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, 1999

                                       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. [ X ]

         The aggregate  market value of Common Stock held by  non-affiliates  of
the registrant on March 1, 2000 was approximately $23.4 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 1, 2000, the registrant had 12,000,350  shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III  incorporates  information  by reference  from the  definitive
Proxy  Statement for the 2000 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(R)  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(R)  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
191 as of December 31, 1999.

         The Company's  collection is centered  around its signature BIG DOGS(R)
name,  logo and "Big Dog"  characters and is designed to appeal to a broad range
of customers. The BIG DOGS(R) 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"(R),  "Large and In Charge" and "Attitude is Everything."
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(R) 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(R) line of activewear and casual sportswear for men and
women,  the Company has  expanded  its LITTLE BIG DOGS(R)  line of infants'  and
children's apparel and its BIG BIG DOGS(R) 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(R)
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 website.

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 website.
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,  catalog  and  website.  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 PETsMART.com).

         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 14 net new stores in 1999. 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. 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(R)  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, 1999:
<TABLE>
<CAPTION>

                                                                   % OF TOTAL
                                                                  RETAIL STORE*
                                                                    NET SALES
                                                                  ------------
<S>                                                                    <C>
Adult Apparel and Accessories ....................................     55.3%
Infants' and Children's Apparel and Accessories ..................     21.0
Big-size Apparel .................................................     17.8
Non-Apparel Products .............................................      5.9
                                                                       -----

         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(R)  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(R)
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(R) adult line in order to
encourage family purchases and leverage overall product  development  costs. The
Company sells its LITTLE BIG DOGS(R) line  primarily  through its retail stores,
catalog  and  website,  and  wholesales  it  to  certain  specialty  and  better
department stores.

         BIG-SIZE  APPAREL.  The Company believes that the BIG DOGS(R) 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(R)  category   targeting  big-size
customers.  The  Company's  BIG BIG  DOGS(R)  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(R)  name  and/or  dog logo.  The  Company  sells its BIG BIG  DOGS(R)  line
primarily  through its retail  stores,  catalog and  website,  and also  through
selected wholesale accounts.

         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(R)  brand  image.  The BIG  DOGS(R)  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,  catalog and website. The Company's catalog and website
serve not only as a means of product distribution, but also as key marketing
pieces 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
PETsMART.com).  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.

         In August 1999, the Company entered into a strategic  relationship with
PETsMART.com, Inc., a premier internet site for pet supplies and pet care needs.
Under their agreement, the Company and PETsMART.com each provide joint marketing
efforts,  including  direct  mail  marketing  and  sponsorship  on each  other's
websites.  The Company also  licensed its  trademarks  to  PETsMART.com  and its
affiliate,  PETsMART, Inc., for pet products. As part of this relationship,  the
Company invested $2.5 million in PETsMART.com. in a venture capital financing on
the same terms provided to the other venture capital firm investors. The Company
also received a warrant for the purchase of  PETsMART.com  stock  exercisable at
increasing  prices starting above the price at which the Company invested in the
venture capital  financing.  The Company sold a warrant to PETsMART.com  for the
purchase of 121,000  shares of common stock of the Company at an exercise  price
of $10 per share.  PETsMART.com,  Inc. has filed a registration statement for an
initial  public  offering of its common  stock;  however,  there is currently no
public market for its stock and there can be no assurance that one will develop.

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 1999, the Company's retail stores  contributed  approximately 92% of
total net sales. As of December 31, 1999, the Company  operated 191 stores in 43
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 1999:
<TABLE>

<CAPTION>
 State            No. of Stores         State              No. of Stores
 -----            -------------         -----              -------------
<S>                          <C>                                      <C>
Alabama                      2         Missouri                       4
Alaska                       1         Nebraska                       1
Arizona                      7         Nevada                         3
California                  36         New Hampshire                  2
Colorado                     3         New Jersey                     2
Connecticut                  2         New Mexico                     1
Delaware                     3         New York                       7
Florida                     11         North Carolina                 6
Georgia                      5         Ohio                           4
Hawaii                       2         Oklahoma                       1
Idaho                        2         Oregon                         6
Illinois                     4         Pennsylvania                   8
Indiana                      4         South Carolina                 5
Iowa                         1         Tennessee                      6
Kansas                       2         Texas                          7
Louisiana                    1         Utah                           2
Maine                        2         Vermont                        1
Maryland                     4         Virginia                       4
Massachusetts                4         Washington                     5
Michigan                     5         Wisconsin                      4
Minnesota                    4         Wyoming                        1
Mississippi                  3


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.  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  2,800 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 website, 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 14 net new stores  during  1999.  The  Company's  cost to open a store in
1999,  including  leasehold   improvements  and  furniture  and  fixtures,   was
approximately  $50,000 (net of tenant  improvement  allowances),  a reduction of
approximately  $17,000 per store  compared  to the prior  year.  The average per
store initial inventory  (partially financed by trade payables) for the new 1999
stores was approximately $64,000 and pre-opening expenses averaged approximately
$13,000 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, four regional managers and approximately 23 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.

NON-RETAIL DISTRIBUTION

         Non-retail channels of distribution,  including catalog,  wholesale and
corporate sales, and, to a lesser extent,  premium  programs,  international and
internet sales, contributed approximately 8% of the Company's total net sales in
1999.

         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 and internet
sales in 1999 were approximately $4.2 million,  or approximately 4% of total net
sales.

