Exhibit 10.2


    
      

    

    
      [FORM
        OF CONVERTIBLE NOTE] 

       

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

       

      BIG
        DOG HOLDINGS, INC.

      8.375%
        CONVERTIBLE NOTE DUE 2012

      


       

      
        	
                Issuance
                  Date: April ___, 2007 

              	
                Original
                  Principal Amount: $_______________

              


      

       

            FOR
        VALUE RECEIVED, Big
        Dog
        Holdings, Inc., a Delaware corporation (the “Company”),
        hereby promises to pay to [___________________]
        or
        registered assigns (“Holder”)
        the
        amount set out above as the Original Principal Amount (as reduced pursuant
        to
        the terms hereof pursuant to redemption, conversion or otherwise, the
“Principal”)
        when
        due, whether upon the Maturity Date (as defined below), acceleration, redemption
        or otherwise (in each case in accordance with the terms hereof) and to pay
        interest (“Interest”)
        on any
        outstanding Principal at the rate of 8.375% per annum (the “Interest
        Rate”),
        from
        the date set out above as the Issuance Date (the “Issuance
        Date”)
        until
        the same becomes due and payable, whether upon an Interest Date (as defined
        below) or the Maturity Date, acceleration, conversion, redemption or otherwise
        (in each case in accordance with the terms hereof). This 8.375% Convertible
        Note
        due 2012 (including all 8.375% Convertible Notes due 2012 issued in exchange,
        transfer or replacement hereof, this “Note”)
        is one
        of an issue of 8.375% Convertible Notes due 2012 issued pursuant to the
        Convertible Note Purchase Agreement (as defined below) on the Closing Date
        (collectively, the “Notes”,
        and
        such other 8.375% Convertible Notes due 2012, the “Other
        Notes”).
        Certain capitalized terms used herein are defined in Section 28.


       

           (1) PAYMENTS
        ON MATURITY.
        Unless
        this Note has been earlier converted pursuant to Section 3, on the Maturity
        Date
        the Company shall pay the Holder an amount in cash equal to all outstanding
        Principal of the Note, plus any accrued and unpaid Interest and any accrued
        and
        unpaid Late Charges. The “Maturity
        Date”
shall
        be March 31, 2012, as may be extended at the option of the Holder (i) in
        the event that, and for so long as, an Event of Default (as defined in
        Section 4(a)) shall have occurred and be continuing on the Maturity Date
        (as may be extended pursuant to this Section 1) or any event that shall
        have occurred and be continuing that with the passage of time and the failure
        to
        cure would result in an Event of Default and (ii) through the date that is
        ten (10) Business Days after the consummation of a Change of Control in the
        event that a Change of Control is publicly announced or a Change of Control
        Notice (as defined in Section 5(b)) is delivered prior to the Maturity
        Date. Other than as specifically permitted by this Note, the Company may
        not
        prepay any portion of the outstanding Principal, accrued and unpaid Interest
        or
        accrued and unpaid Late Charges, if any, on Principal and Interest.


       

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

       

           (2) INTEREST;
        INTEREST RATE.
        Interest on the outstanding Principal amount of this Note shall commence
        accruing on the Issuance Date and shall be computed on the basis of a 365-day
        year and actual days elapsed and shall be payable quarterly, in arrears,
        on
        March 31, June 30, September 30, and December 31 of each year (each, an
“Interest
        Date”),
        with
        the first Interest Date being June 30, 2007. Interest shall be payable on
        each
        Interest Date, to the record holder of this Note on the applicable Interest
        Date, in cash. Prior to the payment of Interest on an Interest Date, Interest
        on
        this Note shall accrue at the Interest Rate and be payable by way of inclusion
        of the Interest in the Conversion Amount in accordance with
        Section 3(b)(i). From and after the occurrence and during the continuance
        of an Event of Default, the Interest Rate shall be increased to 10.375% per
        annum. In the event that such Event of Default is subsequently cured, the
        adjustment referred to in the preceding sentence shall cease to be effective
        as
        of the date of such cure; provided
        that the
        Interest as calculated and unpaid at such increased rate during the continuance
        of such Event of Default shall continue to apply to the extent relating to
        the
        days after the occurrence of such Event of Default through and including
        the
        date of cure of such Event of Default.  

      
         

             (3) CONVERSION
          OF NOTES.
          This
          Note shall be convertible into shares of the Company’s Common Stock on the terms
          and conditions set forth in this Section 3. 

         

                  (a)
          Conversion
          Right.
          Subject
          to the provisions of Section 3(d), at any time or times on or after the
          Issuance Date, the Holder shall be entitled to convert any portion of the
          outstanding and unpaid Conversion Amount (as defined below) into fully
          paid and
          nonassessable shares of Common Stock in accordance with Section 3(c), at
          the Conversion Rate (as defined below), provided,
          that
          the Company may, at its sole option, subject to any applicable Principal
          Market
          shareholder approval rules, pay the Holder an amount of cash equal to the
          Conversion Amount then remaining under this Note, or the portion thereof
          to be
          converted pursuant to this Section 3(a), and reduce the number of shares
          of
          Common Stock which would otherwise be issuable pursuant to the conversion
          by the
          number of shares of Common Stock which would be issuable upon conversion
          of the
          Conversion Amount then remaining under this Note, or the portion thereof
          to be
          converted pursuant to this Section 3(a), valued at the Closing Sale Price
          on the
          Conversion Date stated in the Conversion Notice (each as defined below)
          (“Conversion
          Net Share Settlement”);
          provided,
          further,
          that if
          the Holder is a director, officer, consultant or employee of the Company,
          the
          Company shall only have the option to utilize Conversion Net Share Settlement
          if
          the Company (A) obtains the approval of its stockholders as required by
          the
          applicable rules of the Principal Market for issuances of Common Stock
          in
          connection with such Conversion Net Share Settlement or (B) obtains a written
          opinion from outside counsel to the Company that such approval is not required,
          which opinion shall be reasonably satisfactory to the Required Holders;
          provided, further, that the Company may selectively utilize Conversion
          Net Share
          Settlement among Holders and is not bound to treat all Holders the same
          or on a
          pro rata basis with respect to Conversion Net Share Settlement. The Company
          shall not issue any fraction of a share of Common Stock upon any conversion.
          If
          the issuance would result in the issuance of a fraction of a share of Common
          Stock, the Company shall round such fraction of a share of Common Stock
          down to
          the nearest whole share, and the Company shall pay to the Holder an amount
          in
          cash equal to such fractional share (valued at the Conversion Price). The
          Company shall pay any and all taxes that may be payable with respect to
          the
          issuance and delivery of Common Stock upon conversion of any Conversion
          Amount;
provided
          that the
          Company shall not be required to pay any tax that may be payable in respect
          of
          any issuance of Common Stock to any Person other than the converting Holder
          or
          with respect to any income tax due by the Holder with respect to such Common
          Stock. 


