  Plan or any  related  document  will  adversely  affect  any
independent contractual right of such person without the Participant's consent.

     6.1.3 Plan Not Funded.  Awards  payable  under this Plan will be payable in
shares or from the general assets of the Corporation, and (except as provided in
Section 1.4.3) no special or separate  reserve,  fund or deposit will be made to
assure payment of such Awards. No Participant,  Beneficiary or other person will
have  any  right,  title  or  interest  in any  fund  or in any  specific  asset
(including shares of Common Stock,  except as expressly  otherwise  provided) of
the Company by reason of any Award  hereunder.  Neither the  provisions  of this
Plan (or of any related  documents),  nor the creation or adoption of this Plan,
nor any action taken pursuant to the provisions of this Plan will create,  or be
construed to create, a trust of any kind or a fiduciary relationship between the
Company and any Participant,  Beneficiary or other person.  To the extent that a
Participant,  Beneficiary  or other person  acquires a right to receive  payment
pursuant to any Award hereunder, such right will be no greater than the right of
any unsecured general creditor of the Company.

     6.2      Adjustments; Acceleration

     6.2.1 Adjustments. The following provisions will apply if any extraordinary
dividend  or other  extraordinary  distribution  occurs in respect of the Common
Stock (whether in the form of cash,  Common Stock,  other  securities,  or other
property), or any reclassification,  recapitalization,  stock split (including a
stock  split  in  the  form  of  a  stock   dividend),   reverse   stock  split,
reorganization,   merger,  combination,   consolidation,   split-up,   spin-off,
combination,  repurchase, or exchange of Common Stock or other securities of the
Corporation,  or any similar, unusual or extraordinary corporate transaction (or
event in respect of the Common Stock) or a sale of substantially  all the assets
of the Corporation as an entirety occurs. The Committee will, in such manner and
to such extent (if any) as it deems appropriate and equitable

     (a) proportionately  adjust any or all of (i) the number and type of shares
of Common Stock (or other securities) that thereafter may be made the subject of
Awards  (including the specific maxima and numbers of shares set forth elsewhere
in this Plan),  (ii) the number,  amount and type of shares of Common  Stock (or
other securities or property) subject to any or all outstanding Awards,(iii) the
grant,  purchase,  or exercise price of any or all outstanding  Awards, (iv) the
securities,  cash or other property deliverable upon exercise of any outstanding
Awards, or (v) the performance  standards appropriate to any outstanding Awards,
or
     (b)in  the  case  of  an  extraordinary  dividend  or  other  distribution,
recapitalization,   reclassification,  merger,  reorganization,   consolidation,
combination, sale of assets, split up, exchange, or spin off, make provision for
a cash  payment or for the  substitution  or exchange of any or all  outstanding
Awards or the cash,  securities or property  deliverable to the holder of any or
all outstanding  Awards based upon the distribution or consideration  payable to
holders of the Common Stock of the Corporation upon or in respect of such event.
In each  case,  with  respect  to Awards of  Incentive  Stock  Options,  no such
adjustment  will be made that  would  cause the Plan to violate  Section  422 or
424(a) of the Code or any successor  provisions  without the written  consent of
holders  materially  adversely  affected  thereby.  In any of such  events,  the
Committee may take such action  sufficiently prior to such event if necessary to
permit the  Participant  to realize the  benefits  intended to be conveyed  with
respect  to the  underlying  shares  in  the  same  manner  as is  available  to
stockholders generally.


     6.2.2  Acceleration  of Awards Upon Change in  Control.  Unless  prior to a
Change in Control  Event the Committee  determines  that,  upon its  occurrence,
benefits  under any or all Awards will not  accelerate or  determines  that only
certain or limited  benefits under any or all Awards will be accelerated and the
extent to which they will be accelerated, and/or establishes a different time in
respect  of such  Event for such  acceleration,  then upon the  occurrence  of a
Change in Control Event:

     (a)each  Option  and  Stock  Appreciation  Right  will  become  immediately
exercisable,

     (b) Restricted Stock will immediately vest free of restrictions, and

     (c) each Performance Share Award will become payable to the Participant.

     However,  in the case of a  transaction  intended to be accounted  for as a
pooling of interests  transaction,  the Committee  shall have no discretion with
respect to the foregoing  acceleration of Awards. The Committee may override the
limitations on  acceleration  in this Section 6.2.2 by express  provision in the
Award  Agreement  and may  accord  any  Eligible  Person a right to  refuse  any
acceleration,  whether  pursuant to the Award  Agreement or  otherwise,  in such
circumstances  as the Committee  may approve.  Any  acceleration  of Awards will
comply with applicable legal requirements.

     6.2.3 Possible Early  Termination of Accelerated  Awards.  If any Option or
other right to acquire  Common Stock under this Plan has been fully  accelerated
as required or permitted by Section  6.2.2 but is not  exercised  prior to (a) a
dissolution of the Corporation,  or (b) an event described in Section 6.2.1 that
the Corporation does not survive,  or (c) the consummation of an event described
in Section 6.1 involving a Change of Control approved by the Board,  such Option
or right will  terminate,  subject to any provision that has been expressly made
by the  Committee  through  a plan of  reorganization  approved  by the Board or
otherwise  for  the  survival,  substitution,   assumption,  exchange  or  other
settlement of such Option or right.