         WHOLESALE. During 1999, the Company sold to over 600 wholesale accounts
throughout  the  United  States.  The  Company's  wholesale  sales in 1999  were
approximately $4.1 million, or approximately 4% of total net sales.

     INTERNET.  In June  1999,  Big Dogs  launched  a  limited  offering  of its
products online at its www.BIGDOGS.com  website. Based on the initial success of
this e-commerce  site, the Company  substantially  upgraded the website and made
its entire product line available online in October 1999. As a result,  internet
sales  increased  rapidly in the fourth quarter and totaled $0.6 million for the
year. The Company believes it has significant  opportunities  for internet sales
because  of the  Company's  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 positive about its future
prospects  on the  internet,  especially  since  Big Dogs owns its own brand and
controls its pricing and distribution.

         INTERNATIONAL.  During 1999, the Company's  sales outside of the United
States were limited to three retail stores in Canada and England 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.

         ENTERTAINMENT AND OTHER BRAND LEVERAGING. Big Dogs intends to carefully
evaluate and pursue opportunities to leverage the power of the BIG DOGS(R) brand
through various  activities that are consistent with the brand image,  which may
include  selective  product  licensing,  co-branding and entertainment and media
activities.  In July 1999, the Company  entered into an agreement with Hartbreak
Films,  Inc., the successful  producer of the ABC television show "Sabrina,  the
Teenage  Witch," for the joint  development  of a television  series (or feature
film or home video) based upon the Company's  "Big Dog"  character.  The Company
and  Hartbreak  are  currently  seeking the  backing of a major  studio for such
project.

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.
The bulk of its graphic  T-shirt  business is managed  in-house.  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(R)  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's main warehouse  facility and its mail order warehouse and
fulfillment facility are located in a 136,000 square-foot  distribution facility
in Santa Fe Springs, California. All merchandise is delivered by vendors to this
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(R), BIG DOG SPORTSWEAR(R), dog logo, BIG
DOG(R),  LITTLE BIG DOGS(R) and BIG BIG DOGS(R).  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 1, 2000, the Company had  approximately  600 full-time and 700
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.


<PAGE>


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 1,
2000:

NAME                         AGE                         POSITION
----                         ---                         --------
Andrew D. Feshbach            39             President, Chief Executive Officer
                                              and Director
Douglas N. Nilsen             51             Executive Vice President -
                                              Merchandising
Anthony J. Wall               44             Executive Vice President -
                                              Business Affairs, General Counsel
                                              and Secretary
Andrew W. Wadhams             39             Executive Vice President - Retail
Roberta J. Morris             40             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 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 Inc.,  General Counsel of Fortune  Casuals,
LLC, a manufacturer of casual apparel for the mass market, 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.

         ROBERTA J.  MORRIS  joined the Company in August 1993 and has served as
Chief Financial  Officer since March 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.
<PAGE>

ITEM 2.           PROPERTIES

         The Company's  corporate  headquarters are in leased offices comprising
approximately  24,000  square  feet in Santa  Barbara,  California.  This  lease
expires July 2004,  with an option to extend for another 5 years.  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
first  quarter 1998 through the fourth  quarter  1999,  the high and low "sales"
price of the shares of Common  Stock of the  Company,  as reported on the NASDAQ
National Market.
<TABLE>
<CAPTION>

                                   1999                      1998
                              --------------            ---------------
                              High     Low              High       Low
                              -----    -----            -----      ----
<S>                         <C> <C>  <C> <C>          <C> <C>   <C> <C>
First Quarter               $ 9 1/2  $ 4 5/8          $ 7 1/2   $ 5 1/8
Second Quarter                6 1/8    4 1/2            7 1/2     4 1/2
Third Quarter                 6        5 1/8            5 5/8     2 7/8
Fourth Quarter                8 1/2    5                6 1/8     2 1/8
</TABLE>

         On March 1, 2000,  the last sales price of the Common Stock as reported
on the NASDAQ National  Market was $5 5/8 per share. As of March 1, 2000,  there
were approximately 154 shareholders of record of the Company's Common Stock.

         The Company paid no dividends in 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. This 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.

         On August 31,  1999,  the Company  sold a warrant  for the  purchase of
121,000 shares of common stock of the Company to PETsMART.com, Inc. for $121,000
with an exercise price of $10 per share.  See Item 1.  Business-Marketing.  Such
sale was deemed to be exempt from registration  under the Securities Act of 1933
in reliance on Section 4(2), as a transaction not involving a public offering.


<PAGE>



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,
                                   ------------------------------------------------------
                                      1999         1998       1997        1996      1995
                                   ---------    ---------   --------   --------  --------
                                      (in thousands, except per share and operating data)
<S>                                <C>          <C>         <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................  $ 109,573    $ 100,677   $ 86,181   $ 68,683  $ 51,541
Cost of goods sold...............     46,491       41,236     36,328     29,720    21,571
                                   ---------    ---------   --------   --------  --------
Gross profit.....................     63,082       59,441     49,853     38,963    29,970
Selling, marketing and             ---------    ---------   --------   --------  --------
  distribution expenses..........     50,125       47,809     39,549     32,309    24,814
General and administrative
  expenses.......................      5,020        5,276      4,738      3,937     3,167
                                   ---------   ----------   --------   --------  --------
Total operating expenses.........     55,145       53,085     44,287     36,246    27,981
                                   ---------   ----------   --------   --------  --------
Operating income.................      7,937        6,356      5,566      2,717     1,989
Interest (income) expense........       (395)       (350)      1,268      1,647     1,189
                                   ---------   ----------   --------   --------  --------
Income before provision for
 income taxes....................      8,332        6,706      4,298      1,070       800
Provision for income taxes.......      3,136        2,674      1,633        435       162
                                   ---------   ----------   --------   --------  --------
Net income.......................  $   5,196   $    4,032   $  2,665   $    635  $    638
                                   =========   ==========   ========   ========  ========
Net income per share
 Basic and diluted...............  $    0.43   $     0.32   $   0.24   $   0.06  $   0.07