        
          
            
            

          

          
            2

            
              

            

          

          
            
            

          

        

         

                  (b)
          Conversion
          Rate.
          The
          number of shares of Common Stock issuable upon conversion of any Conversion
          Amount pursuant to Section 3(a) shall be determined by dividing (x) such
          Conversion Amount by (y) the Conversion Price (the “Conversion
          Rate”).
          

         

                       (i) “Conversion
          Amount”
means
          the portion of the Principal to be converted, redeemed or otherwise with
          respect
          to which this determination is being made. 

         

                       (ii) “Conversion
          Price”
means,
          as of any Conversion Date (as defined below) or other date of determination,
          $18.00, subject to adjustment as provided herein. 

         

                  (c)
          Mechanics
          of Conversion.
          

         

                       (i) Optional
          Conversion.
          To
          convert any Conversion Amount into shares of Common Stock on any date (a
          “Conversion
          Date”),
          the
          Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
          on or prior to 8:00 p.m., New York Time, on such date, a copy of an
          executed notice of conversion in the form attached hereto as Exhibit I
          (the
“Conversion
          Notice”)
          to the
          Company and (B) surrender this Note to a reputable overnight carrier for
          delivery to the Company the day immediately following such date (or an
          indemnification undertaking with respect to this Note in the case of its
          loss,
          theft or destruction). On or before the second (2nd)
          Trading
          Day following the date of receipt of a Conversion Notice, the Company shall
          transmit by facsimile a confirmation of receipt of such Conversion Notice
          to the
          Holder and the Company’s transfer agent (the “Transfer
          Agent”).
          On or
          before the third (3rd)Trading
          Day following the date of receipt of a Conversion Notice (the “Share
          Delivery Date”),
          the
          Company shall (X) provided that the Transfer Agent is participating in the
          Depository Trust Company (“DTC”)
          Fast
          Automated Securities Transfer Program, credit such aggregate number of
          shares of
          Common Stock to which the Holder shall be entitled to the Holder’s or its
          designee’s balance account with DTC through its Deposit Withdrawal Agent
          Commission system or (Y) if the Transfer Agent is not participating in the
          DTC Fast Automated Securities Transfer Program, issue and deliver to the
          address
          as specified in the Conversion Notice, a certificate, registered in the
          name of
          the Holder or its designee, for the number of shares of Common Stock to
          which
          the Holder shall be entitled. If this Note is surrendered for conversion
          and the
          outstanding Principal of this Note is greater than the Principal portion
          of the
          Conversion Amount being converted, then the Company shall as soon as practicable
          and in no event later than three (3) Business Days after receipt of this
          Note and at its own expense, issue and deliver to the holder a new Note
          (in
          accordance with Section 18(d)) representing the outstanding Principal not
          converted. The Person or Persons entitled to receive the shares of Common
          Stock
          issuable upon a conversion of this Note shall be treated for all purposes
          as the
          record holder or holders of such shares of Common Stock on the Conversion
          Date.


         

                       (ii) Registration;
          Book-Entry.
          The
          Company shall maintain a register (the “Register”)
          for
          the recordation of the names and addresses of the holders of each Note
          and the
          principal amount of the Notes held by such holders (the “Registered
          Notes”).
          The
          entries in the Register shall be conclusive and binding for all purposes
          absent
          manifest error. The Company and the holders of the Notes shall treat each
          Person
          whose name is recorded in the Register as the owner of a Note for all purposes,
          including, without limitation, the right to receive payments of principal
          and
          interest hereunder, notwithstanding notice to the contrary. A Registered
          Note
          may be assigned or sold in whole or in part only by registration of such
          assignment or sale on the Register. Upon its receipt of a request to assign
          or
          sell all or part of any Registered Note by a Holder, the Company shall
          record
          the information contained therein in the Register and issue one or more
          new
          Registered Notes in the same aggregate principal amount as the principal amount
          of the surrendered Registered Note to the designated assignee or transferee
          pursuant to Section 18. Upon conversion of any portion of this Note in
          accordance with the terms hereof, the Holder shall be required to physically
          surrender this Note to the Company and the Company shall, at its own expense,
          issue and deliver to the Holder a new Note (in accordance with Section
          18(d))
          representing the outstanding Principal of the Note not converted. The Holder
          and
          the Company shall maintain records showing the Principal, Interest and
          Late
          Charges, if any, converted and the dates of such conversions or shall use
          such
          other method, reasonably satisfactory to the Holder and the Company, so
          as not
          to require physical surrender of this Note upon conversion. 


        
          
            
            

          

          
            3

            
              

            

          

          
            
            

          

        

         

                       (iii) Pro
          Rata Conversion; Disputes.
          In the
          event that the Company receives a Conversion Notice from more than one
          holder of
          Notes for the same Conversion Date and the Company can convert some, but
          not
          all, of such portions of the Notes submitted for conversion, the Company,
          subject to Section 3(d), shall convert from each holder of Notes electing
          to have Notes converted on such date a pro rata amount of such holder’s portion
          of its Notes submitted for conversion based on the principal amount of
          Notes
          submitted for conversion on such date by such holder relative to the aggregate
          principal amount of all Notes submitted for conversion on such date. In
          the
          event of a dispute as to the number of shares of Common Stock issuable
          to the
          Holder in connection with a conversion of this Note, the Company shall
          issue to
          the Holder the number of shares of Common Stock not in dispute and resolve
          such
          dispute in accordance with Section 23. 

         

                       (iv) Company’s
          Right of Mandatory Conversion.
          

         

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


        
          
            
            

          

          
            4

            
              

            

          

          
            
            

          

        

         

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


        
          
            
            

          

          
            5

            
              

            

          

          
            
            

          

        

         

                  (d)
          Limitations
          on Conversions.
          

         

                       (i) Principal
          Market Regulation.
          