     6.2.4 Golden Parachute Limitations.  Unless otherwise specified in an Award
Agreement,  no Award  will be  accelerated  under this Plan to an extent or in a
manner that would not be fully  deductible by the Company for federal income tax
purposes because of Section 280G of the Code, nor will any payment  hereunder be
accelerated if any portion of such  accelerated  payment would not be deductible
by the  Company  because  of  Section  280G of the  Code.  If a holder  would be
entitled to benefits or payments  hereunder  and under any other plan or program
that would  constitute  "parachute  payments"  as defined in Section 280G of the
Code,  then the holder may by written notice to the Company  designate the order
in which such parachute payments will be reduced or modified so that the Company
is not denied federal income tax deductions for any "parachute payments" because
of Section 280G of the Code.

     6.3 Effect of Termination  of  Employment.  The Committee will establish in
respect of each Award granted to an Eligible  Person the effect of a termination
of  employment  on the rights and benefits  thereunder  and in so doing may make
distinctions based upon the cause of termination.

     6.4  Compliance  with Laws.  This Plan,  the granting and vesting of Awards
under this Plan and the offer,  issuance  and delivery of shares of Common Stock
and/or the payment of money under this Plan or under  Awards  granted  hereunder
are subject to compliance with all applicable  federal and state laws, rules and
regulations  (including  but not  limited to state and federal  securities  law,
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Corporation, be
necessary or advisable in connection  therewith.  Any securities delivered under
this Plan will be  subject to such  restrictions,  and to any  restrictions  the
Committee  may  require  to  preserve  a pooling of  interests  under  generally
accepted accounting  principles,  and the person acquiring such securities will,
if requested by the Corporation,  provide such assurances and representations to
the  Corporation  as the  Corporation  may deem necessary or desirable to assure
compliance with all applicable legal requirements.

     6.5 Tax Withholding

     6.5.1 Provision for Tax Withholding Offset. Upon any exercise,  vesting, or
payment of any Award or upon the  disposition of shares of Common Stock acquired
pursuant to the exercise of an Incentive  Stock Option prior to  satisfaction of
the holding  period  requirements  of Section 422 of the Code, the Company shall
have the  right at its  option  to (i)  require  the  Participant  (or  Personal
Representative or Beneficiary, as the case may be) to pay or provide for payment
of the amount of any taxes which the  Company  may be required to withhold  with
respect to such Award event or payment or (ii) deduct from any amount payable in
cash the amount of any taxes which the Company may be required to withhold  with
respect to such cash payment. In any case where a tax is required to be withheld
in connection  with the delivery of shares of Common Stock under this Plan,  the
Committee may in its sole  discretion  (subject to Section 6.4) grant (either at
the time of the  Award or  thereafter)  to the  Participant  the right to elect,
pursuant  to such rules and  subject to such  conditions  as the  Committee  may
establish,  to have the Corporation  reduce the number of shares to be delivered
by (or otherwise  reacquire)  the  appropriate  number of shares valued at their
then Fair Market Value, to satisfy such withholding obligation.

     6.5.2 Tax Loans. If so provided in the Award Agreement, the Company may, to
the extent  permitted  by law,  authorize  a loan to an  Eligible  Person in the
amount of any taxes that the Company may be required to withhold with respect to
shares of Common Stock received (or disposed of, as the case may be) pursuant to
a transaction  described in Section 6.5.1.  Such a loan will be for a term, at a
rate of interest and pursuant to such other terms and conditions as the Company,
under  applicable  law may  establish  and such  loan need not  comply  with the
provisions of Section 1.8.

6.6 Plan Amendment, Termination and Suspension.

     6.6.1 Board  Authorization.  The Board may, at any time, terminate or, from
time to time, amend, modify or suspend this Plan, in whole or in part. No Awards
may be granted during any  suspension of this Plan or after  termination of this
Plan, but the Committee will retain  jurisdiction as to Awards then  outstanding
in accordance with the terms of this Plan.

     6.6.2 Stockholder  Approval. To the extent then required under Sections 422
and 424 of the  Code  or any  other  applicable  law,  or  deemed  necessary  or
advisable  by the  Board,  any  amendment  to this  Plan  shall  be  subject  to
stockholder  approval.  The changes to this Plan  approved by the Board prior to
May 1, 1998 to redefine  the term Other  Eligible  Person to permit the grant of
additional  discretionary  Awards  to, and to permit  the  amendment  of formula
Awards then  outstanding and held by,  Non-Employee  Directors,  and to increase
Plan and Award share limits shall be subject to stockholder approval.

     6.6.3 Amendments to Awards. Without limiting any other express authority of
the  Committee  under  but  subject  to the  express  limits of this  Plan,  the
Committee by agreement or resolution  may waive  conditions of or limitations on
Awards to  Eligible  Persons  that the  Committee  in the prior  exercise of its
discretion has imposed, without the consent of a Participant, and may make other
changes to the terms and  conditions  of Awards that do not affect in any manner
materially  adverse to the Participant,  the  Participant's  rights and benefits
under an Award.

     6.6.4   Limitations  on  Amendments  to  Plan  and  Awards.  No  amendment,
suspension or termination of this Plan or change of or affecting any outstanding
Award will,  without  written consent of the  Participant,  affect in any manner
materially  adverse to the Participant any rights or benefits of the Participant
or obligations of the Corporation  under any Award granted under this Plan prior
to the effective date of such change.  Changes  contemplated by Section 6.2 will
not be deemed to constitute  changes or amendments  for purposes of this Section
6.6.

     6.6.5 Amendments to Formula Awards. Options granted under the formula Award
feature  of  Section 8 of the prior  version  of this Plan may be amended by the
Board or a duly  authorized  Committee of the Board in a manner  permitted under
this Plan in respect of Options granted to Eligible Employees.