Weighted average common shares
 Basic...........................     12,032       12,472     10,965      9,978     9,503
 Diluted.........................     12,182       12,509     11,187     10,049     9,503

Cash dividend per common share...  $    0.10   $     0.00   $   0.00   $   0.00  $   0.00

OPERATING DATA:
Number of stores(1)
 Stores open at beginning of
  period.........................        177          150        121         91        51
 Stores added (net of closures)..         14           27         29         30        40
                                         ---          ---        ---        ---       ---
 Stores open at end of period....        191          177        150        121        91
Comparable stores sales increase(2)     1.0%         0.6%       6.6%       3.5%      8.2%

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                   ---------------------------------------------------------
                                      1999        1998        1997        1996         1995
                                   --------    --------     -------     -------     --------
                                                     (amounts in thousands)
BALANCE SHEET DATA:
<S>                                 <C>         <C>         <C>         <C>          <C>

Working capital.................    $32,462     $30,348     $35,468     $13,742      $ 8,030

Total assets....................     56,413      52,994      52,584      25,773       19,011

Total indebtedness (3)..........          0           0           0      15,697       10,732

Stockholders' equity............     46,660      43,187      45,541       6,142        4,737

</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 191 as of December 31, 1999.


<PAGE>


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,
                                                 ---------------------------------

                                                  1999           1998         1997
                                                 -----          -----        -----
<S>                                              <C>            <C>          <C>
Net sales..............................          100.0%         100.0%       100.0%
Cost of goods sold.....................           42.4           41.0         42.2
                                                 -----          -----        -----

Gross profit...........................           57.6           59.0         57.8


Selling, marketing and distribution
  expenses.............................           45.8           47.5         45.9
General and administrative expenses....            4.6            5.2          5.5
                                                 -----          -----        -----

Total operating expenses...............           50.4           52.7         51.4
                                                 -----          -----        -----

Income from operations.................            7.2%           6.3%         6.5%
</TABLE>


YEARS ENDED DECEMBER 31, 1999 AND 1998

     NET SALES. Net sales consist of sales from the Company's  stores,  catalog,
website,  and wholesale accounts,  all net of returns and allowances.  Net sales
increased to $109.6 million in 1999 from $100.7 million for 1998, an increase of
$8.9  million,  or  8.8%.  Of  the  $8.9  million  increase,  $7.6  million  was
attributable to stores not yet qualifying as comparable  stores and $0.8 million
came from the 1.0% comparable store sales increase for the period. Additionally,
non-retail  sales  increased  by $0.5  million for the year,  which is primarily
related to the Company's agreement with PETsMART.com.  The increase in net sales
in 1999 was  attributable to continued growth in the number of stores and in the
children's,  big-size and  non-apparel  categories.  The  Company's  children's,
big-size and non-apparel  products  continued to increase to 45% of total retail
net sales from 43% of total retail net sales in 1998.

         GROSS  PROFIT.  Gross profit  increased  to $63.1  million in 1999 from
$59.4 million for 1998, an increase of $3.7 million, or 6.2%. As a percentage of
net sales,  gross  profit  decreased  to 57.6% in 1999 from 59.0% in 1998.  This
decrease as a percentage of net sales was primarily attributable to an increased
level of  promotional  activity  and  continued  sales in  products  other  than
t-shirts, which have a lower margin.

         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 $50.1 million in 1999 from $47.8 million in
1998, an increase of $2.3 million,  or 4.8%. As a percentage of net sales, these
expenses  decreased  to 45.8% in 1999 from  47.5% in 1998.  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 half 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 second half of 1998 and throughout 1999.

         GENERAL  AND  ADMINISTRATIVE   EXPENSES.   General  and  administrative
expenses consist of administrative salaries, corporate occupancy costs and other
corporate  expenses.  General  and  administrative  expenses  decreased  to $5.0
million in 1999 from $5.3 million in 1998. As a percentage  of net sales,  these
expenses  decreased  to 4.6% in 1999 from 5.2% in 1998.  The decrease in general
and  administrative  expenses is attributable to improved cost controls in 1999,
as well as the leverage of spreading them over a larger revenue base.

         INTEREST INCOME AND EXPENSE. Interest income remained constant at $0.4
million for the years ended 1999 and 1998.

<PAGE>


 YEARS ENDED DECEMBER 31, 1998 AND 1997

         NET SALES.  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,  big-size  and
non-apparel  categories.  The  Company's  children's,  big-size and  non-apparel
products  continued  to  increase  to 43% 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  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  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.

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 1999,  excluding sales generated by stores not open for all of 1999,
substantially  all the Company's  operating income and approximately 28% and 35%
of the  Company's  net retail sales were  generated  during the third and fourth
quarters, respectively.