         

                            (A) The
          Company shall not be obligated to issue any shares of Common Stock upon
          conversion of this Note, and the Holder of this Note shall not have the
          right to
          receive upon conversion of this Note any shares of Common Stock, if the
          issuance
          of such shares of Common Stock would exceed the aggregate number of shares
          of
          Common Stock which the Company may issue upon conversion or exercise, as
          applicable, of the Notes without breaching the Company’s obligations under the
          rules or regulations of the Principal Market including, without limitation,
          that
          no shares of Common Stock shall be issued pursuant to Net Share Settlement
          (as
          defined below) that would result in the aggregate of all shares of Common
          Stock
          issued pursuant to Net Share Settlement being equal to 20% or more of the
          Common
          Stock (or securities convertible or exercisable for Common Stock) or voting
          power of the Company outstanding immediately prior to the date hereof,
          (the
“Exchange
          Cap”),
          except that such limitation shall not apply in the event that the Company
          (A)
          obtains the approval of its stockholders as required by the applicable
          rules of
          the Principal Market for issuances of Common Stock in excess of such amount
          or
          (B) obtains a written opinion from outside counsel to the Company that such
          approval is not required, which opinion shall be reasonably satisfactory
          to the
          Required Holders

         

                            (B) The
          Company shall not be obligated to issue any shares of Common Stock upon
          the
          Maturity Date of this Note, and the Holder of this Note shall not have
          the right
          to receive upon the Maturity Date of this Note any shares of Common Stock,
          if
          the issuance of such shares of Common Stock would exceed the aggregate
          number of
          shares of Common Stock which the Company may issue upon conversion of the
          Notes
          without breaching the Exchange Cap, except that such limitation shall not
          apply
          in the event that the Company (A) obtains the approval of its stockholders
          as
          required by the applicable rules of the Principal Market for issuances
          of Common
          Stock in excess of such amount or (B) obtains a written opinion from
          outside counsel to the Company that such approval is not required, which
          opinion
          shall be reasonably satisfactory to the Required Holders.

         

             (4) RIGHTS
          UPON EVENT OF DEFAULT.
          

         

                  (a)
          Event
          of Default.
          Each of
          the following events shall constitute an “Event
          of Default”:
          

         

                       (i) 
          the Company’s failure to pay to the Holder any amount of Principal (including,
          without limitation, any redemption payments), Interest, Late Charges or
          other
          amounts when and as due under this Note or any other Transaction Document
          (as
          defined in the Convertible Note Purchase Agreement) or any other agreement,
          document, certificate or other instrument delivered in connection with
          the
          transactions contemplated hereby and thereby to which the Holder is a party,
          except, in the case of a failure to pay Interest and Late Charges when
          and as
          due, in which case only if such failure continues for a period of at least
          five
          (5) Business Days; 


        
          
            
            

          

          
            6

            
              

            

          

          
            
            

          

        

         

                       (ii) the
          Company or any of its Subsidiaries pursuant to or within the meaning of
          Title
          11, U.S. Code, or any similar Federal, foreign or state law for the relief
          of
          debtors (collectively, “Bankruptcy
          Law”),
          (A) commences a voluntary case, (B) consents to the entry of an order
          for relief against it in an involuntary case, (C) consents to the
          appointment of a receiver, trustee, assignee, liquidator or similar official
          (a
“Custodian”),
          (D) makes a general assignment for the benefit of its creditors or
          (E) admits in writing that it is generally unable to pay its debts as they
          become due; 

         

                       (iii) a
          court of competent jurisdiction enters an order or decree under any Bankruptcy
          Law that (A) is for relief against the Company or any of its Subsidiaries
          in an involuntary case, (B) appoints a Custodian of the Company or any
          of its
          Subsidiaries or (C) orders the liquidation of the Company or any of its
          Subsidiaries; or

         

                       (iv) 
          the Company breaches any covenant or other term or condition or any material
          representation or warranty of any Transaction Document, except, in the
          case of a
          breach of a covenant which is curable, only if such breach continues for
          a
          period of at least thirty (30) consecutive Business Days after the Company’s
          receipt of written notice thereof.

         

             (5) RIGHTS
          UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
          

         

                  (a)
          Assumption.
          The
          Company shall not enter into or be party to a Fundamental Transaction unless
          (i) the Successor Entity assumes in writing all of the obligations of the
          Company under this Note and the other Transaction Documents in accordance
          with
          the provisions of this Section 5(a) pursuant to written agreements in form
          and
          substance satisfactory to the Required Holders and approved by the Required
          Holders prior to such Fundamental Transaction, including agreements to
          deliver
          to each holder of Notes in exchange for such Notes a security of the Successor
          Entity evidenced by a written instrument substantially similar in form
          and
          substance to the Notes, including, without limitation, having a principal
          amount
          and interest rate equal to the principal amounts then outstanding and the
          interest rates of the Notes held by such holder, having similar conversion
          rights as the Notes and having similar ranking to the Notes, and satisfactory
          to
          the Required Holders and (ii) the Successor Entity (including its Parent
          Entity) is a publicly traded corporation whose common stock is quoted on
          or
          listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
          Transaction, the Successor Entity shall succeed to, and be substituted
          for (so
          that from and after the date of such Fundamental Transaction, the provisions
          of
          this Note referring to the “Company” shall refer instead to the Successor
          Entity), and may exercise every right and power of the Company and shall
          assume
          all of the obligations of the Company under this Note with the same effect
          as if
          such Successor Entity had been named as the Company herein. Upon consummation
          of
          the Fundamental Transaction, the Successor Entity shall deliver to the
          Holder
          confirmation that there shall be issued upon conversion or redemption of
          this
          Note at any time after the consummation of the Fundamental Transaction,
          in lieu
          of the shares of the Company’s Common Stock (or other securities, cash, assets
          or other property) issuable upon the conversion or redemption of the Notes
          prior
          to such Fundamental Transaction, such shares of the publicly traded common
          stock
          (or their equivalent) of the Successor Entity (including its Parent Entity),
          as
          adjusted in accordance with the provisions of this Note. The provisions
          of this
          Section shall apply similarly and equally to successive Fundamental Transactions
          and shall be applied without regard to any limitations on the conversion
          or
          redemption of this Note. 


        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        


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

         

             (6) RESERVED.
          

         

             (7) RIGHTS
          UPON ISSUANCE OF OTHER SECURITIES.
          

         

                  (a) Adjustment
          of Conversion Price upon Subdivision or Combination of Common
          Stock.
          If the
          Company at any time on or after the Subscription Date subdivides (by any
          stock
          split, stock dividend, recapitalization or otherwise) one or more classes
          of its
          outstanding shares of Common Stock into a greater number of shares, the
          Conversion Price in effect immediately prior to such subdivision will be
          proportionately reduced. If the Company at any time on or after the Subscription
          Date combines (by combination, reverse stock split or otherwise) one or
          more
          classes of its outstanding shares of Common Stock into a smaller number
          of
          shares, the Conversion Price in effect immediately prior to such combination
          will be proportionately increased. 


        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

         

                  (b) De
          Minimis Adjustments.
          No
          adjustment in the Conversion Price shall be required unless such adjustment
          would require an increase or decrease of at least $0.01 in such price;
          provided,
          however, that any adjustment which by reason of this Section 7(d) is not
          required to be made shall be carried forward and taken into account in
          any
          subsequent adjustments under this Section 7. All calculations under this
          Section 7 shall be made by the Company in good faith and shall be made to
          the nearest cent or to the nearest one hundredth of a share, as applicable.
          No
          adjustment need be made for a change in the par value or no par value of
          the
          Company’s Common Stock. 