     6.7 Privileges of Stock Ownership. Except as otherwise expressly authorized
by the  Committee  or this  Plan,  a  Participant  will not be  entitled  to any
privilege  of stock  ownership  as to any  shares of Common  Stock not  actually
delivered to and held of record by the  Participant.  No adjustment will be made
for dividends or other rights as a stockholder  for which a record date is prior
to such date of delivery.

     6.8 Effective  Date of the Plan.  The Plan was first  approved by the Board
effective as of August 1, 1997, and, as amended and restated as of September 12,
1997, then approved by the Board and by the Corporation's stockholders. The Plan
was further  amended and  restated in its entirety by the Board as of January 1,
1998 and February 5, 1998. The  restatement as of February 5, 1998 is subject to
stockholder  approval  and if not so  approved  will be  rescinded,  leaving the
restatement as of January 1, 1998 in effect, subject to Section 6.6.

     6.9 Term of the Plan.  No Award will be granted  under this Plan after July
31, 2007 (the "termination  date").  Unless otherwise expressly provided in this
Plan or in an  applicable  Award  Agreement,  any  Award  granted  prior  to the
termination date may extend beyond such date, and all authority of the Committee
with respect to Awards  hereunder,  including  the  authority to amend an Award,
will  continue  during  any  suspension  of this Plan and in  respect  of Awards
outstanding on the termination date.

     6.10 Governing Law/Construction/Severability

     6.10.1  Choice of Law.  This Plan,  the Awards,  all  documents  evidencing
Awards and all other  related  documents  will be governed by, and  construed in
accordance with the laws of the state of California.

     6.10.2  Severability.  If a  court  of  competent  jurisdiction  holds  any
provision invalid and unenforceable,  the remaining provisions of this Plan will
continue in effect.

     6.10.3 Plan Construction.

     (a) Rule  16b-3.  It is the  intent of the  Corporation  that  transactions
involving the Awards under this Plan, in the case of Participants who are or may
be subject to Section 16 of the Exchange Act, satisfy to the extent feasible the
requirements  for  applicable  exemptions  under  Rule 16 so that  such  persons
(unless they otherwise  agree) will be entitled to the benefits of Rule 16b-3 or
other  exemptive  rules under Section 16 of the Exchange Act in respect of those
transactions and will not be subjected to avoidable liability thereunder.

     (b) Section 162(m). It is the further intent of the Company that Options or
SARs with an exercise or base price not less than Fair Market  Value on the date
of grant and  Performance-Based  Awards under  Section 5.2 of this Plan that are
granted  to or held by a person  subject  to  Section  162(m)  of the Code  will
qualify as  performance-based  compensation  under Section 162(m) of the Code to
the extent that the Committee  authorizing the Award (or the payment thereof, as
the case may be) satisfies the administrative  requirements  thereof.  This Plan
shall be interpreted consistent with such intent.

     6.11  Captions.  Captions  and  headings  are  given  to the  sections  and
subsections of this Plan solely as a convenience to facilitate  reference.  Such
headings will not be deemed in any way material or relevant to the  construction
or interpretation of this Plan or any provision thereof.

     6.12 Effect of Change of Subsidiary  Status.  For purposes of this Plan and
any Award  hereunder,  if an entity ceases to be a Subsidiary a  termination  of
employment  and service  will be deemed to have  occurred  with  respect to each
Eligible  Person in  respect  of such  Subsidiary  who does not  continue  as an
Eligible Person in respect of another entity within the Company.

     6.13  Non-Exclusivity of Plan. Nothing in this Plan will limit or be deemed
to limit  the  authority  of the  Board or the  Committee  to  grant  awards  or
authorize any other compensation, with or without reference to the Common Stock,
under any other plan or authority.

7. Definitions

"Award"  means an award of any  Option,  Stock  Appreciation  Right,  Restricted
Stock,  Stock Bonus,  performance share award,  dividend  equivalent or deferred
payment  right or other right or security  that would  constitute a  "derivative
security" under Rule 16a-1(c) of the Exchange Act, or any  combination  thereof,
whether alternative or cumulative, authorized by and granted under this Plan.

"Award Agreement" means any writing setting forth the terms of an Award that has
been authorized by the Committee.

"Award Date" means the date upon which the Committee took the action granting an
Award or such later date as the  Committee  designates  as the Award Date at the
time of the Award.

"Award  Period"  means the period  beginning  on an Award Date and ending on the
expiration date of such Award.

"Beneficiary"  means  the  person,  persons,  trust or  trusts  designated  by a
Participant or, in the absence of a designation, entitled by will or the laws of
descent  and  distribution,  to  receive  the  benefits  specified  in the Award
Agreement  and  under  this  Plan  if  the  Participant   dies,  and  means  the
Participant's  executor or administrator  if no other  Beneficiary is designated
and able to act under the circumstances.

"Board" means the Board of Directors of the Corporation.