         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 1999, the Company's  primary uses of cash were for the build-out
of the  second-floor  mezzanine  at the  Company's  distribution  facility,  new
stores,  investment in PETsMART.com Series D preferred stock,  payment of income
taxes,  payment of cash dividends and stock  repurchases.  The Company satisfied
its cash  requirements  primarily from cash flow from operations,  proceeds from
the sale of a building and excess cash. 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, 1999, the Company had repurchased 1,183,200 shares for
$7,006,000.
<PAGE>

         Cash  provided  by  operating  activities  was $11.8  million  and $3.1
million  in 1999 and  1998,  respectively.  The $8.7  million  increase  in cash
provided  from   operations  is  primarily   attributable  to  the  decrease  in
inventories.  At December 31, 1999 and 1998  inventories  were $19.2 million and
$23.3 million, respectively.

         Cash used in  investment  activities  in 1999 and 1998 was $5.7 million
and $6.8 million, respectively.  Cash flows used in investment activities during
1999 related  primarily to a $2.5 million  investment in  PETsMART.com  Series D
preferred  stock,  opening  14 net new  stores  for $1.0  million,  retrofitting
existing  stores for $0.9 million,  improvements  at the Company's  distribution
facility including build-out of a second-floor  mezzanine totaling $0.5 million,
and issuance of long-term  notes  receivable  to certain  officers and employees
totaling $0.5 million.

         Cash used in financing activities during 1999 and 1998 was $1.6 million
and  $6.4  million,  respectively.  In 1999  the  Company  paid a  discretionary
dividend of $0.10 per share to stockholders for a total dividend payment of $1.2
million and repurchased  100,000 shares of its common stock for a total purchase
price of $0.5 million. In 1998 the Company  repurchased  1,083,200 shares of its
common stock for $6.5 million.

         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,  1999,  the Company had no
advances  and $1.9  million  of letters of credit  outstanding.  The  letters of
credit expire through April 5, 2000.

         In 1999,  the  Company's  average cost to build a new store,  including
leasehold  improvements,  furniture  and fixtures and landlord  allowances,  was
approximately  $50,000.  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 1999 was  approximately
$64,000.  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 2000.

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.  Additionally during 1999, the Company completed the internal testing
of  its  information   technology  systems  and  addressed  its  non-information
technology related systems.  The Company also requested all third-party  vendors
to certify Year 2000 compliance. The costs of the Company's Year 2000 compliance
project were not material to the Company's financial position.

         The Company has not experienced  significant Year  2000-related  issues
over the Year 2000  transition.  Although the Company  believes it has taken the
appropriate steps to address Year 2000 readiness, there is no guarantee that the
Company's  efforts  will  prevent a material  adverse  impact on the  results of
operations and financial condition.
<PAGE>

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 deliver 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.
<PAGE>

         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 1,  2000,  the  Chairman  of the Board,  Fred  Kayne,  beneficially  owned
approximately 49.7% 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.

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, 1999 and 1998, 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.
<PAGE>

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, 2000 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, 2000
---------------------                  President and Director
Andrew D. Feshbach                     (Principal Executive
                                       Officer)

/s/ROBERTA J. MORRIS                Chief Financial Officer,      March 29, 2000
---------------------                  Treasurer and Assistant
Roberta J. Morris                      Secretary(Principal
                                       Financial and Accounting
                                       Officer)

/s/FRED KAYNE                       Chairman of the Board         March 29, 2000
------------------
Fred Kayne

/s/STEVEN C. GOOD                   Director                      March 29, 2000
------------------
Steven C. Good

/s/ROBERT H. SCHNELL                Director                      March 29, 2000
--------------------
Robert H. Schnell

/s/KENNETH A. SOLOMON               Director                      March 29, 2000
---------------------
Kenneth A. Solomon

/s/DAVID J. WALSH                   Director                      March 29, 2000
------------------
David J. Walsh


<PAGE>



                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1999, 1998, and 1997



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

Consolidated Balance Sheets as of December 31, 1999 and 1998.............    F-3

Consolidated Statements of Income for the years ended December 31,
1999, 1998, and 1997.....................................................    F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31,1999, 1998, and 1997.........................................    F-5

Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.....................................................    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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1999.  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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three  years in the period  ended  December
31, 1999 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP


Los Angeles,  California
February 15, 2000, except for Note 10,
as to which date is March 1, 2000
<PAGE>



                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                             DECEMBER 31,
                                                                   -------------------------------
<S>                                                                      <C>                  <C>
                                                                         1999              1998
                                                                    ------------      ------------
                             ASSETS (Note 4)
CURRENT ASSETS:
 Cash and cash equivalents....................................      $ 17,925,000      $ 13,458,000
 Receivables:
  Trade, net..................................................           425,000           592,000
  Other.......................................................           543,000           314,000
 Inventories (Note 8).........................................        19,950,000        23,345,000
 Prepaid expenses and other current assets....................         1,107,000           811,000
 Deferred income taxes (Note 5)...............................           875,000           872,000
                                                                    ------------      ------------
Total current assets..........................................        40,825,000        39,392,000
PROPERTY AND EQUIPMENT, Net (Notes 2 and 8)...................        12,037,000        12,983,000
INTANGIBLE ASSETS, Net........................................           117,000            30,000
OTHER ASSETS (Note 3).........................................         3,434,000           589,000
                                                                    ------------       -----------
TOTAL.........................................................      $ 56,413,000      $ 52,994,000
                                                                    ============      ============