         

             (8) RESERVED.
          

         

             (9) RESERVED.

         

             (10) NONCIRCUMVENTION.
          The
          Company hereby covenants and agrees that the Company will not, by amendment
          of
          its Certificate of Incorporation, Bylaws or through any reorganization,
          transfer
          of assets, consolidation, merger, scheme of arrangement, dissolution, issue
          or
          sale of securities, or any other voluntary action, avoid or seek to avoid
          the
          observance or performance of any of the terms of this Note, and will at
          all
          times in good faith carry out all of the provisions of this Note and take
          all
          action as may be required to protect the rights of the Holder of this
          Note.

         

             (11) RESERVATION
          OF AUTHORIZED SHARES.
          

         

                  (a) Reservation.
          The
          Company shall initially reserve out of its authorized and unissued Common
          Stock
          a number of shares of Common Stock for each of the Notes equal to 100%
          of the
          Conversion Rate with respect to the Conversion Amount of each such Note
          as of
          the Issuance Date. So long as any of the Notes are outstanding, the Company
          shall take all action necessary to reserve and keep available out of its
          authorized and unissued Common Stock, solely for the purpose of effecting
          the
          conversion of the Notes, 100% of the number of shares of Common Stock as
          shall
          from time to time be necessary to effect the conversion of all of the Notes
          then
          outstanding; provided that at no time shall the number of shares of Common
          Stock
          so reserved be less than the number of shares required to be reserved by
          the
          previous sentence (without regard to any limitations on conversions) (the
          “Required
          Reserve Amount”).
          The
          initial number of shares of Common Stock reserved for conversions of the
          Notes
          and each increase in the number of shares so reserved shall be allocated
          pro
          rata among the holders of the Notes based on the principal amount of the
          Notes
          held by each holder at the Closing (as defined in the Convertible Note
          Purchase
          Agreement) or increase in the number of reserved shares, as the case may
          be (the
“Authorized
          Share Allocation”).
          In
          the event that a holder shall sell or otherwise transfer any of such holder’s
          Notes, each transferee shall be allocated a pro rata portion of such holder’s
          Authorized Share Allocation. Any shares of Common Stock reserved and allocated
          to any Person which ceases to hold any Notes shall be allocated to the
          remaining
          holders of Notes, pro rata based on the principal amount of the Notes then
          held
          by such holders. 


        
          
            
            

          

          
            9

            
              

            

          

          
            
            

          

        

         

                  (b) Insufficient
          Authorized Shares.
          If at
          any time while any of the Notes remain outstanding the Company does not
          have a
          sufficient number of authorized and unreserved shares of Common Stock to
          satisfy
          its obligation to reserve for issuance upon conversion of the Notes at
          least a
          number of shares of Common Stock equal to the Required Reserve Amount (an
          “Authorized
          Share Failure”),
          then
          the Company shall immediately take all action necessary to increase the
          Company’s authorized shares of Common Stock to an amount sufficient to allow the
          Company to reserve the Required Reserve Amount for the Notes then outstanding.
          Without limiting the generality of the foregoing sentence, as soon as
          practicable after the date of the occurrence of an Authorized Share Failure,
          but
          in no event later than sixty (60) days after the occurrence of such
          Authorized Share Failure, the Company shall hold a meeting of its stockholders
          for the approval of an increase in the number of authorized shares of Common
          Stock. In connection with such meeting, the Company shall provide each
          stockholder with a proxy statement and shall use its best efforts to solicit
          its
          stockholders’ approval of such increase in authorized shares of Common Stock and
          to cause its board of directors to recommend to the stockholders that they
          approve such proposal. 

         

             (12) 
          REDEMPTION.

         

                  (a) Mechanics.
          If the
          Company has submitted a Change of Control Notice in accordance with
          Section 5(b), the Company shall deliver the applicable Change of Control
          Redemption Price to the Holder concurrently with the consummation of such
          Change
          of Control. In the event that the Company does not pay the applicable Redemption
          Price to the Holder within the time period required, at any time thereafter
          and
          until the Company pays such unpaid Redemption Price in full, the Holder
          shall
          have the option, in lieu of redemption, to require the Company to promptly
          return to the Holder all or any portion of this Note representing the Conversion
          Amount that was submitted for redemption and for which the applicable Redemption
          Price (together with any Late Charges thereon) has not been paid. Upon
          the
          Company’s receipt of such notice, the Redemption Notice shall be null and void
          with respect to such Conversion Amount. The Holder’s delivery of a notice
          voiding a Redemption Notice and exercise of its rights following such notice
          shall not affect the Company’s obligations to make any payments of Late Charges
          which have accrued prior to the date of such notice with respect to the
          Conversion Amount subject to such notice.

         

             (13) VOTING
          RIGHTS.
          The
          Holder shall have no voting rights as the holder of this Note, except as
          required by law, including, but not limited to, the General Corporation
          Law of
          the State of Delaware and as expressly provided in this Note. 

         

             (14) RANKING.
          All
          payments due under this Note shall be unsecured obligations of the Company,
          ranking subordinate to the existing, or any future debt or credit facilities
          of
          the Company and its Subsidiaries. 

         

             (15) RESERVED.
          

         

             (16) VOTE
          TO ISSUE, OR CHANGE THE TERMS OF, NOTES.
          The
          affirmative vote at a meeting duly called for such purpose or the written
          consent without a meeting of the Required Holders shall be required for
          any
          change or amendment to this Note or the Other Notes. No consideration shall
          be
          offered or paid to any holder of Notes to amend or consent to a waiver
          or
          modification of the Notes unless the same consideration also is offered
          to all
          of the holders of Notes. 

         

             (17) TRANSFER.
          This
          Note may be offered, sold, assigned or transferred by the Holder without
          the
          consent of the Company, subject only to the provisions of Section 12 of the
          Convertible Note Purchase Agreement. 


        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

         

             (18) REISSUANCE
          OF THIS NOTE.
          

         

                   (a) Transfer.
          If this
          Note is to be transferred, the Holder shall surrender this Note to the
          Company,
          whereupon the Company will forthwith issue and deliver upon the order of
          the
          Holder a new Note (in accordance with Section 18(d)), registered as the
          Holder may request, representing the outstanding Principal being transferred
          by
          the Holder and, if less then the entire outstanding Principal is being
          transferred, a new Note (in accordance with Section 18(d)) to the Holder
          representing the outstanding Principal not being transferred. The Holder
          and any
          assignee, by acceptance of this Note, acknowledge and agree that, by reason
          of
          the provisions of Section 3(c)(iii) following conversion or redemption
          of any
          portion of this Note, the outstanding Principal represented by this Note
          may be
          less than the Principal stated on the face of this Note. 