"Change in Control Event" means any of the following:

     (a) Approval by the  stockholders  of the Corporation of the dissolution or
liquidation of the Corporation;

     (b)  Approval by the  stockholders  of the  Corporation  of an agreement to
merge or consolidate, or otherwise reorganize, with or into one or more entities
that are not  Subsidiaries or other  affiliates,  as a result of which less than
50% of the outstanding  voting  securities of the surviving or resulting  entity
immediately  after  the  reorganization  are,  or will be,  owned,  directly  or
indirectly,   by  stockholders  of  the  Corporation   immediately  before  such
reorganization  (assuming  for purposes of such  determination  that there is no
change in the record ownership of the  Corporation's  securities from the record
date for such  approval  until such  reorganization  and that such record owners
hold no securities of the other parties to such  reorganization),  but including
in such determination any securities of the other parties to such reorganization
held by affiliates of the Corporation);

     (c)  Approval  by the  stockholders  of the  Corporation  of  the  sale  of
substantially  all of the  Corporation's  business  and/or assets to a person or
entity that is not a Subsidiary or other affiliate; or;

     (d) Any "person"  (as such term is used in Sections  13(d) and 14(d) of the
Exchange Act but excluding any person described in and satisfying the conditions
of Rule 13d-1(b)(1)  thereunder),  other than a Current  Affiliate,  becomes the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act),  directly or
indirectly,  of securities of the Corporation  representing more than 50% of the
combined voting power of the Corporation's then outstanding  securities entitled
to  then  vote  generally  in the  election  of  directors  of the  Corporation;
provided,  however, that a Change of Control will not be deemed to have occurred
if a Current Affiliate transfers to an organization  described under Section 501
of the Code  beneficial  ownership of more than 50% of the combined voting power
of the Corporation's then outstanding securities entitled to then vote generally
in the election of directors of the Corporation; or

     (e) During any period not longer than two  consecutive  years,  individuals
who at the beginning of such period constituted the Board cease to constitute at
least a majority thereof, unless the election, or the nomination for election by
the Corporation's stockholders,  of each new Board member was approved by a vote
of at least  three-fourths  of the Board  members  then still in office who were
Board members at the beginning of such period (including for these purposes, new
members whose election or nomination was so approved).

"Current  Affiliate"  means  Fred  Kayne or any of his  affiliates  (within  the
meaning of the Exchange Act), successors,  heirs,  descendants or members of his
immediate family.

"Code" means the Internal Revenue Code of 1986, as amended from time to time.

"Commission" means the Securities and Exchange Commission.

"Committee"  means  the  Board  or any one or  more  committees  of  director(s)
appointed by the Board to administer this Plan with respect to the Awards within
the scope of authority  delegated by the Board.  At least one committee  will be
comprised  only of two or  more  directors,  each of  whom,  in  respect  of any
decision involving both (i) a Participant affected by the decision who is or may
be subject  to  Section  162(m) of the Code and (ii)  compensation  intended  as
performance-based compensation within the meaning of Section 162(m) of the Code,
will be Disinterested; in acting on any transaction with or for the benefit of a
Section 16 Person,  the  participating  members of such  Committee also shall be
Non-Employee Directors within the meaning of Rule 16b-3 under the Exchange Act.

"Common  Stock"  means  the  Common  Stock of the  Corporation  and  such  other
securities or property as may become the subject of Awards, or become subject to
Awards, pursuant to an adjustment made under Section 6.2 of this Plan.

"Company" means, collectively, the Corporation and its Subsidiaries.

"Corporation"  means  Big  Dog  Sportswear,  a  Delaware  corporation,  and  its
successors.

"Disinterested" means a director who is an "outside director" within the meaning
of Section 162(m) of the Code any applicable legal or regulatory requirements.

"Eligible  Employee" means an officer (whether or not a director) or employee of
the Company.

"Eligible Person" means an Eligible  Employee,  or any Other Eligible Person, as
determined by the Committee.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

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

"Fair Market  Value" on any date means (a) if the stock is listed or admitted to
trade on a national securities  exchange,  the closing price of the stock on the
Composite  Tape, as published in the Western Edition of The Wall Street Journal,
of the principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date,  then the closing price of the stock as quoted on such  Composite  Tape on
the next  preceding  date on which there was trading in such shares;  (b) if the
stock is not listed or admitted to trade on a national securities exchange,  the
last/closing  price for the stock on such date,  as  furnished  by the  National
Association of Securities  Dealers,  Inc.  ("NASD")  through the NASDAQ National
Market  Reporting  System  or a  similar  organization  if the NASD is no longer
reporting such information;  (c) if the stock is not listed or admitted to trade
on a national  securities  exchange and is not  reported on the National  Market
Reporting System, the mean between the bid and asked price for the stock on such
date, as furnished by the NASD or a similar organization; or (d) if the stock is
not  listed or  admitted  to trade on a  national  securities  exchange,  is not
reported on the National Market Reporting System and if bid and asked prices for
the stock are not furnished by the NASD or a similar organization,  the value as
established by the Committee at such time for purposes of this Plan.

"Incentive  Stock Option" means an Option that is designated  and intended as an
incentive  stock option within the meaning of Section 422 of the Code, the award
of that contains such  provisions  (including  but not limited to the receipt of
stockholder  approval of this Plan, if the award is made prior to such approval)
and is made under such  circumstances and to such persons as may be necessary to
comply with that section.

"Nonqualified Stock Option" means an Option that is designated as a Nonqualified
Stock Option and will include any Option  intended as an Incentive  Stock Option
that fails to meet the applicable legal requirements thereof. Any Option granted
hereunder that is not designated as an incentive  stock option will be deemed to
be designated a  nonqualified  stock option under this Plan and not an incentive
stock option under the Code.

"Non-Employee  Director"  means  a  member  of the  Board  of  Directors  of the
Corporation  who is not an officer or employee of the  Company.  For purposes of
this Plan, the Chairman of the Board` will be deemed an officer of the Company.

"Option"  means an option to purchase  Common Stock granted under this Plan. The
Committee  will  designate  any  Option  granted  to  an  Eligible  Person  as a
Nonqualified Stock Option or an Incentive Stock Option.

"Other Eligible Person" means (a) any individual  consultant or advisor or agent
who  renders  or has  rendered  bona  fide  services  (other  than  services  in
connection  with the offering or sale of  securities of the Company in a capital
raising transaction) to the Company, and who (to the extent provided in the next
sentence) is selected to participate  in this Plan by the Committee;  or (b) any
director. A person who is neither an employee, officer nor director who provides
bona fide  services to the Company may be selected as an Other  Eligible  Person
only if such person's  participation in this Plan would not adversely affect (c)
the  Corporation's  eligibility to use Form S-8 to register under the Securities
Act of 1933, as amended,  the offering of shares issuable under this Plan by the
Company or (d) the Corporation's compliance with any other applicable laws.

"Participant"  means an Eligible Person who has been granted an Award under this
Plan and a  Non-Employee  Director who received an Award under  Section 8 of the
prior version of this Plan.

"Performance  Share Award" means an Award of a right to receive shares of Common
Stock  under  Section  5.1,  or to  receive  shares  of  Common  Stock  or other
compensation (including cash) under Section 5.2, the issuance or payment of that
is contingent  upon,  among other  conditions,  the  attainment  of  performance
objectives specified by the Committee.

"Personal  Representative"  means the person or persons who, upon the disability
or incompetence of a Participant,  has acquired on behalf of the Participant, by
legal  proceeding  or  otherwise,  the power to  exercise  the rights or receive
benefits under this Plan by virtue of having become the legal  representative of
the Participant.

"Plan" means this Amended and Restated 1997  Performance  Award Plan, as amended
from time to time.

"QDRO" means a qualified  domestic  relations order as defined in Section 414(p)
of the Code or Title I,  Section  206(d)(3)  of ERISA (to the same  extent as if
this Plan were subject thereto), or the applicable rules thereunder.

"Restricted  Shares" or "Restricted  Stock" means shares of Common Stock awarded
to a Participant under this Plan, subject to payment of such  consideration,  if
any, and such  conditions  on vesting  (which may  include,  among  others,  the
passage of time,  specified  performance  objectives or other  factors) and such
transfer and other  restrictions  as are established in or pursuant to this Plan
and the related  Award  Agreement,  for so long as such shares  remain  unvested
under the terms of the applicable Award Agreement.

"Retirement"  means  retirement  with the consent of the Company or, from active
service as an employee or officer of the  Company on or after  attaining  age 55
with ten or more years of service or age 65.

"Rule 16b-3" means Rule 16b-3 as promulgated  by the Commission  pursuant to the
Exchange Act, as amended from time to time.

"Section 16 Person" means a person subject to Section 16(a) of the Exchange Act.

"Securities Act" means the Securities Act of 1933, as amended from time to time.

"Stock  Appreciation Right" or "SAR" means a right authorized under this Plan to
receive  a number  of  shares  of  Common  Stock  or an  amount  of  cash,  or a
combination  of  shares  and  cash,  the  aggregate  amount or value of which is
determined  by  reference  to a change in the Fair  Market  Value of the  Common
Stock.

"Stock  Bonus" means an Award of shares of Common Stock  granted under this Plan
for no consideration other than past services and without restriction other than
such  transfer or other  restrictions  as the  Committee  may deem  advisable to
assure compliance with law.

"Subsidiary"  means  any  corporation  or  other  entity  a  majority  of  whose
outstanding  voting  stock or voting  power is  beneficially  owned  directly or
indirectly by the Corporation.

"Total Disability" means a disability where Participant is unable to effectively
engage in the material activities  required for Participant's  position with the
Company by reason of any medically  determinable  physical or mental  impairment
that can be expected to result in death or that has lasted or can be expected to
last for a period of 90 consecutive days or for shorter periods  aggregating 180
days in any consecutive 12 month period
<PAGE>
                                                                  Exhibit 10.10B

                            TERMS AND CONDITIONS FOR
                    NON-QUALIFIED OPTIONS GRANTED UNDER THE
                AMENDED AND RESTATED 1997 PERFORMANCE AWARD PLAN


1.  Exercisability  of Option.  The Option shall vest and become  exercisable in
percentage installments of the aggregate number of shares of Common Stock of the
Company as set forth in the Option  Agreement.  The Option may be exercised only
to the extent the Option is exercisable and vested.

     a.  Cumulative  Exercisability.  To the extent the Optionee does not in any
year purchase all the shares that the Optionee may then  exercise,  the Optionee
has the right  cumulatively  thereafter  to purchase any shares not so purchased
until the Option terminates or expires.

     b. No Fractional  Shares.  Fractional share interests shall be disregarded,
but may be cumulated.

     c. Minimum  Exercise.  No fewer than 100 shares may be purchased at any one
time,  unless the number  purchased is the total number at the time  exercisable
under the Option.

2. Method of Exercise of Option.  To the extent  exercisable,  the Option may be
exercised by the  delivery to the Company of a written  notice from the Optionee
stating  the  number  of shares  to be  purchased  pursuant  to the  Option  and
accompanied by payment:

     a. made in cash or electronic funds transfer,  or by certified or cashier's
check  payable to the order of the  Company,  in the full amount of the purchase
price of the shares and  amounts  required  to  satisfy  applicable  withholding
taxes, or

     b. by the  delivery  of shares that have been held by the  Optionee  for at
least six months,  in  accordance  with  Section  2.2.2(e)  of the Plan,  unless
otherwise provided by the Committee.

     Other payment methods may be permitted only if expressly  authorized by the
Committee  with respect to this option or all options under the Plan. The Option
is  non-transferable  and may be exercised  only by the Optionee,  except as the
Committee may otherwise expressly permit.