                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Accounts payable (Note 8)....................................      $  3,411,000      $  3,494,000
 Income taxes payable ........................................         1,768,000         2,621,000
 Accrued expenses and other current liabilities...............         3,184,000         2,928,000
                                                                    ------------      ------------
Total current liabilities.....................................         8,363,000         9,043,000
DEFERRED RENT (Note 6)........................................           878,000           764,000
DEFERRED GAIN ON SALE-LEASEBACK (Note 2)......................           512,000               --
                                                                    ------------      ------------
 Total liabilities............................................         9,753,000         9,807,000
                                                                    ------------      ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 3, 7, and 10):
 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 shares issued at December 31, 1999 and 1998......           132,000           132,000
 Additional paid-in capital...................................        42,417,000        42,296,000
 Retained earnings............................................        11,750,000         7,764,000
 Treasury stock, 1,183,200 and 1,083,200 shares at
  December 31, 1999 and 1998, respectively....................        (7,006,000)       (6,494,000)
 Notes receivable from common stockholders....................          (633,000)         (511,000)
                                                                     -----------      ------------
  Total stockholders' equity..................................        46,660,000        43,187,000
                                                                     -----------      ------------
TOTAL.........................................................      $ 56,413,000      $ 52,994,000
                                                                    ============      ============
</TABLE>


                See notes to consolidated financial statements.

<PAGE>



                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>

<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                               --------------------------------------------
<S>                                               <C>               <C>              <C>
                                                  1999              1998             1997
                                               ---------          --------        ---------

NET SALES (Note 3)........................  $ 109,573,000     $ 100,677,000    $  86,181,000
COST OF GOODS SOLD (Note 8)...............     46,491,000        41,236,000       36,328,000
                                            -------------     -------------    -------------
GROSS PROFIT..............................     63,082,000        59,441,000       49,853,000
                                            -------------     -------------    -------------

OPERATING EXPENSES:
 Selling, marketing and distribution......     50,125,000        47,809,000       39,549,000
 General and administrative (Note 8)......      5,020,000         5,276,000        4,738,000
                                            -------------     -------------     ------------
  Total operating expenses................     55,145,000        53,085,000       44,287,000
                                            -------------     -------------     ------------

INCOME FROM OPERATIONS....................      7,937,000         6,356,000        5,566,000

INTEREST (INCOME) EXPENSE, NET (Note 4)..        (395,000)         (350,000)       1,268,000
                                            -------------     -------------     ------------
INCOME BEFORE PROVISION FOR
  INCOME TAXES...........................       8,332,000         6,706,000        4,298,000

PROVISION FOR INCOME TAXES (Note 5)......       3,136,000         2,674,000        1,633,000
                                            -------------     -------------     ------------

NET INCOME...............................   $   5,196,000      $  4,032,000     $  2,665,000
                                            =============      ============     ============
NET INCOME PER SHARE
 BASIC AND DILUTED.......................    $       0.43      $       0.32     $       0.24
                                             ============      ============     ============
</TABLE>

                 See notes to consolidated financial statements.


<PAGE>



                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                                              NOTES
                               COMMON STOCK            ADDITIONAL                       TREASURY STOCK      RECEIVABLE
                              ---------------           PAID-IN         RETAINED      ------------------    FROM COMMON
                              SHARES   AMOUNT           CAPITAL         EARNINGS       SHARES      AMOUNT   STOCKHOLDERS    TOTAL
                              ------   ------         ----------        --------      -------     -------   ------------  ---------
BALANCE,
<S>                       <C>           <C>           <C>             <C>               <C>        <C>         <C>           <C>
JANUARY 1, 1997            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 7).......         --          --         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 7).........         --         --              --             --      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      4,764,000     1,083,200   (6,494,000)  (511,000)  43,187,000

Cash dividend paid.......         --         --              --      (1,210,000)         --             --        --    (1,210,000)
Repurchased common
  stock (Note 7).........         --         --              --             --        100,000     (512,000)       --      (512,000)
Warrants issued..........         --         --          121,000            --           --             --        --       121,000
Interest on notes
 receivable..............         --         --              --             --           --            --    (122,000)    (122,000)
Net income...............         --         --              --       5,196,000          --            --         --     5,196,000
                            ----------  ---------   -------------  -------------    ---------  -----------  ---------  -----------
BALANCE,
DECEMBER 31, 1999........  13,183,550  $ 132,000   $  42,417,000  $  11,750,000     1,183,200  $(7,006,000) $(633,000) $46,660,000
                           ==========  =========   =============  =============     =========  ===========  =========  ===========

</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,
                                                                             ------------------------------------------
                                                                                 1999           1998            1997
                                                                             -----------     -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                          <C>             <C>            <C>
 Net income................................................................  $ 5,196,000     $ 4,032,000    $ 2,665,000
 Adjustments to reconcile net income to net cash provided by operating
  activities:
  Depreciation and amortization............................................    4,088,000       3,752,000      2,620,000
  Provision for losses on receivables......................................       21,000          26,000         25,000
  (Gain) Loss on disposition of property and equipment.....................     (503,000)        123,000         37,000
  Deferred income taxes....................................................       (3,000)       (728,000)           --
  Changes in operating assets and liabilities:
   Receivables.............................................................      (83,000)       (181,000)       194,000
   Inventories.............................................................    3,395,000      (6,631,000)    (1,311,000)
   Prepaid expenses and other assets.......................................     (296,000)        (67,000)      (266,000)
   Accounts payable........................................................      (83,000)        727,000      1,532,000
   Income taxes payable....................................................     (853,000)      1,226,000      1,245,000
   Accrued expenses and other current liabilities..........................      256,000         697,000        420,000
   Deferred rent...........................................................      114,000         114,000        162,000
   Deferred gain on sale-leaseback.........................................      512,000             --             --
                                                                             ---=-------     -----------    -----------
    Net cash provided by operating activities..............................   11,761,000       3,090,000      7,323,000
                                                                             -----------     -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures......................................................   (4,745,000)     (6,508,000)    (5,285,000)
 Investments...............................................................   (2,626,000)           --             --
 Proceeds from sale of property and equipment..............................    2,134,000          13,000           --
 Principal repayments of notes receivable..................................      163,000             --            --
 Issuance of long-term notes receivable and interest.......................     (550,000)            --            --
 Other.....................................................................      (69,000)       (259,000)       (23,000)
                                                                             -----------     -----------    -----------
    Net cash used in investing activities..................................   (5,693,000)     (6,754,000)    (5,308,000)
                                                                             -----------     -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock....................................          --              --      35,576,000
 Repurchase of common stock................................................     (512,000)     (6,494,000)           --
 Proceeds from issuance of warrants........................................      121,000            --              --
 Proceeds from exercise of options.........................................          --             --          171,000
 Proceeds from exercise of warrants........................................          --          72,000         552,000
 Principal repayments of notes receivable..................................          --          36,000         185,000
 Principal repayments of subordinated debt.................................          --             --      (14,400,000)
 Principal repayments under capital lease obligations......................          --             --       (1,314,000)
 Dividends paid............................................................   (1,210,000)            --            --
                                                                             -----------     ------------   -----------
    Net cash (used in) provided by financing activities....................   (1,601,000)     (6,386,000)    20,770,000
                                                                             -----------     -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................    4,467,000     (10,050,000)    22,785,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...............................   13,458,000      23,508,000        723,000
                                                                             -----------     -----------    -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.....................................  $17,925,000     $13,458,000    $23,508,000
                                                                             ===========     ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid for:
  Interest.................................................................   $   30,000      $   42,000     $1,659,000
  Income taxes.............................................................   $3,991,000      $2,176,000     $  388,000
</TABLE>

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

     The  Company  entered  into a  capital  lease  obligation  of  $18,000  for
equipment for the year ended 1997.

     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 7).

     In 1999, the Company recorded  $122,000 in interest income related to notes
receivable from common stockholders.

                 See notes to consolidated financial statements.


<PAGE>


                      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  $13,406,000  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.


<PAGE>


                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

INTANGIBLE ASSETS

         Intangible   assets  are  stated  at  cost  and  amortized   using  the
straight-line method over five years. Accumulated amortization was $693,000, and
$665,000 at December 31, 1999 and 1998, respectively.

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.

SELLING, MARKETING AND DISTRIBUTION EXPENSES

         Included in this classification are approximately  $304,000,  $474,000,
and $547,000 in 1999, 1998, and 1997,  respectively,  of store preopening
expenses, which are expensed as incurred.

INCOME TAXES

         The Company  accounts  for income  taxes  using an asset and  liability
approach for  measuring  deferred  income  taxes based on temporary  differences
between the financial  statement and income tax bases of assets and  liabilities
existing at each balance sheet date. A valuation allowance is established,  when
necessary,  to reduce  deferred  income tax assets to the amount  expected to be
realized.  The income tax  provision or benefit is the tax payable or refundable
for the period plus or minus the change during the period in deferred income tax
assets (see Note 5).

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>
                                                                       1999            1998           1997
                                                                   -----------     -----------    -----------

Net income                                                         $ 5,196,000     $ 4,032,000    $ 2,665,000
                                                                   ===========     ===========    ===========
Basic Weighted Average Shares:
 Weighted average number of shares outstanding................      12,032,000      12,472,000     10,965,000
Effect of Dilutive Securities:
 Options and warrants.........................................         150,000          37,000        222,000
                                                                   -----------     -----------     ----------
Diluted Weighted Average Shares:
 Weighted average number of shares outstanding and
 common share equivalents.....................................      12,182,000      12,509,000     11,187,000
                                                                   ===========     ===========    ===========

Antidilutive options and warrants.............................         929,000       1,615,000            --
</TABLE>

<PAGE>


                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      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.

2. PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:
<TABLE>
<CAPTION>

                                                                           DECEMBER 31,
                                                                     ---------------------------
                                                                         1999            1998
                                                                     -----------     -----------
<S>                                                                  <C>             <C>

         Leasehold improvements.............................         $ 9,334,000     $ 8,400,000
         Equipment and fixtures.............................          15,428,000      13,413,000
                                                                     -----------     -----------

                                                                      24,762,000      21,813,000

         Less accumulated depreciation and amortization.....          12,725,000       8,830,000
                                                                     -----------     -----------
         Property and equipment, net........................         $12,037,000     $12,983,000
                                                                     ===========     ===========
</TABLE>

         Depreciation and amortization expense on property and equipment totaled
$4,060,000, $3,621,000 and $2,479,000 in 1999, 1998, and 1997, respectively.

         In May 1999,  the  Company  purchased  the  building  which  houses its
downtown  Santa  Barbara  retail store for $1.6  million.  In August  1999,  the
Company sold this  building for $2.1 million and  simultaneously  entered into a
10-year  lease.  The $0.5 million  gain related to the sale of this  building is
being deferred over the life of the lease.

3. INVESTMENT IN PETsMART.COM

     In 1999, the Company  purchased  $2,500,000 of Series D preferred stock and
entered into a strategic  relationship  agreement  and related  agreements  with
PETsMART.com,  Inc. Under these  agreements,  the Company and PETsMART.com  will
participate in cooperative  marketing  efforts,  including  direct  mailings and
sponsorship  on  each  other's  websites.  Included  as  part  of the  strategic
relationship,  the  Company  bought  a  warrant  to  purchase  common  stock  of
PETsMART.com  at  varying  exercise  prices.  The  warrant is subject to partial
revocation in the event certain performance criteria are not met.  Additionally,
the Company sold  PETsMART.com a five-year warrant to purchase 121,000 shares of
common stock of the Company at an exercise  price of $10 per share for $121,000.
The Company also provided  consulting  and other  services to  PETsMART.com  for
which  it  received  $750,000  of  income  that is  included  in Net  Sales.  In
conjunction with this investment, which is accounted for on the cost method, the
Company  also  made  loans  totaling  $400,000  to  certain  officers  and other
individuals  of the Company to finance their  purchase of the Series D preferred
stock of PETsMART.com. Such secured notes bear interest at 9% per annum, payable
annually with principal due in October, 2003.
<PAGE>

                     BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



4. 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 $1,950,000,  at December 31, 1999. The letters of credit expire through
April 6, 2000.

5. INCOME TAXES

         The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                            -----------------------------------------
<S>                                                             <C>           <C>           <C>
                                                               1999          1998           1997
                                                            -----------    -----------   ------------
        Current:
            Federal......................................   $ 2,672,000    $ 2,978,000   $ 1,438,000
            State........................................       467,000        424,000       195,000
                                                            -----------    ------------  -----------
        Total............................................     3,139,000      3,402,000     1,633,000
                                                            -----------    ------------  -----------

        Deferred:
            Federal......................................         4,000       (664,000)        5,000
            State........................................        (7,000)       (64,000)       (5,000)
                                                            -----------    -----------   -----------
        Total............................................        (3,000)      (728,000)          --
                                                            -----------    -----------   -----------
        Total income tax provision.......................   $ 3,136,000    $ 2,674,000   $ 1,633,000
                                                            ===========    ============  ===========
</TABLE>


        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>
                                                                1999           1998          1997
                                                               ------        -------        ------

        Federal statutory income tax rate................       34.0%          34.0%         34.0%
        State taxes, net of federal benefit..............        3.6            3.4           3.2
        Other, net.......................................        0.0            2.5           0.8
                                                               -----           ----          ----

        Total............................................       37.6%          39.9%         38.0%
                                                                ====           ====          ====
</TABLE>
<PAGE>

                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


5. INCOME TAXES (continued)

         Significant  components of the Company's net deferred income tax assets
are as follows:
<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,
                                                                          --------------------------
<S>                                                                           <C>            <C>
                                                                              1999           1998
                                                                          -----------    -----------
        Deferred income tax assets:
            Allowance for doubtful receivables and sales returns.......   $    36,000    $    27,000
            Accrued vacation...........................................        49,000         40,000
            Inventory uniform capitalization...........................       423,000        714,000
            Intangible assets..........................................       164,000        168,000
            State income taxes.........................................       129,000        114,000
            Deferred rent..............................................       347,000        298,000
            Deferred gain on sale of building..........................       202,000            --
            Reserve liabilities........................................        25,000         82,000
            Other......................................................           --          10,000
                                                                          -----------     ----------
        Total deferred income tax assets..............................      1,375,000      1,453,000
                                                                          -----------     ----------

        Deferred income tax liabilities:
            Prepaid expenses...........................................      (192,000)      (108,000)
            Depreciation...............................................      (308,000)      (473,000)
                                                                          -----------     ----------
        Total deferred income tax liabilities..........................      (500,000)      (581,000)
                                                                          -----------   --- --------
        Deferred income tax asset.....................................    $   875,000    $   872,000
                                                                          ===========    ===========
</TABLE>


6. 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>

                  2000............................................................     $ 15,183,000
                  2001............................................................       12,286,000
                  2002............................................................        9,413,000
                  2003............................................................        7,598,000
                  2004............................................................        5,685,000
                  Thereafter......................................................       10,497,000
                                                                                       ------------
                  Total...........................................................     $ 60,662,000
                                                                                       ============
</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)

6. COMMITMENTS AND CONTINGENCIES (continued)

         Rent  expense for the years ended  December  31,  1999, 1998, and 1997,
totaled $15,636,000, $13,962,000, and $11,333,000,  respectively, and includes
contingent  rentals of $329,000, $336,000, and $149,000 for the years ended
December 31, 1999, 1998, and 1997, 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.

7. 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 has repurchased 1,183,200 shares
totaling $7,006,000 as of December 31, 1999.

         As of  December  31,  1999,  1998,  and 1997,  there  were  unexercised
warrants outstanding of 193,000, 72,000, and 96,000,  respectively,  to purchase
common stock at exercise prices ranging between $10 and $3 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.

<PAGE>

                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


7. STOCKHOLDERS' EQUITY (continued)

         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.

The following summarizes stock option activity for the periods presented:
<TABLE>
<CAPTION>

                                                                                    WEIGHTED-
                                                              NUMBER                AVERAGE
                                                            OF SHARES            EXERCISE PRICE
                                                          ------------           --------------
<S>                                                            <C>                      <C>

Balance at January 1, 1997...........................          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

 Options granted.....................................          70,000                  5.82
 Options cancelled...................................        (116,000)                (6.59)
                                                          -----------
Balance at December 31, 1999.........................       1,195,450                  6.27
                                                          ===========
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1999:

<TABLE>
<CAPTION>

                                                                                                    OPTIONS
                                              OPTIONS OUTSTANDING                                 EXERCISABLE
                               ----------------------------------------------------      ----------------------------

                                                  WEIGHTED-
                                                   AVERAGE              WEIGHTED-
     RANGE OF EXERCISE         OPTIONS            REMAINING             AVERAGE           OPTIONS     WEIGHTED-AVERAGE
           PRICES            OUTSTANDING       CONTRACTUAL LIFE      EXERCISE PRICE     EXERCISABLE    EXERCISE PRICE
         -----------      ----------------     ----------------      --------------     -----------   ----------------
<S>         <C>                  <C>                 <C>                    <C>             <C>            <C>

           $3.50               282,500             9.0 years             $ 3.50           62,500         $ 3.50
        5.00 - 6.50            651,950             8.3 years               6.35          139,623           6.14
            8.00               125,000             8.3 years               8.00              --             --
       10.00 - 14.00           136,000             8.1 years              10.05            2,400          10.88
                             ---------                                                   -------
        3.50 - 14.00         1,195,450             8.4 years               6.27          204,523           5.39
                             =========                                                   =======
</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.
<PAGE>

                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


7. STOCKHOLDERS' EQUITY (continued)

         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
1999, 1998, and 1997,  respectively:  expected volatility of 223%, 259%, and 7%;
risk-free  interest rates of 5.6%, 5.4%, and 6.4%;  expected lives of 10.0, 9.9,
and 7.7 years; and $0.10 per share cash dividend in 1999, no dividend in 1998 or
1997.  Forfeitures  are recognized as they occur. If the computed fair values of
the 1999,  1998,  and 1997 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.
<TABLE>
<CAPTION>


                                                                               YEARS ENDED DECEMBER 31,
                                                                     -------------------------------------------
<S>                                                                        <C>             <C>            <C>
                                                                        1999              1998          1997
                                                                     -----------      -----------    -----------
Net income:
 As reported....................................................     $ 5,196,000      $ 4,032,000    $ 2,665,000
 Pro forma......................................................       4,700,000        3,586,000      2,567,000
Net income per share:
 As reported:
 Basic and diluted..............................................     $      0.43     $       0.32    $      0.24

 Pro forma:
 Basic and diluted...............................................    $      0.39     $       0.29    $      0.23

Weighted average fair value of options granted during the year...    $      3.77     $       5.04    $      4.37

</TABLE>

8. RELATED PARTY TRANSACTIONS

         Two  of  the  Company's   stockholders  and  directors  have  ownership
interests  in  two  former  merchandise  vendors  to  the  Company.  Merchandise
inventory  purchased  from  these  related  vendors  totaled   $2,182,000   and
$8,636,000, for the years ended December 31, 1998 and 1997, respectively. There
were no purchases made 1999. Included in accounts payable is $5,000 due to these
vendors at December 31, 1998.

         The Company also received  consulting  services from related parties in
1997. Such expenses  incurred for the year ended December 31, 1997 were $90,000,
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  $3,000,
$871,000,  and $371,000 for the years ended  December 31, 1999,  1998, and 1997,
respectively.


<PAGE>


                      BIG DOG HOLDINGS, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


9. QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
                                                               FIRST        SECOND       THIRD      FOURTH
                                                              QUARTER       QUARTER     QUARTER     QUARTER
                                                              -------      --------    --------     -------
                                                                  (in thousands, except per share)
Year ended December 31, 1999:
<S>                                                           <C>          <C>         <C>          <C>
 Net sales...........................................        $ 16,743     $ 24,093    $ 29,596    $  39,141
 Gross profit........................................           8,887       14,560      18,154       21,481
 Selling, marketing and distribution expenses........          11,323       12,107      12,240       14,455
 General and administrative expenses.................           1,215        1,249       1,242        1,314
 Total operating expenses............................          12,538       13,356      13,482       15,769
 (Loss) income from operations.......................          (3,651)       1,204       4,672        5,712
 Net (loss) income...................................          (2,170)         734       2,887        3,745
 Net (loss) income per share
  Basic and diluted..................................        $  (0.18)    $   0.06    $   0.24    $    0.31
 Weighted average shares outstanding
  Basic..............................................          12,100       12,029      12,002       12,000
  Diluted............................................          12,100       12,160      12,150       12,171

Year ended December 31, 1998:
 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

</TABLE>



10. SUBSEQUENT EVENT

     In March  2000,  the  Company  declared a cash  dividend of $0.10 per share
payable on March 27, 2000 to  stockholders of record at the close of business on
March 11, 2000.
<PAGE>

                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
            Exhibit No.          Description

<S>             <C>                                                         <C>
                3.1        Amended and Restated Certificate of Incorporation(1)
                3.1A       Cerificate of Correction(1)
                3.2        Amended and Reinstated Bylaws(2)
                4.1        Reference Is herby made to Exhibits 3.1, 3.1A and 3.2
                4.2        Specimen Stock Certificate (1)
               10.1        Grid Promissory Note of Company to Isreal Discount
                               Bank dated 2/19/98(3)
               10.3        Form of Warrants issued November 4, 1996(1)
               10.10       Amended and Restated 1997 Performance Award Plan(3)
               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(3)
               10.10C      From of Eligible Director Non-Qualified Stock Option
                               Agreement(3)
               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 Greeland Realty LLC dated as
                               of July 22, 1996, (1) and Fourth Lease Amendment
                               dated December 18, 1998(3)
               10.14       From 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.

(3) Incorporated by reference from the Registrant's Annual Report on From 10-K
    for the year ended December 31, 1998.