         

                       (b) Lost,
          Stolen or Mutilated Note.
          Upon
          receipt by the Company of evidence reasonably satisfactory to the Company
          of the
          loss, theft, destruction or mutilation of this Note, and, in the case of
          loss,
          theft or destruction, of any indemnification undertaking by the Holder
          to the
          Company in customary form and, in the case of mutilation, upon surrender
          and
          cancellation of this Note, the Company shall execute and deliver to the
          Holder a
          new Note (in accordance with Section 18(d)) representing the outstanding
          Principal. 

         

                       (c) Note
          Exchangeable for Different Denominations.
          This
          Note is exchangeable, upon the surrender hereof by the Holder at the principal
          office of the Company, for a new Note or Notes (in accordance with Section
          18(d)
          and in principal amounts of at least $1,000.00) representing in the aggregate
          the outstanding Principal of this Note, and each such new Note will represent
          such portion of such outstanding Principal as is designated by the Holder
          at the
          time of such surrender. 

         

                       (d) Issuance
          of New Notes.
          Whenever the Company is required to issue a new Note pursuant to the terms
          of
          this Note, such new Note (i) shall be of like tenor with this Note, (ii)
          shall represent, as indicated on the face of such new Note, the Principal
          remaining outstanding (or in the case of a new Note being issued pursuant
          to
          Section 18(a) or Section 18(c), the Principal designated by the Holder
          which, when added to the principal represented by the other new Notes issued
          in
          connection with such issuance, does not exceed the Principal remaining
          outstanding under this Note immediately prior to such issuance of new Notes),
          (iii) shall have an issuance date, as indicated on the face of such new
          Note, which is the same as the Issuance Date of this Note, (iv) shall have
          the
          same rights and conditions as this Note, and (v) shall represent accrued
          and unpaid Interest and Late Charges on the Principal and Interest of this
          Note,
          if any, from the Issuance Date. 

         

                  (19)
          REMEDIES,
          CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
          RELIEF.
          The
          remedies provided in this Note shall be cumulative and in addition to all
          other
          remedies available under this Note and any of the other Transaction Documents
          at
          law or in equity (including a decree of specific performance and/or other
          injunctive relief), and nothing herein shall limit the Holder’s right to pursue
          actual and consequential damages for any failure by the Company to comply
          with
          the terms of this Note. Amounts set forth or provided for herein with respect
          to
          payments, conversion and the like (and the computation thereof) shall be
          the
          amounts to be received by the Holder and shall not, except as expressly
          provided
          herein, be subject to any other obligation of the Company (or the performance
          thereof). The Company acknowledges that a breach by it of its obligations
          hereunder will cause irreparable harm to the Holder and that the remedy
          at law
          for any such breach may be inadequate. The Company therefore agrees that,
          in the
          event of any such breach or threatened breach, the Holder shall be entitled,
          in
          addition to all other available remedies, to an injunction restraining
          any
          breach, without the necessity of showing economic loss and without any
          bond or
          other security being required. 


        
          
            
            

          

          
            11

            
              

            

          

          
            
            

          

        

         

                  (20)
          PAYMENT
          OF COLLECTION, ENFORCEMENT AND OTHER COSTS.
          If
          (a) this Note is placed in the hands of an attorney for collection or
          enforcement or is collected or enforced through any legal proceeding or
          the
          Holder otherwise takes action to collect amounts due under this Note or
          to
          enforce the provisions of this Note or (b) there occurs any bankruptcy,
          reorganization, receivership of the Company or other proceedings affecting
          Company creditors’ rights and involving a claim under this Note, then the
          Company shall pay the costs incurred by the Holder for such collection,
          enforcement or action or in connection with such bankruptcy, reorganization,
          receivership or other proceeding, including, but not limited to, financial
          advisory fees and attorneys’ fees and disbursements. 

         

                  (21)
          CONSTRUCTION;
          HEADINGS.
          This
          Note shall be deemed to be jointly drafted by the Company and all the Purchasers
          and shall not be construed against any person as the drafter hereof. The
          headings of this Note are for convenience of reference and shall not form
          part
          of, or affect the interpretation of, this Note. 

         

                  (22)
          FAILURE
          OR INDULGENCE NOT WAIVER.
          No
          failure or delay on the part of the Holder in the exercise of any power,
          right
          or privilege hereunder shall operate as a waiver thereof, nor shall any
          single
          or partial exercise of any such power, right or privilege preclude other
          or
          further exercise thereof or of any other right, power or privilege.


         

                  (23)
          DISPUTE
          RESOLUTION.

         

                  (a) All
          disputes, claims, or controversies arising out of or relating to this Note
          that
          are not resolved by mutual agreement shall be resolved by litigation, or
          if the
          Company and the Holder agree to resolve any particular dispute by arbitration,
          then such arbitration shall be conducted in accordance with the procedures
          set
          forth in Section 23(b) below.

         

                  (b) In
          the event the parties hereto agree to resolve a particular dispute by
          arbitration, the following procedures will apply: Such dispute shall be
          submitted to arbitration by one arbitrator mutually agreed upon by the
          parties,
          and if no agreement can be reached within thirty (30) days after names
          of
          potential arbitrators have been proposed by J.A.M.S./Endispute, Inc. or
          its
          successor, then by one arbitrator having reasonable experience in corporate
          finance transactions of the type provided for in this Agreement and who
          is
          chosen by J.A.M.S./Endispute, Inc. or its successor. The arbitration shall
          take
          place in Los Angeles, California, in accordance with the J.A.M.S./Endispute,
          Inc. rules then in effect, and judgment upon any award rendered in such
          arbitration will be binding and may be entered in any court having jurisdiction
          thereof. There shall be limited discovery prior to the arbitration hearing
          as
          follows: (a) exchange of witness lists and copies of documentary evidence
          and
          documents relating to or arising out of the issues to be arbitrated, (b)
          depositions of all party witnesses and (c) such other depositions as may
          be
          allowed by the arbitrators upon a showing of good cause. Depositions shall
          be
          conducted in accordance with the California Rules of Civil Procedure, the
          arbitrator shall be required to provide in writing to the parties the basis
          for
          the award or order of such arbitrator, and a court reporter shall record
          all
          hearings, with such record constituting the official transcript of such
          proceedings. The prevailing party shall be entitled to reasonable attorney’s
          fees, costs, and necessary disbursements in addition to any other relief
          to
          which such party may be entitled.


        
          
            
            

          

          
            12

            
              

            

          

          
            
            

          

        

         

                  (24)
          NOTICES;
          PAYMENTS.
          