3. Continuance of Employment  Required.  The vesting schedule requires continued
service  through each  applicable  vesting date as a condition to the vesting of
the applicable installment and rights and benefits under this Agreement. Partial
service,  even if  substantial,  during any vesting  period will not entitle the
Optionee  to any  proportionate  vesting or avoid or mitigate a  termination  of
rights and benefits upon or following a termination  of employment or service as
provided in Section 4 below or under the Plan.

4. Effect of Termination of Employment or Death. If the Optionee's employment by
either the Company or any subsidiary terminates, the Option and all other rights
and benefits under this Agreement terminate except that the Optionee may, at any
time within the following periods after the Severance Date,  exercise the Option
to the  extent  the Option was  exercisable  on the  Severance  Date and has not
otherwise expired:

     a.  Termination by the Company or a subsidiary,  other than a Dismissal for
Cause (as defined below) --- for a period of 3 months

     b. Voluntary  resignation  (other than in  anticipation of or in connection
with a Dismissal for Cause) --for a period of 3 months

     c. Retirement --- for a period of 12 months

     d. Total Disability or death of Optionee --- for a period of 12 months

     In case of a Dismissal for Cause or a voluntary resignation in anticipation
of or in  connection  with a Dismissal  for Cause,  the Option  shall  terminate
immediately, in its entirety.

     "Dismissal  for Cause"  means the Company or a  subsidiary  has  terminated
Optionee's employment because of any of the following:

     e. Any  wrongful  act by  Optionee  that  has  resulted  in the  Optionee's
personal gain at the expense of the Company or any of its subsidiaries;

     f. Optionee's refusal to perform assigned duties;

     g.   Optionee's   incompetence,   insubordination,    negligence,   willful
misconduct, breach of fiduciary duty, or conviction of (or pleading guilty or no
contest to) a crime (other than minor traffic violations or similar offenses);

     h.  Optionee's  being under the  influence  of, or using,  distributing  or
possessing,  unauthorized  or illegal drugs or  intoxicating  beverages while on
duty or on the Company's premises;

     i.  Suspicion  or  finding of  Optionee's  theft,  embezzlement,  breach of
confidentiality, fraud or dishonesty;

     j.  Optionee's  willful  destruction  or  defacement  of the  Company's,  a
visitor's, or an employee's property;

     k.  Optionee's  unauthorized  disclosure or use of  confidential  or inside
information, or trade secrets;

     l. Optionee's falsification or alteration of the Company's records;

     m. Optionee's inappropriate unauthorized absences from work;

     n. Optionee's violation of any policy or rule of the Company; or

     o. Optionee's unfair competition,  disparagement of the Company, inducement
of an employee to terminate his or her employment with the Company, or any other
conduct that results or may be expected to result in a substantial  detriment to
the business or reputation of the Company or any of its subsidiaries.

     In addition,  if the Optionee's  employment is terminated other than upon a
Dismissal for Cause, but the Optionee then commits or the Company then discovers
an act referred to in (a), (e), (f), (g), (h) or (k) after such termination, the
remaining Options held by such Optionee shall immediately  terminate.  Each case
shall be determined by the Committee in its sole  discretion,  whether before or
after the date of termination of employment.

5. Change in Subsidiary's Status; Leaves of Absence. If the Optionee is employed
by an entity that ceases to be a  subsidiary,  this event is deemed for purposes
of this  Agreement  to be a  termination  of the  Optionee's  employment  by the
Company other than a Dismissal  for Cause.  Absence from work caused by military
service, authorized sick leave or other leave approved in writing by the Company
shall not be considered a termination  of employment by the Company for purposes
of Section 4.

6.  Notices.  Any notice to be given  shall be in writing and  addressed  to the
Company at its principal office, to the attention of the General Counsel, and to
the Optionee at his or her last address of record,  or at such other  address as
either  party may  hereafter  designate  in writing to the other for purposes of
notices in respect of the Option.

7.  Optionee  not a  Stockholder.  Neither  the  Optionee  nor any other  person
entitled to exercise the Option shall have any of the rights or  privileges of a
stockholder  of the Company as to any shares of Common  Stock until the issuance
and delivery to him or her of a certificate  evidencing the shares registered in
his or her name.

8. No  Employment  Commitment by Company.  Nothing  contained in these Terms and
Conditions  or the Option  Agreement or in the Plan  constitutes  an  employment
commitment by the Company,  affects Optionee's status as an employee at will who
is subject to  termination  without  cause,  confers upon  Optionee any right to
remain employed by the Company or any subsidiary, interferes in any way with the
right of the Company or any subsidiary at any time to terminate such employment,
or affects  the right of the Company or any  subsidiary  to increase or decrease
Optionee's other compensation.

9. Effect of Award  Agreement.  The Option  Agreement  shall be binding upon and
inure to the benefit of any successor or  successors  of the Company,  except to
the extent the Committee determines otherwise.

10. Choice of Law. The constructive interpretation,  performance and enforcement
of the Option  Agreement  and the Option  shall be  governed  by the laws of the
State of California.

11. Defined Terms.  Capitalized terms used herein or in the Option Agreement and
not otherwise defined herein shall have the meaning assigned by the Plan.

12. Plan.  The Option and all rights of Optionee  thereunder are subject to, and
the  Optionee  agrees to be bound by,  all of the  terms and  conditions  of the
provisions of the Plan. Unless otherwise  expressly  provided in these Terms and
Conditions,  provisions of the Plan that confer  discretionary  authority on the
Committee  do not (and shall not be deemed to) create any  additional  rights in
the Optionee not expressly set forth in the Optionee's  Option Agreement or in a
written amendment thereto.

13.  Arbitration of Claims.  Any controversy or claim arising out of or relating
to the Option,  the Option  Agreement,  the Plan, or these Terms and Conditions,
their  enforcement  or  interpretation,   or  an  alleged  breach,  default,  or
misrepresentation in connection with any of their provisions, shall be submitted
to binding  arbitration  in accordance  with the  provisions  of the  Optionee's
agreement  with  the  Company  to  submit  all  employment-related  disputes  to
arbitration.  This  understanding  shall  not be  deemed to limit in any way the
provisions  of  Section  1.2.3 of the Plan,  as to the  effect of actions by the
Board or the  Committee  relating  or  pursuant  to the Plan as  conclusive  and
binding on all persons and as to other matters.
<PAGE>
                                                                  Exhibit 10.10C
                             BIG DOG HOLDINGS, INC.
                               ELIGIBLE DIRECTOR
                      NONQUALIFIED STOCK OPTION AGREEMENT


                  THIS AGREEMENT dated as of , is between BIG DOG HOLDINGS, INC.
, a Delaware corporation (the "Company"),  and  __________________________  (the
"Director").  The Company and the Director  agree to the terms and conditions of
this Award Agreement under the 1997 Plan described below.

1. Option Grant. This Agreement evidences the grant to the Director,  as of , of
an Option to purchase an  aggregate  of shares of Common  Stock , subject to the
terms and  conditions  and to  adjustment as set forth herein or pursuant to the
Amended and Restated 1997  Performance  Award Plan, as amended from time to time
(the "1997 Plan").

2. Exercise Price. The Option entitles the Director to purchase  (subject to the
terms of  Sections 3 through 5 below and to the extent  exercisable)  all or any
part of the  Option  shares at a price per share of $ , which  equals or exceeds
the Fair Market Value of the shares on the date of this Agreement.  The exercise
price of the Option will be paid in full at the time of each purchase in cash or
by check or in shares of Common  Stock  valued at their Fair Market Value on the
date of exercise of the Option, or partly in such shares and partly in cash, but
any such shares used in payment  must be owned by the  Participant  at least six
months prior to the date of exercise.

3. Option  Exercisability and Term.  Subject to adjustment  pursuant to the 1997
Plan,  the Option  will first  become and remain  exercisable  as to ( %) of the
shares  on and  as to an  additional  shares  ( %) on  each  of  the  next  four
anniversaries of that date, in each case subject to adjustments and acceleration
under Section 5 below. The Option will expire on , unless earlier  terminated in
accordance with the terms of the 1997 Plan or Section 4 or 5 below.

4. Service and Effect of Termination of Service. The Director agrees to serve as
a director,  subject to and in accordance  with the  provisions of the Company's
Certificate  of  Incorporation,  bylaws and  applicable  law. If the  Director's
services as a member of the Board  terminate,  this Option will terminate at the
times and to the  extent set forth  below or  pursuant  to any other  applicable
provisions  of the 1997 Plan,  including but not limited to Section 6.6.5 of the
1997 Plan.  If the  Director's  services as a member of the Board  terminate  by
reason of death,  Disability or Retirement,  the Option will immediately  become
and will remain  exercisable for two years after the date of such termination or
until , whichever  first occurs.  If the Director's  services as a member of the
Board terminate for any other reason, any portion of the Option that is not then
exercisable  will  terminate  and  any  portion  of  such  Option  that  is then
exercisable  may be exercised for six months after the date of such  termination
or until , whichever first occurs.

5.  Adjustments;  Acceleration;  Termination.  The  Option  will be  subject  to
adjustments,  accelerations  and  terminations as provided in Section 6.2 of the
1997 Plan,  but only to the extent that in the case of a Change in Control Event
such  effect and any Board or  Committee  action in respect  thereof is effected
pursuant to the terms of a reorganization  agreement approved by stockholders of
the  Company or is  otherwise  consistent  with the  effect on  Options  held by
persons other than executive  officers or directors of the Company (or, if there
are none,  consistent  in respect of the  underlying  shares  with the effect on
stockholders generally).

         Upon the occurrence of a Change in Control Event and acceleration under
Section 6.2.2 of the 1997 Plan, the Option will become  immediately  exercisable
in full.

         The Option may be amended by the Board or a duly  authorized  Committee
of the Board in a manner  permitted  under the 1997 Plan in  respect  of Options
granted to Eligible Employees.

6.  General  Terms.  The  Option  and this  Amended  Nonqualified  Stock  Option
Agreement are subject to, and the Company and the Director agree to be bound by,
the  provisions of the 1997 Plan that apply to the Option.  Such  provisions are
incorporated  herein by this reference.  The Director has received a copy of the
1997  Plan  and has  read  its  applicable  provisions.  Capitalized  terms  not
otherwise defined herein have the meaning set forth in the 1997 Plan.

The parties have signed this Non-Qualified Stock Option Agreement as of .

BIG DOG HOLDINGS, INC.
(a Delaware corporation)

By _____________________________

Its ____________________________


Participant/Director


 -------------------------------
(Signature)
 -------------------------------
(Print Name)



<PAGE>




                                                                   Exhibit 10.12

                             FOURTH LEASE AMENDMENT

THIS FOURTH  LEASE  AMENDMENT  dated as of December  18, 1998 is entered into by
FREELAND  REALTY LLC,  assignee of S.V.B.  Properties  ("Landlord")  and BIG DOG
HOLDINGS, INC. d/b/a BIG DOG SPORTSWEAR, assignee of Fortune Dogs, Inc.
("Tenant").

RECITALS

A. Landlord and Tenant are parties to a Lease dated June 1, 1994 (the  "Original
Lease"), under which Landlord has leased to Tenant certain premises,  consisting
of approximately  10,600 sf, in a building  described as 121 Gray Avenue,  Santa
Barbara,  California  (the "Gray  Building").  Such Lease has been  amended by a
Lease  Amendment dated December 1, 1994, a Second Lease Amendment dated March 1,
1996, an oral  month-to-month  lease of a loading dock on the first floor, and a
Third Lease  Amendment  dated July 22, 1996 (as so amended,  the "Lease").  As a
result of such amendments, Tenant now leases approximately 13,897 sf in the Gray
Building (the "Current Space").

B. Tenant now desires to lease additional space in the Gray Building  consisting
of 3,132 sf know as Suite 208 and comprising all of the space formerly  occupied
by Miramar Systems (the "New Space"). WHEREFORE, the parties agree as follows:

TERMS AND CONDITIONS

1. Tenant agrees to lease from  Landlord and Landlord  agrees to lease to Tenant
the New Space on the terms as provided  herein.  The total square footage of the
premises  leased to Tenant  under the Lease is  increased to 17,029 sf (provided
that all provisions for rent, expenses and other items based upon square footage
shall  be  subject  to  Tenant's  right  to  a  retroactive  adjustment  upon  a
remeasurement). Tenant shall immediately have the exclusive right to the six (6)
additional parking spaces in the parking lot of the Gray Building designated for
the New Space.

2.  Landlord  shall deliver  exclusive  possession of the New Space to Tenant no
later than March 1, 1999 (and agrees to deliver the New Space  earlier if it has
completed the refurbishments  provided below). The initial term for the lease of
the New Space shall end on July 31, 2004. Prior to March 1, 1999, Landlord shall
(i) repaint and recarpet the New Space with new materials  consistent in quality
with  those  existing  in the  executive  offices  on the 3rd  floor of the Gray
Building  (colors to be  selected  by Tenant) and (ii)  recarpet  the  stairways
located between the 1st and 2nd floors with new materials  consistent in quality
with  those  presently  there.   Landlord   represents  and  warrants  that  all
electrical, phoneline, plumbing, HVAC and other mechanical systems in or serving
the New Space shall be in good working order as of the delivery date.  Except as
provided in this paragraph, the Tenant shall accept the New Space in its "as is"
condition.

3. Landlord  acknowledges  that Tenant desires to also lease Suites 205 and 205A
currently  occupied by WSPA and that Tenant is negotiating with WSPA for them to
vacate such space.  Landlord agrees that in the event Tenant acquires the use of
Suites  205 and 205A,  Tenant  shall be  permitted,  at its cost,  to remove the
interior  walls on the second floor of the Gray Building  separating  Suites 205
and 205A from Suite 203 and  separating New Space from Suite 203 (so that all of
the second floor becomes one unit).  If Tenant  removes such walls,  and thereby
gains  exclusive  use of common area,  the Lease shall be amended to reflect the
additional  space  so  occupied  and the  rent  paid by  Tenant  shall  increase
proportionately.

4.  Commencing on the later of April 1, 1999 and the date 31 calendar days after
Landlord has turned over possession of the New Space in complete compliance with
the requirements, representations and warranties in paragraph 2 above (the "Rent
Commencement  Date"),  Tenant shall be obligated to pay minimum  monthly rent on
the New  Space at the  rate of  $1.35  per sf  ($4,228.20  based  on 3,132  sf).
Effective as of the end of the 24th full month after the Rent  Commencement Date
(the  "Adjustment  Date"),  and on each 12-month  anniversary  of the Adjustment
Date, the minimum monthly rent for the New Space shall be adjusted in accordance
with CPI as per the formula in Section 4 of the Original  Lease  (except that in
such formula, "C" shall equal the monthly index for the 9th full month after the
Rent Commencement  Date).  Except as to the foregoing  provisions  regarding the
minimum  monthly  rent for the New  Space,  the lease of the New Space  shall be
subject to the other rent provisions of the Lease  (including  Section 3), which
include  payment  of  operating  expenses  by  Tenant.  The  parties  agree that
effective as of the Rent  Commencement  Date,  Tenant's  proportionate  share of
operating costs shall be increased to 87.65%.

5. Tenant  shall have the option to renew the lease of the New Space for one (1)
additional  five (5) year period on the same terms and  conditions  as set forth
herein  except that the total rent shall be adjusted to the then current  market
rate.

6.  Landlord and Tenant  hereby  acknowledge  that  Pacifica  Commercial  Realty
represents  Landlord  and  Blair  Hayes  Commercial  Realty  represents  Tenant.
Landlord will pay a fee upon  execution of this  Amendment  equal to six percent
(6%) of the total  minimum  monthly rent for years 1-5,  said  commission  to be
split equally between the brokers.

7. Landlord and Tenant also agree that the  month-to-month  lease of the loading
dock on the  first  floor of the Gray  Building  consisting  of 338 sf is hereby
converted  to a  permanent  lease on the same terms as those  applicable  to the
Current Space (same rent per sf,  contiguous term, etc.). No commission shall be
payable on such space.

8. Except as amended hereby,  the parties agree and  acknowledge  that the Lease
shall remain in full force and effect in accordance with its terms.

IN WITNESS  WHEREOF,  the parties have  executed  this  Amendment as of the date
first written above

Landlord
FREELAND REALTY LLC


By   /s/ DIRK FREELAND
         Dirk Freeland, Managing General Partner

Tenant
 BIG DOG HOLDINGS INC. d/b/a BIG DOG SPORTSWEAR


By  /s/ ANTHONY WALL
          Anthony Wall, Executive Vice President