         

                       (a)
          Notices.
          Whenever notice is required to be given under this Note, unless otherwise
          provided herein, such notice shall be given in accordance with Section 13
          of the Convertible Note Purchase Agreement. The Company shall provide the
          Holder
          with prompt written notice of all actions taken pursuant to this Note,
          including
          in reasonable detail a description of such action and the reason therefore.
          Without limiting the generality of the foregoing, the Company will give
          written
          notice to the Holder (i) immediately upon any adjustment of the Conversion
          Price, setting forth in reasonable detail, and certifying, the calculation
          of
          such adjustment and (ii) at least twenty (20) days prior to the date
          on which the Company closes its books or takes a record (A) with respect to
          any dividend or distribution upon the Common Stock, (B) with respect to any
          pro rata subscription offer to holders of Common Stock or (C) for
          determining rights to vote with respect to any Fundamental Transaction,
          dissolution or liquidation, provided in each case that such information
          shall be
          made known to the public prior to or in conjunction with such notice being
          provided to the Holder. 

         

                       (b) Payments.
          Whenever any payment of cash is to be made by the Company to any Person
          pursuant
          to this Note, such payment shall be made in lawful money of the United
          States of
          America by a check drawn on the account of the Company and sent via overnight
          courier service to such Person at such address as previously provided to
          the
          Company in writing (which address, in the case of each of the Purchasers,
          shall
          initially be as set forth on the Schedule of Buyers attached to the Convertible
          Note Purchase Agreement); provided that the Holder may elect to receive
          a
          payment of cash via wire transfer of immediately available funds by providing
          the Company with prior written notice setting out such request and the
          Holder’s
          wire transfer instructions. Whenever any amount expressed to be due by
          the terms
          of this Note is due on any day which is not a Business Day, the same shall
          instead be due on the next succeeding day which is a Business Day and,
          in the
          case of any Interest Date which is not the date on which this Note is paid
          in
          full, the extension of the due date thereof shall not be taken into account
          for
          purposes of determining the amount of Interest due on such date. Any amount
          of
          Principal or other amounts due under the Transaction Documents which is
          not paid
          when due shall result in a late charge being incurred and payable by the
          Company
          in an amount equal to interest on such amount at the rate of two percent
          (2%) per annum from the date such amount was due until the same is paid
          in full
          (“Late
          Charge”).

         

                  (25)
          CANCELLATION.
          After
          all Principal, accrued Interest and other amounts at any time owed on this
          Note
          have been paid in full, this Note shall automatically be deemed canceled,
          shall
          be surrendered to the Company for cancellation and shall not be reissued.
          

         

                  (26)
          WAIVER
          OF NOTICE.
          To the
          extent permitted by law, the Company hereby waives demand, notice, protest
          and
          all other demands and notices in connection with the delivery, acceptance,
          performance, default or enforcement of this Note and the Convertible Note
          Purchase Agreement. 

         

                  (27)
          GOVERNING
          LAW; JURISDICTION; SEVERABILITY; JURY TRIAL.
          This
          Note shall be governed by, and construed in accordance with, the internal
          laws
          of the State of New York, without giving effect to the principles of conflicts
          of law. THE
          COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT
          TO
          REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR
          IN
          CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
          HEREBY. 


        
          
            
            

          

          
            13

            
              

            

          

          
            
            

          

        

         

             (28) CERTAIN
          DEFINITIONS.
          For
          purposes of this Note, the following terms shall have the following meanings:
          

         

                       (a) “Bloomberg”
means
          Bloomberg Financial Markets. 

         

                       (b) “Business
          Day”
means
          any day other than Saturday, Sunday or other day on which commercial banks
          in
          The City of New York are authorized or required by law to remain closed.
          

         

                       (c) “Change
          of Control”
means
          any Fundamental Transaction other than (A) any reorganization,
          recapitalization or reclassification of Common Stock, in which holders
          of the
          Company’s voting power immediately prior to such reorganization,
          recapitalization or reclassification continue after such reorganization,
          recapitalization or reclassification to hold publicly traded securities
          and,
          directly or indirectly, the voting power of the surviving entity or entities
          necessary to elect a majority of the members of the board of directors
          (or their
          equivalent if other than a corporation) of such entity or entities, or
          (B) pursuant to a migratory merger effected solely for the purpose of
          changing the jurisdiction of incorporation of the Company. 

         

                       (d) “Change
          of Control Premium”
means,
          (i) until the first anniversary of the Issuance Date, 120%,
          (ii) commencing on the first anniversary of the Issuance Date until the
          second anniversary of the Issuance Date, 115%, (iii) commencing on the
          second anniversary of the Issuance Date until the third anniversary of
          the
          Issuance Date, 110% and (iv) commencing on the third anniversary of the
          Issuance
          Date, 105%. 

         

                       (e) “Closing Bid Price”
and
          “Closing Sale Price”
means,
          for any security as of any date, the last closing bid price and last closing
          trade price, respectively, for such security on the Principal Market, as
          reported by Bloomberg, or, if the Principal Market begins to operate on
          an
          extended hours basis and does not designate the closing bid price or the
          closing
          trade price, as the case may be, then the last bid price or last trade
          price,
          respectively, of such security prior to 4:00:00 p.m., New York Time, as
          reported by Bloomberg, or, if the Principal Market is not the principal
          securities exchange or trading market for such security, the last closing
          bid
          price or last trade price, respectively, of such security on the principal
          securities exchange or trading market where such security is listed or
          traded as
          reported by Bloomberg, or if the foregoing do not apply, the last closing
          bid
          price or last trade price, respectively, of such security in the
          over-the-counter market on the electronic bulletin board for such security
          as
          reported by Bloomberg, or, if no closing bid price or last trade price,
          respectively, is reported for such security by Bloomberg, the average of
          the bid
          prices, or the ask prices, respectively, of any market makers for such
          security
          as reported in the “pink sheets” by Pink Sheets LLC (formerly the National
          Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price
          cannot be calculated for a security on a particular date on any of the
          foregoing
          bases, the Closing Bid Price or the Closing Sale Price, as the case may
          be, of
          such security on such date shall be the fair market value as mutually determined
          by the Company and the Holder. If the Company and the Holder are unable
          to agree
          upon the fair market value of such security, then such dispute shall be
          resolved
          pursuant to Section 23. All such determinations to be appropriately
          adjusted for any stock dividend, stock split, stock combination or other
          similar
          transaction during the applicable calculation period. 


        
          
            
            

          

          
            14

            
              

            

          

          
            
            

          

        

         

                       (f) “Closing
          Date”
shall
          have the meaning set forth in the Convertible Note Purchase Agreement,
          which
          date is the date the Company initially issued Notes pursuant to the terms
          of the
          Convertible Note Purchase Agreement. 

         

                       (g) “Common
          Stock Deemed Outstanding”
means,
          at any given time, the number of shares of Common Stock outstanding at
          such
          time, plus the number of shares of Common Stock deemed to be outstanding
          pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the
          Options or Convertible Securities are actually exercisable at such time,
          but
          excluding any Common Stock owned or held by or for the account of the Company
          or
          issuable upon conversion or exercise, as applicable, of the Notes. 

         

                       (h) “Contingent
          Obligation”
means,
          as to any Person, any direct or indirect liability, contingent or otherwise,
          of
          that Person with respect to any indebtedness, lease, dividend or other
          obligation of another Person if the primary purpose or intent of the Person
          incurring such liability, or the primary effect thereof, is to provide
          assurance
          to the obligee of such liability that such liability will be paid or discharged,
          or that any agreements relating thereto will be complied with, or that
          the
          holders of such liability will be protected (in whole or in part) against
          loss
          with respect thereto. 

         

                       (i) “Convertible
          Note Purchase Agreement”
means
          that certain convertible note purchase agreement dated as of the Subscription
          Date by and among the Company and the initial holders of the Notes pursuant
          to
          which the Company issued the Notes. 

         

                       (j) “Eligible
          Market”
means
          the Principal Market, The New York Stock Exchange, Inc., the American Stock
          Exchange, The Nasdaq Global Select Market or The Nasdaq Capital Market.
          

         

                       (k) “Equity
          Conditions”
means
          each of the following conditions: (i) on the applicable date of
          determination, either (x) the Registration Statement filed pursuant to the
          Purchase Agreement shall be effective and available for the resale of all
          remaining Registrable Securities in accordance with the terms of the Purchase
          Agreement or (y) all shares of Common Stock issuable upon conversion of the
          Notes shall be eligible for sale without restriction and without the need
          for
          registration under any applicable federal or state securities laws; (ii)
          on the
          applicable date of determination, the Common Stock is designated for quotation
          on the Principal Market or any other Eligible Market and shall not have
          been
          suspended from trading on such exchange or market (other than suspensions
          of not
          more than two (2) days and occurring prior to the applicable date of
          determination due to business announcements by the Company) nor shall delisting
          or suspension by such exchange or market been threatened or pending either
          (A) in writing by such exchange or market or (B) by falling below the
          then effective minimum listing maintenance requirements of such exchange
          or
          market; (iii) any applicable shares of Common Stock to be issued in
          connection with the event requiring determination may be issued in full
          without
          violating Section 3(d) hereof and the rules or regulations of the Principal
          Market or any other applicable Eligible Market; and (iv) on the applicable
          date of determination, there shall not have occurred either (A) an Event of
          Default or (B) an event that with the passage of time or giving of notice
          would constitute an Event of Default. 

         

                       (l) “Equity
          Conditions Failure”
means
          that on any day during the period commencing ten (10) Trading Days prior
          to the
          applicable Mandatory Conversion Notice Date through the applicable Mandatory
          Conversion Date, the Equity Conditions have not been satisfied (or waived
          in
          writing by the Holder). 


        
          
            
            

          

          
            15

            
              

            

          

          
            
            

          

        

         

                       (m) “Fundamental
          Transaction”
means
          that the Company shall, directly or indirectly, in one or more related
          transactions, (i) consolidate or merge with or into (whether or not the
          Company is the surviving corporation) another Person or Persons, if the
          holders
          of the Voting Stock (not including any shares of Voting Stock held by the
          Person
          or Persons making or party to, or associated or affiliated with the Persons
          making or party to, such consolidation or merger) immediately prior to
          such
          consolidation or merger shall hold or have the right to direct the voting
          of
          less than 50% of the Voting Stock or such voting securities of such other
          surviving Person immediately following such transaction, or (ii) sell,
          assign, transfer, convey or otherwise dispose of all or substantially all
          of the
          properties or assets of the Company to another Person, or (iii) allow
          another Person to make a purchase, tender or exchange offer that is accepted
          by
          the holders of more than the 50% of the outstanding shares of Voting Stock
          (not
          including any shares of Voting Stock held by the Person or Persons making
          or
          party to, or associated or affiliated with the Persons making or party
          to, such
          purchase, tender or exchange offer), or (iv) consummate a stock purchase
          agreement or other business combination (including, without limitation,
          a
          reorganization, recapitalization, spin-off or scheme of arrangement) with
          another Person whereby such other Person acquires more than the 50% of
          the
          outstanding shares of Voting Stock (not including any shares of Voting
          Stock
          held by the other Person or other Persons making or party to, or associated
          or
          affiliated with the other Persons making or party to, such stock purchase
          agreement or other business combination), (v) reorganize, recapitalize or
          reclassify its Common Stock or (vi) any “person” or “group” (as these terms
          are used for purposes of Sections 13(d) and 14(d) of the Exchange Act)
          is or
          shall become the “beneficial owner” (as defined in Rule 13d-3 under the
          Exchange Act), directly or indirectly, of 50% of the aggregate ordinary
          voting
          power represented by issued and outstanding Common Stock; provided,
          a joint
          venture, licensing arrangement or other strategic relationship involving
          the
          licensing, manufacturing or marketing of, or other similar arrangement
          with
          respect to, any of the Company’s products (even if such arrangement or
          relationship involves an investment in the Company) shall not be a Fundamental
          Transaction. 

         

                       (n) “Parent
          Entity”
of
          a
          Person means an entity that, directly or indirectly, controls the applicable
          Person and whose common stock or equivalent equity security is quoted or
          listed
          on an Eligible Market, or, if there is more than one such Person or Parent
          Entity, the Person or Parent Entity with the largest public market
          capitalization as of the date of consummation of the Fundamental Transaction.
          

         

                       (o) “Person”
means
          an individual, a limited liability company, a partnership, a joint venture,
          a
          corporation, a trust, an unincorporated organization, any other entity
          and a
          government or any department or agency thereof. 

         

                       (p) “Principal
          Market”
means
          The Nasdaq Global Market. 

         

                       (q) “Redemption
          Notices”
means,
          collectively, the Change of Control Redemption Notices and the Holder Redemption
          Notice, each of the foregoing, individually, a Redemption Notice. 

         

                    
            (r) “Redemption
          Prices”
means,
          collectively, Change of Control Redemption Price, each of the foregoing,
          individually, a Redemption Price. 

         

                       (s) “Required
          Holders”
means
          the holders of Notes representing at least two-thirds (2/3rd)
          of the
          aggregate principal amount of the Notes then outstanding. 


        
          
            
            

          

          
            16

            
              

            

          

          
            
            

          

        

         

                       (t) “SEC”
means
          the United States Securities and Exchange Commission. 

         

                       (u) “Subscription
          Date”
means
          April 3, 2007. 

         

                       (v) “Subsidiary”
means
          any entity in which the Company, directly or indirectly, owns any of the
          capital
          stock or holds an equity or similar interest. 

         

                       (w) “Successor
          Entity”
means
          the Person, which may be the Company, formed by, resulting from or surviving
          any
          Fundamental Transaction or the Person with which such Fundamental Transaction
          shall have been made, provided that if such Person is not a publicly traded
          entity whose common stock or equivalent equity security is quoted or listed
          for
          trading on an Eligible Market, Successor Entity shall mean such Person’s Parent
          Entity. 

         

                       (x) “Trading
          Day”
means
          any day on which the Common Stock is traded on the Principal Market, or,
          if the
          Principal Market is not the principal trading market for the Common Stock,
          then
          on the principal securities exchange or securities market on which the
          Common
          Stock is then traded; provided that “Trading Day” shall not include any day on
          which the Common Stock is scheduled to trade on such exchange or market
          for less
          than 4.5 hours or any day that the Common Stock is suspended from trading
          during
          the final hour of trading on such exchange or market (or if such exchange
          or
          market does not designate in advance the closing time of trading on such
          exchange or market, then during the hour ending at 4:00:00 p.m., New York
          Time). 

         

                       (y) “Voting
          Stock”
of
          a
          Person means capital stock of such Person of the class or classes pursuant
          to
          which the holders thereof have the general voting power to elect, or the
          general
          power to appoint, at least a majority of the board of directors, managers
          or
          trustees of such Person (irrespective of whether or not at the time capital
          stock of any other class or classes shall have or might have voting power
          by
          reason of the happening of any contingency). 

         

             (29) DISCLOSURE.
          Upon
          receipt or delivery by the Company of any notice in accordance with the
          terms of
          this Note, unless the Company has in good faith determined that the matters
          relating to such notice do not constitute material, nonpublic information
          relating to the Company or its Subsidiaries, the Company shall within one
          (1) Business Day after any such receipt or delivery publicly disclose such
          material, nonpublic information on a Current Report on Form 8-K or otherwise.
          In
          the event that the Company believes that a notice contains material, nonpublic
          information, relating to the Company or its Subsidiaries, the Company shall
          indicate to the Holder contemporaneously with delivery of such notice,
          and in
          the absence of any such indication, the Holder shall be allowed to presume
          that
          all matters relating to such notice do not constitute material, nonpublic
          information relating to the Company or its Subsidiaries.

         

        (30)
          ACKNOWLEDGEMENTS.
          THE
          HOLDER HEREBY ACKNOWLEDGES RECEIPT OF A DRAFT OF THE COMPANY’S FORM 10-K
          ANTICIPATED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
          APRIL 2,
          2007. THE HOLDER FURTHER ACKNOWLEDGES THAT WITH RESPECT TO NET SHARE SETTLEMENT,
          THE COMPANY IS NOT OBLIGATED TO TREAT ALL HOLDERS THE SAME OR ON A PRO
          RATA
          BASIS WITH RESPECT TO THE COMPANY’S UTILIZING NET SHARE SETTLEMENT. WITHOUT
          LIMITING THE FOREGOING, THE HOLDER ACKNOWLEDGES THAT DIRECTORS, OFFICERS,
          CONSULTANTS OR EMPLOYEES OF THE COMPANY MAY, SUBJECT TO ANY APPLICABLE
          PRINCIPAL
          MARKET SHAREHOLDER APPROVAL RULES, BE AMONG HOLDERS SUBJECT TO THE COMPANY’S NET
          SHARE SETTLEMENT OPTION.

         

        [Signature
          Page Follows] 


        
          
            
            

          

          
            17

            
              

            

          

          
            
            

          

        

         

             IN
          WITNESS WHEREOF, the Company has caused this Note to be duly executed as
          of the
          Issuance Date set out above. 

         

        
          	
                  BIG
                    DOG HOLDINGS, INC.

                
	
                  By:

                	
                   

                	
                   

                
	
                   

                	
                   

                	
                   

                
	
                   

                	
                  Name: 

                	 
	
                   

                	
                  Title:

                	 


        

         

        
          
            
            

          

          
            18

            
              

            

          

          
            
            

          

        

         

        Purchaser:_______________________________________

         

         

        By:____________________________________________

         

         

        Print
          Name:______________________________________

         

         

        Title:___________________________________________

         

        
          
            
            

          

          
            19

            
              

            

          

          
            
            

          

        

         

        EXHIBIT
          I 

         

        BIG
          DOG HOLDINGS, INC. 

         

        CONVERSION
          NOTICE 

         

        Reference
          is made to the 8.375% Convertible Note due 2012 (the “Note”)
          issued
          to the undersigned by Big Dog Holdings, Inc. (the “Company”).
          In
          accordance with and pursuant to the Note, the undersigned hereby elects
          to
          convert the Conversion Amount (as defined in the Note) of the Note indicated
          below into shares of Common Stock par value $0.01 per share (the “Common
          Stock”)
          of the
          Company, as of the date specified below. 

         

         

        Date
          of
          Conversion:_________________________

         

        Aggregate
          Conversion Amount to be converted:______________________________

         

        


         

        Please
          confirm the following information:

         

        Conversion
          Price:____________________

         

        Number
          of
          shares of Common Stock to be issued:_____________________________

         

         

        Please
          issue the Common Stock into which the Note is being converted in the following
          name and to the following address: 

         

        Issue
          to:____________________________________

         

        Address:____________________________________

         

            _________________________________

         

        Facsimile
          Number:______________________________

         

        Authorization:

         

         

        By:_________________________________________

         

        Name:_______________________________________

         

        Title:________________________________________

         

        Dated:_______________________________________

         

        Account
          Number:______________________________

         

             (if
          electronic book entry transfer)

         

        Transaction
          Code Number:__________________________________

         

             (if
          electronic book entry transfer)


        
          
            
            

          

          
            20

            
              

            

          

          
            
            

          

        

         

        ACKNOWLEDGMENT 

         

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

         

        
          	
                   

                	
                   

                	
                   

                	
                   

                	
                   

                
	
                   

                	
                   

                	
                   

                	
                   

                	
                   

                
	
                   

                	
                  BIG
                    DOG HOLDINGS, INC.

                	
                   

                
	
                   

                	
                   

                	
                   

                	
                   

                	
                   

                
	
                   

                	
                  By:

                	
                   

                	
                   

                	
                   

                
	
                   

                	
                   

                	
                   

                	
                   

                	
                   

                
	
                   

                	
                   

                	
                   

                	
                  Name:

                	
                   

                
	
                   

                	
                   

                	
                   

                	
                  Title: