Document:

Exhibit 10.1

    
      

    

    Execution
      Copy

     

    CONVERTIBLE
      NOTE PURCHASE AGREEMENT

    

    This
      Convertible Note Purchase Agreement (the “Agreement”)
      is
      made as of April 3, 2007 between Big Dog Holdings, Inc., a Delaware
      corporation (the “Company”),
      and
      the purchasers set forth on Exhibit
      B
      hereto
      (individually, a “Purchaser”
and
      collectively, the “Purchasers”).

    

    WITNESSETH:

    

    WHEREAS,
      the Company desires to sell to the Purchasers, and the Purchasers desire to
      purchase from the Company, $18,500,000 aggregate principal amount of
      8.375% Convertible Notes due 2012, initially convertible into an
      aggregate of 1,027,777 shares (the “Shares”)
      of the
      Company’s common stock, par value $0.01 per share (the “Common
      Stock”),
      pursuant to promissory notes in the form attached hereto as Exhibit
      A
      (the
“Notes”)
      in a
      private placement pursuant to Section 4(2) of the Securities Act of 1933, as
      amended (the “Securities
      Act”),
      and
      Rule 506 promulgated thereunder, and pursuant to the terms of this Agreement;
      the private placement described in this recital is referred to herein as the
      “Offering”.
      This
      Agreement and the Notes, and any other documents or agreements executed in
      connection with the transactions contemplated hereunder, are referred to herein
      as the “Transaction
      Documents”.

    

    WHEREAS,
      the Company desires to sell to each Purchaser, and each Purchaser desires to
      purchase from the Company, the principal amount of Notes set forth on
Exhibit
      B
      opposite
      the name of each Purchaser; and

    

    WHEREAS,
      the parties hereto desire to enter into this Agreement for the purpose of
      setting forth certain representations, warranties and covenants made by each
      to
      the other as an inducement to the execution and delivery of this Agreement
      and
      the conditions precedent to the consummation of the transactions set forth
      in
      this Agreement. 

    

    NOW,
      THEREFORE, in consideration of the premises and of the mutual provisions,
      agreements and covenants contained herein and for other good and valuable
      consideration, the receipt and sufficiency of which are hereby acknowledged,
      the
      parties hereto agree as follows: 

    

    
      	 	
              Section
                1.

            	
              Authorization
                and Sale of the Notes.

            

    

     

    (a)    Subject
      to the terms and conditions set forth in this Agreement, the Company has
      authorized the sale of the Notes to accredited investors (as defined in the
      Securities Act) in accordance with Rule 506 under the Securities
      Act.

     

    (b)    The
      completion of the purchase and sale of the Notes (the “Closing”)
      shall
      occur on the date of this Agreement (the “Closing
      Date”).
      At
      the Closing, the Company shall deliver to each Purchaser one or more Notes
      representing the aggregate principal amount set forth such Purchaser’s name on
Exhibit
      B
      hereto,
      each such Note to be recorded in the name of the applicable Purchaser or, if
      so
      indicated on the signature page hereto, in the name of a nominee designated
      by
      each Purchaser.

    

    
      
        
          
          

        

        
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                Section
                  2.

              	
                Conditions
                  to Closing.

              

      

       

      (a)    Condition
        to Company’s Obligations.
        The
        Company’s obligation to issue the Notes to the Purchasers shall be subject to
        the following conditions, any one or more of which may be waived by the
        Company:

       

      
        	 	
                1.

              	
                receipt
                  by the Company of a wire transfer of funds to an account designated
                  by the
                  Company in the full amount of the purchase price for all of the
                  Notes
                  being purchased hereunder as set forth on Exhibit
                  B;

              

      

       

      
        	 	
                2.

              	
                the
                  representations and warranties of the Purchasers set forth herein
                  shall be
                  true and correct as of the Closing Date in all respects (except
                  for
                  representations and warranties that speak as of a specific date,
                  which
                  representations and warranties shall be true and correct as of
                  such date);
                  

              

      

       

      
        	 	
                3.

              	
                receipt
                  by the Company of a subordination agreement in favor of Wells Fargo
                  in
                  substantially the form of Exhibit
                  E;
                  and

              

      

       

      
        	 	
                4.

              	
                the
                  satisfaction of the undertakings of the Purchasers to be fulfilled
                  prior
                  to the Closing.

              

      

       

      (b)    Conditions
        to Purchasers’ Obligations.
        The
        Purchasers’ obligations to purchase the Notes shall be subject to the following
        conditions:

       

      
        	 	
                1.

              	
                the
                  representations and warranties of the Company set forth herein
                  shall be
                  true and correct as of the Closing Date in all respects (except
                  for
                  representations and warranties that speak as of a specific date,
                  which
                  representations and warranties shall be true and correct as of
                  such
                  date);

              

      

       

      
        	 	
                2.

              	
                the
                  Company shall have satisfied the undertakings to be fulfilled by
                  the
                  Company prior to Closing;

              

      

       

      
        	 	
                3.

              	
                payment
                  for the costs, expenses and filing fees identified in Section 24;
                  and

              

      

       

      
        	 	
                4.

              	
                each
                  Purchaser shall have received such documents as each Purchaser
                  shall
                  reasonably have requested, including without limitation a standard
                  opinion
                  of Company counsel as to the matters set forth in the form attached
                  as
                  Exhibit
                  C
                  hereto, including without limitation as to exemption from the registration
                  requirements of the Securities Act of the sale of the Notes and
                  the
                  conversion of the Notes into
                  Shares.

              

      

       

      Section
        3.    Representations,
        Warranties and Covenants of the Company.
        The
        Company hereby represents and warrants to, and covenants with, each Purchaser,
        as follows:

       

      (a)    Organization.
        The
        Company and each of its “Subsidiaries”
(as
        defined in Rule 405 under the Securities Act) is duly organized and validly
        existing in good standing under the laws of the jurisdiction of its
        organization. Each of the Company and its Subsidiaries has full corporate
        power
        and authority to own, operate and occupy its properties and to conduct its
        business as presently conducted and as described in the documents filed by
        the
        Company under the Securities Exchange Act of 1934, as amended, and the rules
        and
        regulations promulgated thereunder (the “Exchange
        Act”),
        since
        the end of its most recently completed fiscal year through the date hereof,
        including, without limitation, its most recent report on Form 10-K (the
“Exchange
        Act Documents”)
        and is
        registered or qualified to do business and in good standing in each jurisdiction
        in which the nature of the business conducted by it or the location of the
        properties owned or leased by it requires such qualification and where the
        failure to be so qualified would have a material adverse effect upon the
        condition (financial or otherwise), earnings, business, properties or operations
        of the Company and its Subsidiaries, taken as a whole (a “Material
        Adverse Effect”),
        and
        no proceeding has been instituted in any such jurisdiction, revoking, limiting
        or curtailing, or seeking to revoke, limit or curtail, such power and authority
        or qualification.

       

      
        
          
          

        

        
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      (b)    Due
        Authorization and Valid Issuance.
        The
        Company has all corporate power and authority to execute, deliver and perform
        its obligations under the Transaction
        Documents,
        and the
        Transaction Documents have been duly authorized and validly executed and
        delivered by the Company and constitute legal, valid and binding agreements
        of
        the Company enforceable against the Company in accordance with their terms,
        except as rights to indemnity and contribution may be limited by state or
        federal securities laws or the public policy underlying such laws, except
        as
        enforceability may be limited by applicable bankruptcy, insolvency,
        reorganization, moratorium or similar laws affecting creditors’ and contracting
        parties’ rights generally and except as enforceability may be subject to general
        principles of equity (regardless of whether such enforceability is considered
        in
        a proceeding in equity or at law). The Notes being purchased by each Purchaser
        hereunder and the Shares issuable upon conversion of, or in satisfaction
        of the
        obligation to make certain interest payments on, the Notes are duly authorized
        and will, upon issuance and payment therefor pursuant to the terms hereof
        and
        thereof, be validly issued, fully-paid and nonassessable.

       

      (c)    Non-Contravention.
        The
        execution and delivery of the Transaction Documents, the issuance and sale
        of
        the Notes under this Agreement, the issuance of the Shares under the Notes,
        the
        fulfillment of the terms of the Transaction Documents, and the consummation
        of
        the transactions contemplated thereby will not (A) conflict with or
        constitute a violation of, or default (with the passage of time or otherwise)
        under, (i) any bond, debenture, note or other evidence of indebtedness,
        lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
        venture or other agreement or instrument to which the Company or any Subsidiary
        is a party or by which it or any of its Subsidiaries or their respective
        properties are bound, (ii) the charter or by-laws of the Company or any
        Subsidiary, or (iii) any law, administrative regulation, ordinance or order
        of any court or governmental agency, arbitration panel or authority applicable
        to the Company or any Subsidiary or their respective properties, except in
        the
        case of clauses (i) and (iii) for any such conflicts, violations or
        defaults which are not reasonably likely to have a Material Adverse Effect
        or
        (B) result in the creation or imposition of any lien, encumbrance, claim,
        security interest or restriction whatsoever upon any of the material properties
        or assets of the Company or any Subsidiary or an acceleration of indebtedness
        pursuant to any obligation, agreement or condition contained in any bond,
        debenture, note or any other evidence of indebtedness or any material indenture,
        mortgage, deed of trust or any other agreement or instrument to which the
        Company or any Subsidiary is a party or by which any of them is bound or
        to
        which any of the material property or assets of the Company or any Subsidiary
        is
        subject except for any such creation or imposition which is not reasonably
        likely to have a Material Adverse Effect. No consent, approval, authorization
        or
        other order of, or registration, qualification or filing with, any regulatory
        body, administrative agency, or other governmental body in the United States
        or
        any other person (including, without limitation, the stockholders of the
        Company) is required for the execution and delivery of the Transaction
        Documents, the valid issuance and sale of the Notes to be sold pursuant to
        the
        Agreements and the valid issuance of the Shares under the Notes, other than
        such
        as have been made or obtained, and except for post-closing securities filings
        or
        notifications required to be made under federal or state securities
        laws.

       

      
        
          
          

        

        
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                (d)

              	
                Capitalization.

              

      

       

      
        	 	
                1.

              	
                The
                  capitalization of the Company as of September 30, 2006 is
                  as set forth in the most recent applicable Exchange Act Documents,
                  increased as set forth in the next sentence. The Company has not
                  issued
                  any capital stock since that date other than pursuant to (i) employee
                  benefit plans disclosed in the Exchange Act Documents, or (ii)
                  outstanding
                  warrants, options or other securities disclosed in the Exchange
                  Act
                  Documents. The Notes to be sold pursuant to the Transaction Documents
                  have
                  been duly authorized, and when issued and paid for in accordance
                  with the
                  terms of the Transaction Documents, will be duly and validly issued,
                  fully
                  paid and nonassessable. The Shares have been duly authorized and,
                  when
                  issued pursuant to the terms of the Notes, the Shares will be duly
                  and
                  validly issued, fully paid and nonassessable. The outstanding shares
                  of
                  capital stock of the Company have been duly and validly issued
                  and are
                  fully paid and nonassessable, have been issued in compliance with
                  all
                  federal and state securities laws, and were not issued in violation
                  of any
                  preemptive rights or similar rights to subscribe for or purchase
                  securities.

              

      

       

      
        	 	
                2.

              	
                Except
                  as set forth on Schedule
                  3(d)2,
                  there are no outstanding rights (including, without limitation,
                  preemptive
                  rights), warrants or options to acquire, or instruments convertible
                  into
                  or exchangeable for, any unissued shares of capital stock or other
                  equity
                  interest in the Company or any Subsidiary, or any contract, commitment,
                  agreement, understanding or arrangement of any kind to which the
                  Company
                  is a party or of which the Company has knowledge and relating to
                  the
                  issuance or sale of any capital stock of the Company or any Subsidiary,
                  any such convertible or exchangeable securities or any such rights,
                  warrants or options.

              

      

       

      
        	 	
                3.

              	
                Other
                  than with respect to the registration procedures set forth in Section
                  7
                  hereof, and without limiting the foregoing, no preemptive right,
                  co-sale
                  right, right of first refusal, registration right, or other similar
                  right
                  exists with respect to the Notes and Shares or the issuance and
                  sale
                  thereof. No further approval or authorization of any stockholder,
                  the
                  Board of Directors of the Company or others is required for the
                  issuance
                  and sale of the Notes and the Shares, including under Nasdaq rules.
                  The
                  Company owns the entire equity interest in each of its Subsidiaries,
                  free
                  and clear of any pledge, lien, security interest, encumbrance,
                  claim or
                  equitable interest, other than as described in Schedule
                  3(d)3.
                  Except as set forth on Schedule
                  3(d)3,
                  there are no stockholders agreements, voting agreements or other
                  similar
                  agreements with respect to the Company’s Common Stock to which the Company
                  is a party or, to the knowledge of the Company, between or among
                  any of
                  the Company’s stockholders.

              

      

       

      
        
          
          

        

        
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      (e)    Legal
        Proceedings.
        There
        is no material legal or governmental proceeding pending or, to the knowledge
        of
        the Company, threatened to which the Company or any Subsidiary is or may
        be a
        party or of which the business or property of the Company or any Subsidiary
        is
        subject that is required to be disclosed in an Exchange Act Documents and
        not so
        disclosed.

       

      (f)    No
        Violations.
        Except
        as disclosed in the Exchange Act Documents, neither the Company nor any
        Subsidiary is (i) in violation of its charter, bylaws, or other organizational
        document, or (ii) in violation of any law, administrative regulation, ordinance
        or order of any court or governmental agency, arbitration panel or authority
        applicable to the Company or any Subsidiary, which violation, individually
        or in
        the aggregate, would be reasonably likely to have a Material Adverse Effect,
        or
        (iii) in default (and there exists no condition which, with the passage of
        time
        or otherwise, would constitute a default) in the performance of any bond,
        debenture, note or any other evidence of indebtedness in any indenture,
        mortgage, deed of trust or any other material agreement or instrument to
        which
        the Company or any Subsidiary is a party or by which the Company or any
        Subsidiary is bound or by which the properties of the Company or any Subsidiary
        are bound, which would be reasonably likely to have a Material Adverse
        Effect.

       

      (g)    Environmental
        Matters.
        To the
        Company’s knowledge, the Company and its Subsidiaries are and have been in
        compliance in all material respects with all Environmental Laws; (b) there
        has
        been no release or threatened release of any pollutant, contaminant or toxic
        or
        hazardous material, substance or waste, or petroleum or any fraction thereof,
        (each a “Hazardous
        Substance”)
        on,
        upon, into or from any site currently or heretofore owned, leased or otherwise
        used by the Company or its Subsidiaries in violation of any Environmental
        Laws;
        (c) there have been no Hazardous Substances generated by the Company or its
        Subsidiaries that have been disposed of or come to rest at any site that
        has
        been included in any published U.S. federal, state or local “superfund” site
        list or any other similar list of hazardous or toxic waste sites published
        by
        any governmental authority in the United States; and (d) there are no
        underground storage tanks located on, no polychlorinated biphenyls
        (“PCBs”)
        or
        PCB-containing equipment used or stored on, and no hazardous waste as defined
        by
        the Resource Conservation and Recovery Act, as amended, stored on, any site
        owned or operated by the Company or its Subsidiaries, except for the storage
        of
        hazardous waste in compliance with Environmental Laws. The Company has made
        available to the Purchasers true and complete copies of all material
        environmental records, reports, notifications, certificates of need, permits,
        pending permit applications, correspondence, engineering studies, and
        environmental studies or assessments. For purposes of this Section 3(g),
        “Environmental
        Laws”
means
        any law, regulation, or other applicable requirement relating to (a) releases
        or
        threatened release of Hazardous Substance; (b) pollution or protection of
        employee health or safety, public health or the environment; or (c) the
        manufacture, handling, transport, use, treatment, storage, or disposal of
        Hazardous Substances.

       

      
        
          
          

        

        
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      (h)    Governmental
        Permits, Etc.
        With
        the exception of the matters which are disclosed in the Exchange Act Documents
        or described in Sections 3(a), 3(n), 3(o) and 3(p) hereof, each of the Company
        and its Subsidiaries has all necessary franchises, licenses, certificates
        and
        other authorizations from any foreign, federal, state or local government
        or
        governmental agency, department, or body that are currently necessary for
        the
        operation of the business of the Company and its Subsidiaries as currently
        conducted as described in the Exchange Act Documents except where the failure
        to
        currently possess could not reasonably be expected to have a Material Adverse
        Effect.

       

      (i)    Intellectual
        Property.
        Except
        as specifically set forth on Schedule
        3(i),
        (i) each of the Company and its Subsidiaries owns or possesses sufficient
        rights to conduct its business as currently conducted in the ordinary course,
        including, without limitation, rights to use all material patents, patent
        rights, industry standards, trademarks, copyrights, licenses, inventions,
        trade
        secrets, trade names and know-how described or referred to in Schedule
        3(i)
        as owned
        or possessed by it or that are necessary for the conduct of its business
        as now
        conducted (collectively, “Intellectual
        Property”)
        except
        where the failure to currently own or possess would not have a Material Adverse
        Effect, (ii) neither the Company nor any of its Subsidiaries is infringing,
        or
        has received any notice of, or has any knowledge of, any asserted infringement
        by the Company or any of its Subsidiaries of, any rights of a third party
        with
        respect to any Intellectual Property that, individually or in the aggregate,
        would have a Material Adverse Effect and (iii) neither the Company nor any
        of its Subsidiaries has received any notice of, or has any knowledge of,
        infringement by a third party with respect to any Intellectual Property rights
        of the Company or of any Subsidiary that, individually or in the aggregate,
        would have a Material Adverse Effect.

       

      (j)    Financial
        Statements.
        The
        financial statements of the Company and the related notes contained in the
        Exchange Act Documents present fairly, in accordance with generally accepted
        accounting principles, the financial position of the Company and its
        Subsidiaries as of the dates indicated, and the results of its operations
        and
        cash flows for the periods therein specified except that the unaudited interim
        financial statements were or are subject to normal year-end adjustments.
        Such
        financial statements (including the related notes) have been prepared in
        accordance with generally accepted accounting principles applied on a consistent
        basis throughout the periods therein specified, except as may be disclosed
        in
        the notes to such financial statements, or in the case of unaudited statements,
        as may be permitted by the Securities and Exchange Commission (“SEC”)
        on
        Form 10-Q under the Exchange Act and except as disclosed in the Exchange
        Act Documents. The other financial information contained in the Exchange
        Act
        Documents has been prepared on a basis consistent with the financial statements
        of the Company.

       

      (k)    No
        Material Adverse Change.
        Except
        as disclosed in the Exchange Act Documents, since September 30, 2006, there
        has
        not been (i) any event which has had, or would be reasonably expected to
        have, a Material Adverse Effect; (ii) any obligation, direct or contingent,
        that
        is material to the Company and its Subsidiaries considered as one enterprise,
        incurred by the Company, except obligations incurred in the ordinary course
        of
        business, (iii) any dividend or distribution of any kind declared, paid or
        made on the capital stock of the Company or any of its Subsidiaries, or
        (iv) any loss or damage (whether or not insured) to the physical property
        of the Company or any of its Subsidiaries which has been sustained which
        has had
        a Material Adverse Effect.

       

      
        
          
          

        

        
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      (l)    Disclosure.
        The
        representations and warranties of the Company contained in this Section 3
        as of the date hereof and as of the Closing Date, do not contain any untrue
        statement of a material fact or omit to state a material fact required to
        be
        stated therein or necessary to make the statements therein, in light of the
        circumstances under which they were made, not misleading. Except with respect
        to
        the material terms and conditions of the transaction contemplated by the
        Transaction Documents, which shall be publicly disclosed by the Company pursuant
        to Section 21 hereof, the Company confirms that neither it nor any person
        acting on its behalf has provided each Purchaser with any information that
        the
        Company believes constitutes material, non-public information. The Company
        understands and confirms that each Purchaser will rely on the foregoing
        representations in effecting transactions in securities of the
        Company.

       

      (m)    NASDAQ
        Compliance.
        The
        Company’s Common Stock is registered pursuant to Section 12(g) of the
        Exchange Act and is listed on The Nasdaq Stock Market, Inc. Global Market
        (the
“Nasdaq
        National Market”),
        and
        the Company has taken no action designed to, or likely to have the effect
        of,
        terminating the registration of the Common Stock under the Exchange Act or
        de-listing the Common Stock from the Nasdaq National Market, nor has the
        Company
        received any notification that the SEC or the National Association of Securities
        Dealers, Inc. (“NASD”)
        is
        contemplating terminating such registration or listing. The Company is in
        compliance with all applicable Nasdaq maintenance requirements and corporate
        governance requirements for continuing listing on Nasdaq National Market.
        The
        issuance by the Company of the Notes and the Shares shall not have the effect
        of
        terminating the registration of the Common Stock under the Exchange Act or
        delisting the Common Stock from the Nasdaq National Market.

       

      (n)    Reporting
        Status.
        The
        Company is eligible to use Form S-3 to register the Shares to be offered
        for the
        account of each Purchaser, subject to SEC interpretation and limitation as
        to
        the number of Shares which may be included in a re-sale registration statement
        on Form S-3. The Exchange Act Documents, as of their respective dates and
        as of
        the Closing Date, do not and will not include any untrue statement of a material
        fact or omit to state any material fact necessary in order to make the
        statements therein, in the light of the circumstances under which they were
        or
        will be made, not misleading. The following documents complied as to form
        in all
        material respects with the SEC’s requirements as of their respective filing
        dates:

       

      
        	 	
                1.

              	
                the
                  Annual Report on Form 10-K for the fiscal year ended December 31,
                  2005;
                  

              

      

       

      
        	 	
                2.

              	
                all
                  other documents, if any, filed by the Company with the SEC during
                  the
                  one-year period preceding the date of this Agreement pursuant to
                  the
                  reporting requirements of the Exchange
                  Act.

              

      

       

      (o)    NASDAQ
        Listing.
        The
        Company shall comply with all requirements of the NASD and SEC with respect
        to
        the issuance of the Notes and the Shares, and the listing of the Shares on
        the
        Nasdaq National Market. The Company will promptly seek to list all of the
        Shares
        on the Nasdaq National Market.

       

      
        
          
          

        

        
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      (p)    No
        Manipulation of Stock.
        The
        Company has not taken and will not, in violation of applicable law, take,
        any
        action designed to or that might reasonably be expected to cause or result
        in
        stabilization or manipulation of the price of the Common Stock to facilitate
        the
        sale or resale of the Notes or the Shares.

       

      (q)    Company
        not an “Investment Company”.
        The
        Company has been advised of the rules and requirements under the Investment
        Company Act of 1940, as amended (the “Investment
        Company Act”).
        To
        the knowledge of the Company, the Company is not, and immediately after receipt
        of payment for the Notes will not be, an “investment company” or an entity
“controlled” by an “investment company” within the meaning of the Investment
        Company Act and shall conduct its business in a manner so that it will not
        become subject to the Investment Company Act.

       

      
        	 	
                (r)

              	
                Foreign
                  Corrupt Practices; Embargoed Person.

              

      

       

      
        	 	
                1.

              	
                Neither
                  the Company, nor to the knowledge of the Company, any agent or
                  other
                  person acting on behalf of the Company, has (i) directly or indirectly,
                  used any corrupt funds for unlawful contributions, gifts, entertainment
                  or
                  other unlawful expenses related to foreign or domestic political
                  activity,
                  (ii) made any unlawful payment to foreign or domestic government
                  officials
                  or employees or to any foreign or domestic political parties or
                  campaigns
                  from corporate funds, (iii) failed to disclose fully any contribution
                  made
                  by the Company (or made by any person acting on its behalf of which
                  the
                  Company is aware) which is in violation of law, or (iv) violated
                  in any
                  material respect any provision of the Foreign Corrupt Practices
                  Act of
                  1977, as amended.

              

      

       

      
        	 	
                2.

              	
                None
                  of the funds or other assets of the Company constitute or shall
                  constitute
                  property of, or shall be beneficially owned, directly or indirectly,
                  by
                  any person with whom U.S. persons are restricted from engaging
                  in
                  financial or other transactions under United States law, including,
                  but
                  not limited to, the International Emergency Economic Powers Act,
                  50 U.S.C.
                  § 1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1
                  et seq.,
                  and any executive orders or regulations promulgated under any such
                  United
                  States laws (each, an “Embargoed
                  Person”),
                  with the result that the investments evidenced by the Shares are
                  or would
                  be in violation of law; (ii) no Embargoed Person has or shall have
                  any
                  interest of any nature whatsoever in the Company with the result
                  that the
                  investments evidenced by the Shares are or would be in violation
                  of law;
                  and (iii) none of the funds of the Company are or shall be derived
                  from
                  any unlawful activity with the result that the investments evidenced
                  by
                  the Notes are or would be in violation of law; provided, that with
                  respect
                  to the covenants contained in this Section 3(s)2, the Company may
                  assume
                  that the Purchasers are not Embargoed Persons. The Company certifies
                  that,
                  to the Company’s knowledge, the Company has not been designated, and is
                  not owned or controlled, by an Embargoed
                  Person.

              

      

       

      
        
          
          

        

        
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      (s)    Accountants.
        To the
        Company’s knowledge, Singer Lewak Greenbaum & Goldstein LLP are independent
        accountants as required by the Securities Act and the rules and regulations
        promulgated thereunder.

       

      (t)    Contracts.
        The
        contracts described in the Exchange Act Documents that are material to the
        Company are in full force and effect on the date hereof, and neither the
        Company
        nor, to the Company's knowledge, any other party to such contracts is in
        breach
        of or default under any of such contracts which breach or default would have
        a
        Material Adverse Effect. The Company has filed with the SEC all contracts
        and
        agreements required to be filed by the Exchange Act.

       

      (u)    Taxes.
        Except
        as such would not have a Material Adverse Effect, the Company has filed all
        necessary federal, state and foreign income and franchise tax returns when
        due
        (or obtained appropriate extensions for filing) and has paid or accrued all
        taxes shown as due thereon, and the Company has no knowledge of a tax deficiency
        which has been or might be asserted or threatened against it which would
        have a
        Material Adverse Effect.

       

      (v)    Transfer
        Taxes.
        On the
        Closing Date, all stock transfer or other taxes (other than income taxes)
        which
        are required to be paid in connection with the sale and transfer of the Notes
        to
        be sold to each Purchaser hereunder will be, or will have been, fully paid
        or
        provided for by the Company and all laws imposing such taxes will be or will
        have been fully complied with. Upon the issuance of the Shares pursuant to
        the
        Notes, all stock transfer or other taxes (other than income taxes) which
        are
        required to be paid in connection therewith will be, or will have been, fully
        paid or provided for by the Company and all laws imposing such taxes will
        be or
        will have been fully complied with.

       

      (w)    Private
        Offering; No General Solicitation.
        Assuming the correctness of the representations and warranties of each
        Purchaser, set forth in Section 4 hereof, and of the Placement Agent, set
        forth in a certificate to the Company and its counsel in connection herewith,
        the offer and sale of Notes hereunder is, and the issuance of the Shares
        under
        the Notes will be, exempt from registration under the Securities Act. The
        Company has not distributed and will not distribute prior to the Closing
        Date
        any offering material in connection with this Offering and sale of the Notes
        other than the Transaction Documents. The Company has not in the past nor
        will
        it hereafter take any action independent of the placement agent to sell,
        offer
        for sale or solicit offers to buy any securities of the Company which would
        bring the offer, issuance or sale of the Notes as contemplated by this
        Agreement, or the issuance of the Shares pursuant to the Notes, within the
        provisions of Section 5 of the Securities Act, unless such offer, issuance
        or
        sale was or shall be within the exemptions of Section 4 of the Securities
        Act.
        Neither the Company nor any person acting on behalf of the Company (other
        than
        the Placement Agent, as to whom the Company makes no representation or warranty)
        has offered or sold any of the Notes by any form of general solicitation
        or
        general advertising. The Company has offered the Notes for sale only to each
        Purchaser and certain other accredited investors within the meaning of Rule
        501
        under the Securities Act. The Company has no intention of making, and will
        not
        make, an offer or sale of any securities, for a period of six months after
        the
        date of this Agreement, which would be required to be integrated into this
        Offering in a manner that would require the registration under the Securities
        Act of any of the Notes or the Shares, except for the offering of Notes as
        contemplated by the Agreements.

       

      
        
          
          

        

        
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      (x)    Controls
        and Procedures.
        The
        Company is in material compliance with all provisions of the Sarbanes-Oxley
        Act
        of 2002 which are applicable to it as of the Closing Date. The Company has
        established and maintains an effective system of internal control over financial
        reporting (as such term is defined in the Exchange Act ) regarding the
        reliability of financial reporting and preparation of financial statements
        for
        external purposes in accordance with GAAP and includes policies and procedures
        that (i) pertain to maintenance of records that in reasonable detail accurately
        and fairly reflect the transactions and dispositions of the assets of the
        issuer; (ii) provide reasonable assurance that transactions are recorded
        as
        necessary to permit preparation of financial statements in accordance with
        GAAP,
        and that receipts and expenditures of the issuer are being made only in
        accordance with authorizations of management and directors of the issuer;
        and
        (iii) provide reasonable assurance regarding prevention or timely detection
        of
        unauthorized acquisition, use, or disposition of the issuer’s assets that could
        have a material adverse effect on the financial statements. The Company has
        established and maintains disclosure controls and procedures (as defined
        in
        Exchange Act) that are effective in ensuring that information required to
        be
        disclosed by the Company in the reports that it files or submits under the
        Exchange Act is recorded, processed, summarized and reported, within the
        time
        periods specified in the SEC’s rules and forms, including, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed by the Company in the reports that it files or submits under the
        Act
        is accumulated and communicated to the Company’s management, including its
        principal executive and principal financial officers, or persons performing
        similar functions, as appropriate to allow timely decisions regarding required
        disclosure. The Company’s certifying officers have evaluated the effectiveness
        of the Company’s disclosure controls and procedures and presented in the
        applicable Exchange Act Documents their conclusions about the effectiveness
        of
        the disclosure controls and procedures, as of the end of the periods covered
        by
        such Exchange Act Documents based on such evaluation. Since the last such
        evaluation date, there has been no change in the Company’s internal control over
        financial reporting that has materially affected, or is reasonably likely
        to
        materially affect, the Company’s internal control over financial reporting, and
        no significant deficiencies or material weaknesses in internal controls over
        financial reporting, or other factors that could significantly affect the
        Company’s internal control over financial reporting, have been
        identified.

       

      (y)    Transactions
        With Affiliates.
        Except
        as set forth on Schedule
        3(y)
        or as
        contemplated in this Agreement, there are no obligations of the Company to
        officers, directors, stockholders or employees of the Company other than
        (i) for
        payment of salary for services rendered and for bonus payments; (ii)
        reimbursements for reasonable expenses incurred on behalf of the Company;
        (iii)
        for other standard employee benefits made generally available to all employees
        (including stock option agreements outstanding under any stock option plan
        approved by the Board of Directors of the Company); and (iv) obligations
        listed
        in the Company’s financial statements. Except as described above or on
Schedule
        3(y),
        none of
        the officers, directors or, to the best of the Company’s knowledge, key
        employees or stockholders of the Company or any members of their immediate
        families, are indebted to the Company, individually or in the aggregate,
        in
        excess of $120,000 or have any direct or indirect ownership interest in any
        firm
        or corporation with which the Company is affiliated or with which Company
        has a
        business relationship, or any firm or corporation which competes with the
        Company, other than passive investments in publicly traded companies
        (representing less than one percent (1%) of such company) which may compete
        with
        the Company. Except as described above, no officer, director or stockholder,
        or
        any member of their immediate families, is, directly or indirectly, interested
        in any material contract with the Company and no agreements, understandings
        or
        proposed transactions are contemplated between the Company and any such person.
        Except as set forth in any Exchange Act Documents, the Company is not a
        guarantor or indemnitor of any indebtedness of any other person, firm or
        corporation.

       

      
        
          
          

        

        
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      (z)    No
        Registration Rights.
        Except
        as set forth on Schedule
        3(z),
        no
        person has the right, which right has not been waived, to require the Company
        or
        any Subsidiary to register any securities for sale under the Securities Act
        by
        reason of the filing of the Registration Statement with the SEC or the issuance
        and sale of the Notes or the Shares. 

       

      (aa)   Margin
        Securities.
        Neither
        the Company nor any of the Subsidiaries owns any “margin securities” as that
        term is defined in Regulation U of the Board of Governors of the Federal
        Reserve System (the “Federal
        Reserve Board”),
        and
        none of the proceeds of the sale of the Notes will be used, directly or
        indirectly, for the purpose of purchasing or carrying any margin security,
        for
        the purpose of reducing or retiring any indebtedness which was originally
        incurred to purchase or carry any margin security or for any other purpose
        which
        might cause any of the Notes to be considered a “purpose credit” within the
        meanings of Regulation T, U or X of the Federal Reserve Board.

       

      (bb)   Assets;
        Solvency.
        The
        Company and its Subsidiaries have good and marketable title in fee simple
        to all
        items of real property and marketable title to all personal property owned
        by
        each of them, free and clear of any pledge, lien, encumbrance, security interest
        or other defect or claim of any third party, and any real property and buildings
        leased by the Company or such Subsidiaries are held under valid, subsisting
        and
        enforceable leases, in each case, with such exceptions as are not material
        and
        do not interfere with the use made or proposed to be made of such property
        and
        buildings by the Company or such Subsidiaries. The fair saleable value of
        the
        assets of the Company exceeds the amount that will be required to be paid
        on or
        in respect of its existing debts and other known liabilities (including known
        contingent liabilities) as they mature; the Company does not intend to, and
        does
        not believe that it will, incur debts beyond its ability to pay such debts
        as
        they mature; and upon the issuance of the Notes, the fair salable value of
        the
        assets of the Company will exceed the amount that will be required to be
        paid on
        or in respect of its existing debts and other liabilities (including known
        contingent liabilities) as they mature.

       

      Section
        4.    Representations,
        Warranties and Covenants of each Purchaser.
        Each
        Purchaser, severally and not jointly, represents and warrants to, and covenants
        with, the Company that:

       

      (a)    Such
        Purchaser is an accredited investor as defined in Rule 501 under the Securities
        Act.

       

      
        
          
          

        

        
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      (b)    The
        Purchaser has all requisite power and authority to execute, deliver and perform
        its obligations under this Agreement. The execution of this Agreement and
        the
        consummation of the transactions contemplated hereby have been duly authorized
        by all necessary action on the part of such Purchaser and this Agreement
        has
        been duly executed and delivered and constitutes the valid and binding
        obligation of the Purchaser enforceable in accordance with its terms, except
        as
        rights to indemnity and contribution may be limited by state or federal
        securities laws or the public policy underlying such laws, except as
        enforceability may be limited by applicable bankruptcy, insolvency,
        reorganization, moratorium or similar laws affecting creditors’ and contracting
        parties’ rights generally and except as enforceability may be subject to general
        principles of equity (regardless of whether such enforceability is considered
        in
        a proceeding in equity or at law).

       

      (c)    The
        Notes
        and Shares to be purchased by the Purchaser will be acquired for investment
        for
        the Purchaser’s own account, not as a nominee or agent, and not with a view to
        the resale or distribution of any part thereof in violation of the Securities
        Act, and such Purchaser has no present intention of selling, granting any
        participation in, or otherwise distributing the same. Such Purchaser does
        not
        have any contract, undertaking, agreement, or arrangement with any person
        to
        sell, transfer, or grant participation to any person with respect to any
        of the
        Notes or Shares. Nothing contained herein shall be deemed a representation
        or
        warranty by such Purchaser to hold the Notes or Shares for any period of
        time.

       

      (d)    Purchaser
        acknowledges that it has received all the information that it has requested
        relating to the Company and the purchase of the Notes and Shares. The Purchaser
        further represents that it has had an opportunity to ask questions and receive
        answers from the Company regarding the terms and conditions of the Offering.
        The
        foregoing, however, does not limit or modify the representations and warranties
        of the Company in this Agreement or the right of the Purchaser to rely
        thereon.

       

      (e)    Purchaser
        understands that the Notes and Shares that it is purchasing are characterized
        as
“restricted securities” under the federal securities laws inasmuch as they are
        being acquired from the Company in a transaction not involving a public
        offering, and that under such laws and applicable regulations such securities
        may be resold without registration under the Act, only in certain limited
        circumstances. In this connection, the Purchaser represents that it understands
        the resale limitations imposed by the Act.

       

      (f)    Legends.
        It is
        understood that the Notes and certificate or certificates for the Shares
        shall
        bear a legend reading substantially as follows:

       

      THIS
        SECURITY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
        UNDER
        THE UNITED STATES SECURITIES ACT OF 1933 (THE “SECURITIES
        ACT”),
        AND
        THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF
        MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, EXCEPT: (I) PURSUANT TO
        AN
        EFFECTIVE REGISTRATION STATEMENT RELATED THERETO; OR (II) IN ACCORDANCE WITH
        AN
        OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
        IS NOT REQUIRED UNDER THE SECURITIES ACT.

       

      
        
          
          

        

        
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      (g)    The
        Company acknowledges and agrees that such Purchaser does not make or has
        not
        made any representations or warranties with respect to the transactions
        contemplated hereby other than those specifically set forth herein or in
        the
        Accredited Investor Questionnaire.

       

      (h)    It
        shall
        be a condition to any transfer of any Note that the proposed transferee shall
        have completed and delivered to the Company an “Accredited Investor
        Questionnaire” representing that such transferee is an accredited investor, and
        that each such transferee shall make each of the representations and warranties
        and shall comply with the Purchaser’s covenants set forth in this Section
        4.

       

      (i)    Short
        Sales and Confidentiality after the date hereof.
        Each
        Purchaser, severally and not jointly, covenants that neither it nor any
        affiliate acting on its behalf or pursuant to any understanding with it has
        engaged or will engage, directly or indirectly, in any transactions in the
        securities of the Company (including, without limitation, any short sales
        involving the Company’s securities) until 2 days after the date the transactions
        contemplated by this Agreement are first publicly announced as described
        in
        Section 21. Each Purchaser, severally and not jointly, covenants that until
        such
        time as the transactions contemplated by this Agreement are publicly disclosed
        by the Company as described in Section 21, such Purchaser will maintain the
        confidentiality of all disclosures made to it in connection with this
        transaction (including the existence and terms of this transaction). Each
        Purchaser acknowledges the SEC's position set forth in Item 65, Section A,
        of
        the Manual of Publicly Available Telephone Interpretations, dated July 1997,
        compiled by the Office of Chief Counsel, Division of Corporation Finance,
        and
        such Purchaser will adhere to such position. Notwithstanding the foregoing,
        in
        the case of a Purchaser that is a multi-managed investment vehicle whereby
        separate portfolio managers manage separate portions of such Purchaser's
        assets
        and the portfolio managers have no direct knowledge of the investment decisions
        made by the portfolio managers managing other portions of such Purchaser's
        assets, the covenant set forth above shall only apply with respect to the
        portion of assets managed by the portfolio manager that made the investment
        decision to purchase the Securities covered by this Agreement.

       

      (j)    The
        Purchaser understands that nothing in the Exchange Act Documents, this
        Agreement, the Note or any other materials presented to the Purchaser in
        connection with the purchase and sale of the Note and the Shares constitutes
        legal, tax or investment advice. The Purchaser has consulted such legal,
        tax and
        investment advisors as it, in its sole discretion, has deemed necessary or
        appropriate in connection with its purchase of the Note and the
        Shares.

       

      (k)    Change
        of Control.
        The
        Purchaser covenants and agrees with the Company that it shall not sell the
        Shares to any Person, if as a result of such sale such Person would
        beneficially own on an as-converted basis more than twenty percent (20%)
        of the
        issued and outstanding Common Stock.

       

      (l)    California
        Disclosure.
        The
        Purchaser acknowledges the following disclosure, which is set forth herein
        pursuant to Section 25102(a) of the California Corporate Securities Law of
        1968
        (provided that, subject to the accuracy of the Purchasers' representations
        and
        warranties to the Company, the Company represents that the sale of the Shares
        is
        so exempt):

       

      
        
          
          

        

        
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      THE
        SALE
        OF THE SECURITIES THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED
        WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
        ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
        CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE
        SALE
        OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR
        25105
        OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
        ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE
        SALE
        IS SO EXEMPT.

       

      Section
        5.    Affirmative
        and Negative Covenants.
        The
        covenants and agreements set forth in Section 3 of each Note are hereby
        incorporated by reference into this Agreement.

       

      Section
        6.    Survival
        of Representations, Warranties and Agreements.
        Notwithstanding any investigation made by any party to this Agreement, all
        covenants, agreements, representations and warranties made by the Company
        and
        each Purchaser herein shall survive the execution of this Agreement, the
        delivery to each Purchaser of the Notes being purchased and the payment therefor
        until the expiration date of the Company’s obligation to keep the Registration
        Statement effective pursuant to Section 7(a)(3).

       

      Section
        7.    Registration
        of the Shares; Compliance with the Securities Act.

       

      
        	 	
                (a)

              	
                Registration
                  Procedures and Other Matters.
                  The Company shall:

              

      

       

      
        	 	
                1.

              	
                subject
                  to Section 7(b), and subject to receipt of necessary information
                  from the
                  Purchaser after request from the Company to the Purchaser to provide
                  such
                  information, which request shall be mailed in accordance with Section
                  13
                  hereof no later than 5 business days after the Closing Date, prepare
                  and
                  file with the SEC, within 90 days after the Closing Date (the
                  “Filing
                  Date”),
                  a registration statement on Form S-3 (the “Registration
                  Statement”)
                  to enable the resale of the Shares by each Purchaser from time
                  to time
                  through the automated quotation system of the Nasdaq National Market
                  or in
                  privately-negotiated transactions;

              

      

       

      
        	 	
                2.

              	
                subject
                  to receipt of necessary information from the Purchaser after request
                  from
                  the Company to the Purchaser to provide such information, use its
                  commercially reasonable efforts to cause the Registration Statement
                  to
                  become effective on or prior to the 180th
                  day after the Closing Date (the “Required
                  Effective Date”);

              

      

       

      
        	 	
                3.

              	
                use
                  its commercially reasonable efforts to prepare and file with the
                  SEC such
                  amendments and supplements to the Registration Statement and the
                  Prospectus used in connection therewith as may be necessary to
                  keep the
                  Registration Statement current, effective and free from any material
                  misstatement or omission to state a material fact for a period
                  not
                  exceeding, with respect to each Purchaser’s Shares, the earlier of
                  (i) the date on which each Purchaser may sell all Shares then held
                  by
                  each Purchaser without restriction by the volume limitations of
                  Rule 144 of the Securities Act, (ii) such time as all Shares
                  issuable pursuant to the Notes have been sold pursuant to a registration
                  statement, or (iii) such time as all Shares and Notes cease to
                  be
                  outstanding;

              

      

       

      
        
          
          

        

        
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                4.

              	
                furnish
                  to each Purchaser with respect to the Shares registered under the
                  Registration Statement such number of copies of the Registration
                  Statement, Prospectuses, preliminary Prospectuses and free writing
                  prospectuses (as defined in Rule 405 under the Securities Act)
                  in
                  conformity with the requirements of the Securities Act and such
                  other
                  documents as each Purchaser may reasonably request, in order to
                  facilitate
                  the public sale or other disposition of all or any of the Shares
                  by each
                  Purchaser; provided, however, that the obligation of the Company
                  to
                  deliver copies of Prospectuses, preliminary Prospectuses or free
                  writing
                  prospectuses to each Purchaser shall be subject to the receipt
                  by the
                  Company of reasonable assurances from each Purchaser that each
                  Purchaser
                  will comply with the applicable provisions of the Securities Act
                  and of
                  such other securities or blue sky laws as may be applicable in
                  connection
                  with any use of such Prospectuses, preliminary Prospectuses or
                  free
                  writing prospectuses;

              

      

       

      
        	 	
                5.

              	
                file
                  documents required of the Company for normal blue sky clearance
                  in states
                  specified in writing by each Purchaser and use its reasonable best
                  efforts
                  to maintain such blue sky qualifications during the period the
                  Company is
                  required to maintain the effectiveness of the Registration Statement
                  pursuant to Section 7(a)(3); provided, however, that the Company
                  shall not be required to qualify to do business or consent to service
                  of
                  process in any jurisdiction in which it is not now so qualified
                  or has not
                  so consented;

              

      

       

      
        	 	
                6.

              	
                bear
                  all expenses in connection with the procedures in paragraph (1)
                  through
                  (5) of this Section 7(a) (other than underwriting discounts or
                  commissions, brokers’ fees and similar selling expenses, and any other
                  fees or expenses incurred by each Purchaser, including attorney
                  fees of
                  each Purchaser) and the registration of the Shares pursuant to
                  the
                  Registration Statement; 

              

      

       

      
        	 	
                7.

              	
                advise
                  each Purchaser, promptly after it shall receive notice or obtain
                  knowledge
                  of the issuance of any stop order by the SEC delaying or suspending
                  the
                  effectiveness of the Registration Statement or of the initiation
                  or threat
                  of any proceeding for that purpose; and it will promptly use its
                  reasonable best efforts to prevent the issuance of any stop order
                  or to
                  obtain its withdrawal at the earliest possible moment if such stop
                  order
                  should be issued; and

              

      

       

      
        	 	
                8.

              	
                provide
                  a “Plan
                  of Distribution”
                  section of the Registration Statement substantially in the form
                  attached
                  hereto as Exhibit
                  D.

              

      

       

      
        
          
          

        

        
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            15 -

          
            

          

        

        
          
          

        

      

      (b)    Notwithstanding
        anything herein to the contrary, if the SEC prevents the Company from including
        any or all of the Shares on the Registration Statement due to limitations
        on the
        use of Rule 415 of the Securities Act for the resale of the Shares by the
        Purchasers (a “Rule
        415 Limitation”),
        the
        Registration Statement shall register the resale of a number of Shares which
        is
        equal to the maximum number of shares as is permitted by the SEC (the
“Registration
        Cap”).
        In
        such event, the number of Shares to be registered for each Purchaser in the
        Registration Statement shall be reduced pro rata
        among
        all Purchasers. The failure to include any or all of the Shares in such
        Registration Statement shall not be a breach or default by the Company under
        this Agreement and shall not be deemed a failure by the Company to use
        "commercially reasonable efforts" or "reasonable best efforts" as set forth
        above or elsewhere in this Agreement. With respect to Shares not included
        in the
        Registration Statement, the Company shall continue to use commercially
        reasonable efforts to register all such remaining Shares as promptly as
        possible, but if the SEC, by written or oral comment or otherwise, limits
        the
        Company’s ability to file, or prohibits or delays the filing of, a Registration
        Statement with respect to any or all the Shares which were not included in
        the
        initial Registration Statement (a “Subsequent
        Shelf Limitation”),
        it
        shall not be a breach or default by the Company under this Agreement and
        shall
        not be deemed a failure by the Company to use “commercially reasonable efforts”
or “reasonable best efforts” as set forth above or elsewhere in this
        Agreement.

       

      Section
        8.    Transfer
        of Shares After Registration; Suspension.

       

      (a)    The
        Purchaser agrees that it will not effect any disposition of the Shares or
        its
        right to purchase the Shares that would constitute a sale within the meaning
        of
        the Securities Act except as contemplated in the Registration Statement referred
        to in Section 7 and as described below or as otherwise permitted by law,
        and that it will promptly notify the Company of any changes in the information
        set forth in the Registration Statement regarding each Purchaser or its plan
        of
        distribution.

       

      (b)    Except
        in
        the event that paragraph (c) below applies, the Company shall (i) if deemed
        necessary by the Company, prepare and file from time to time with the SEC
        a
        post-effective amendment to the Registration Statement or a supplement to
        the
        related Prospectus or a supplement or amendment to any document incorporated
        therein by reference or file any other required document so that such
        Registration Statement will not contain an untrue statement of a material
        fact
        or omit to state a material fact required to be stated therein or necessary
        to
        make the statements therein not misleading, and so that, as thereafter delivered
        to purchasers of the Shares being sold thereunder, such Prospectus will not
        contain an untrue statement of a material fact or omit to state a material
        fact
        required to be stated therein or necessary to make the statements therein,
        in
        light of the circumstances under which they were made, not misleading;
        (ii) provide each Purchaser copies of any documents filed pursuant to
        Section 7(a) as each Purchaser may reasonably request; and
        (iii) inform each Purchaser that the Company has complied with its
        obligations in Section 7(a) (or that, if the Company has filed a
        post-effective amendment to the Registration Statement which has not yet
        been
        declared effective, the Company will notify each Purchaser to that effect,
        will
        use its reasonable best efforts to secure the effectiveness of such
        post-effective amendment as promptly as possible and will promptly notify
        each
        Purchaser pursuant to Section 7(a) hereof when the amendment has
        become effective).

       

      
        
          
          

        

        
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      (c)    Subject
        to paragraph (d) below, in the event (i) of any request by the SEC or any
        other federal or state governmental authority during the period of effectiveness
        of the Registration Statement for amendments or supplements to a Registration
        Statement or related Prospectus or for additional information; (ii) of the
        issuance by the SEC or any other federal or state governmental authority
        of any
        stop order suspending the effectiveness of a Registration Statement or the
        initiation of any proceedings for that purpose; (iii) of the receipt by the
        Company of any notification with respect to the suspension of the qualification
        or exemption from qualification of any of the Shares for sale in any
        jurisdiction or the initiation or threatening of any proceeding for such
        purpose; or (iv) of any event or circumstance which, upon the advice of its
        counsel, necessitates the making of any changes in the Registration Statement
        or
        Prospectus, or any document incorporated or deemed to be incorporated therein
        by
        reference, so that, in the case of the Registration Statement, it will not
        contain any untrue statement of a material fact or any omission to state
        a
        material fact required to be stated therein or necessary to make the statements
        therein not misleading, and that in the case of the Prospectus, it will not
        contain any untrue statement of a material fact or any omission to state
        a
        material fact required to be stated therein or necessary to make the statements
        therein, in the light of the circumstances under which they were made, not
        misleading; then the Company shall deliver a certificate in writing to each
        Purchaser (the “Suspension
        Notice”)
        to the
        effect of the foregoing and, upon receipt of such Suspension Notice, each
        Purchaser will refrain from selling any Shares pursuant to the Registration
        Statement (a “Suspension”)
        until
        each Purchaser’s receipt of copies of a supplemented or amended Prospectus
        prepared and filed by the Company, or until it is advised in writing by the
        Company that the current Prospectus may be used, and has received copies
        of any
        additional or supplemental filings that are incorporated or deemed incorporated
        by reference in any such Prospectus. In the event of any Suspension, the
        Company
        will use its reasonable best efforts to cause the use of the Prospectus so
        suspended to be resumed as soon as reasonably practicable within 20 business
        days after the delivery of a Suspension Notice to each Purchaser. In addition
        to
        and without limiting any other remedies (including, without limitation, at
        law
        or at equity) available to each Purchaser, each Purchaser shall be entitled
        to
        specific performance in the event that the Company fails to comply with the
        provisions of this Section 8.

       

      (d)    Notwithstanding
        the foregoing paragraphs of this Section 8, each Purchaser shall not be
        prohibited from selling Shares under the Registration Statement as a result
        of
        Suspensions on more than two occasions of not more than 45 days each in any
        twelve month period, unless, in the good faith judgment of the Company’s Board
        of Directors, upon the advice of counsel of the Company and, subject to the
        provisions of Section 9 below, the sale of Notes under the Registration
        Statement in reliance on this paragraph 8(d) would be reasonably likely to
        cause
        a violation of the Securities Act or the Exchange Act and result in liability
        to
        the Company.

       

      (e)    Provided
        that a Suspension is not then in effect, each Purchaser may sell Shares under
        the Registration Statement, provided that it arranges for delivery of a current
        Prospectus to the transferee of such Shares. Upon receipt of a request therefor,
        the Company has agreed to provide an adequate number of current Prospectuses
        to
        each Purchaser and to supply copies to any other parties requiring such
        Prospectuses.

       

      
        
          
          

        

        
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                Section
                  9.

              	
                Indemnification.

              

      

       

      (a)    For
        the
        purpose of this Section 9: (i) the term “Selling
        Stockholder”
means
        each Purchaser and any affiliate of such Purchaser; (ii) the term “Registration
        Statement”
shall
        include the Prospectus in the form first filed with the SEC pursuant to
        Rule 424(b) of the Securities Act or filed as part of the Registration
        Statement at the time of effectiveness if no Rule 424(b) filing is
        required, and any exhibit, supplement or amendment included in or relating
        to
        the Registration Statement referred to in Section 7; and (iii) the term
“Untrue
        Statement”
means
        any untrue statement or alleged untrue statement, or any omission or alleged
        omission to state in, the Registration Statement a material fact required
        to be
        stated therein or necessary to make the statements therein not
        misleading.

       

      (b)    The
        Company agrees to indemnify and hold harmless each Selling Stockholder from
        and
        against any losses, claims, damages, liabilities, or expenses to which such
        Selling Stockholder may become subject (under the Securities Act or otherwise)
        insofar as such losses, claims, damages, liabilities or expenses (or actions
        or
        proceedings in respect thereof) arise out of, or are based upon (i) any
        breach of the representations or warranties of the Company contained herein
        or
        failure to comply with the covenants and agreements of the Company contained
        herein, (ii) any Untrue Statement, or (iii) any failure by the Company
        to fulfill any undertaking included in the Registration Statement as amended
        or
        supplemented from time to time, and the Company will reimburse such Selling
        Stockholder for any reasonable legal or other expenses reasonably incurred
        in
        investigating, defending or preparing to defend any such action, proceeding
        or
        claim, or preparing to defend any such action, proceeding or claim, provided,
        however,
        that
        the Company shall not be liable in any such case to the extent that such
        loss,
        claim, damage or liability arises out of, or is based upon, an Untrue Statement
        made in reliance upon and in conformity with written information furnished
        to
        the Company by or on behalf of such Selling Stockholder specifically for
        use in
        preparation of the Registration Statement, as amended or supplemented from
        time
        to time, or the failure of such Selling Stockholder to comply with its covenants
        and agreements contained in Section 4 hereof
        respecting the sale of the Shares or any statement or omission in any Prospectus
        that is corrected in any subsequent Prospectus that was delivered to the
        Selling
        Stockholder prior to the pertinent sale or sales by the Selling Stockholder.
        The
        Company shall reimburse each Selling Stockholder for the indemnifiable amounts
        provided for herein on demand as such expenses are incurred.

       

      (c)    The
        Purchaser agrees to indemnify and hold harmless the Company (and each person,
        if
        any, who controls the Company within the meaning of Section 15 of the
        Securities Act, each officer of the Company who signs the Registration Statement
        and each director of the Company) from and against any losses, claims, damages
        or liabilities to which the Company (or any such officer, director or
        controlling person) may become subject (under the Securities Act or otherwise),
        insofar as such losses, claims, damages or liabilities (or actions or
        proceedings in respect thereof) arise out of, or are based upon, (i) any
        failure of each Purchaser to comply with the covenants and agreements contained
        in Section 4 hereof respecting the sale of the Notes or Shares, or
        (ii) any Untrue Statement if such Untrue Statement was made in reliance
        upon and in conformity with written information furnished by or on behalf
        of
        each Purchaser specifically for use in preparation of the Registration
        Statement, as amended or supplemented from time to time, and each Purchaser
        will
        reimburse the Company (or such officer, director or controlling person),
        as the
        case may be, for any legal or other expenses reasonably incurred in
        investigating, defending or preparing to defend any such action, proceeding
        or
        claim. The Purchaser shall reimburse the Company or such officer, director
        or
        controlling person, as the case may be, for the indemnifiable amounts provided
        for herein on demand as such expenses are incurred. Notwithstanding the
        foregoing, each Purchaser’s aggregate obligation to indemnify the Company and
        such officers, directors and controlling persons shall be limited to the
        net
        amount received by each Purchaser from the sale of the Notes and
        Shares.

       

      
        
          
          

        

        
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      (d)    Promptly
        after receipt by any indemnified person of a notice of a claim or the beginning
        of any action in respect of which indemnity is to be sought against an
        indemnifying person pursuant to this Section 9, such indemnified person
        shall notify the indemnifying person in writing of such claim or of the
        commencement of such action, but the omission to so notify the indemnifying
        person will not relieve it from any liability which it may have to any
        indemnified person under this Section 9 (except to the extent that such
        omission materially and adversely affects the indemnifying person’s ability to
        defend such action) or from any liability otherwise than under this
        Section 9. Subject to the provisions hereinafter stated, in case any such
        action shall be brought against an indemnified person, the indemnifying person
        shall be entitled to participate therein, and, to the extent that it shall
        elect
        by written notice delivered to the indemnified person promptly after receiving
        the aforesaid notice from such indemnified person, shall be entitled to assume
        the defense thereof, with counsel reasonably satisfactory to such indemnified
        person. After notice from the indemnifying person to such indemnified person
        of
        its election to assume the defense thereof, such indemnifying person shall
        not
        be liable to such indemnified person for any legal expenses subsequently
        incurred by such indemnified person in connection with the defense thereof,
        provided,
        however,
        that if
        there exists or shall exist a conflict of interest that would make it
        inappropriate, in the opinion of counsel to the indemnified person, for the
        same
        counsel to represent both the indemnified person and such indemnifying person
        or
        any affiliate or associate thereof, the indemnified person shall be entitled
        to
        retain its own counsel at the expense of such indemnifying person; provided,
        however, that no indemnifying person shall be responsible for the fees and
        expenses of more than one separate counsel (together with appropriate local
        counsel) for all indemnified parties. In no event shall any indemnifying
        person
        be liable in respect of any amounts paid in settlement of any action unless
        the
        indemnifying person shall have approved the terms of such settlement;
provided
        that
        such consent shall not be unreasonably withheld or delayed. No indemnifying
        person shall, without the prior written consent of the indemnified person,
        effect any settlement of any pending or threatened proceeding in respect
        of
        which any indemnified person is or could have been a party and indemnification
        could have been sought hereunder by such indemnified person, unless such
        settlement includes an unconditional release of such indemnified person from
        all
        liability on claims that are the subject matter of such proceeding.

       

      (e)    If
        the
        indemnification provided for in this Section 9 is unavailable to or
        insufficient to hold harmless an indemnified person under subsection (b)
        or (c)
        above in respect of any losses, claims, damages or liabilities (or actions
        or
        proceedings in respect thereof) referred to therein, then each indemnifying
        person shall contribute to the amount paid or payable by such indemnified
        person
        as a result of such losses, claims, damages or liabilities (or actions in
        respect thereof) in such proportion as is appropriate to reflect the relative
        fault of the Company on the one hand and each Purchaser, as well as any other
        Selling Shareholders under such Registration Statement on the other in
        connection with the statements or omissions or other matters which resulted
        in
        such losses, claims, damages or liabilities (or actions in respect thereof),
        as
        well as any other relevant equitable considerations. The relative fault shall
        be
        determined by reference to, among other things, in the case of an Untrue
        Statement, whether the Untrue Statement relates to information supplied by
        the
        Company on the one hand or an Purchaser or other Selling Shareholder on the
        other and the parties’ relative intent, knowledge, access to information and
        opportunity to correct or prevent such Untrue Statement. The Company and
        each
        Purchaser agree that it would not be just and equitable if contribution pursuant
        to this subsection (e) were determined by pro rata allocation (even if each
        Purchaser and other Selling Shareholders were treated as one entity for such
        purpose) or by any other method of allocation which does not take into account
        the equitable considerations referred to above in this subsection (e). The
        amount paid or payable by an indemnified person as a result of the losses,
        claims, damages or liabilities (or actions in respect thereof) referred to
        above
        in this subsection (e) shall be deemed to include any legal or other expenses
        reasonably incurred by such indemnified person in connection with investigating
        or defending any such action or claim. Notwithstanding the provisions of
        this
        subsection (e), each Purchaser shall not be required to contribute any amount
        in
        excess of the amount by which the net amount received by each Purchaser from
        the
        sale of the Shares to which such loss relates exceeds the amount of any damages
        which such Purchaser has otherwise been required to pay by reason of such
        Untrue
        Statement. No person guilty of fraudulent misrepresentation (within the meaning
        of Section 11(f) of the Securities Act) shall be entitled to contribution
        from any person who was not guilty of such fraudulent misrepresentation. The
        Purchaser’s obligations in this subsection to contribute shall be in proportion
        to its sale of Shares to which such loss relates and shall not be joint with
        any
        other Selling Shareholders.

       

      
        
          
          

        

        
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            19 -

          
            

          

        

        
          
          

        

      

      (f)    The
        parties to this Agreement hereby acknowledge that they are sophisticated
        business persons who were represented by counsel during the negotiations
        regarding the provisions hereof including, without limitation, the provisions
        of
        this Section 9, and are fully informed regarding said provisions. They
        further acknowledge that the provisions of this Section 9 fairly allocate
        the risks in light of the ability of the parties to investigate the Company
        and
        its business in order to assure that adequate disclosure is made in the
        Registration Statement as required by the Securities Act and the Exchange
        Act.
        The parties are advised that federal or state public policy as interpreted
        by
        the courts in certain jurisdictions may be contrary to certain of the provisions
        of this Section 9, and the parties hereto hereby expressly waive and
        relinquish any right or ability to assert such public policy as a defense
        to a
        claim under this Section 9 and further agree not to attempt to assert any
        such defense.

       

      (g)    Notwithstanding
        the other provisions of this Section 9, the Purchasers’ sole and exclusive
        remedy with respect to a breach of Section 7(b) of this Agreement shall be
        default interest under the Notes.

       

      Section
        10.    Termination
        of Conditions and Obligations.
        The
        conditions precedent imposed by Section 8 or this Section 10 upon the
        transferability of the Shares shall cease and terminate as to any particular
        Shares when such Shares are sold or otherwise disposed of in accordance with
        the
        intended method of disposition set forth in the Registration Statement covering
        such Shares or at such time as an opinion of counsel reasonably satisfactory
        to
        the Company shall have been rendered to the effect that such conditions are
        not
        necessary in order to comply with the Securities Act.

       

      
        
          
          

        

        
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      Section
        11.    Information
        Available.
        So long
        as the Registration Statement is effective covering the resale of Shares
        owned
        by each Purchaser, upon the reasonable request of each Purchaser, the Company
        will furnish to each Purchaser:

       

      (a)    as
        soon
        as practicable after it is available, one copy of (i) its Annual Report to
        Stockholders (which Annual Report shall contain financial statements audited
        in
        accordance with generally accepted accounting principles by a national firm
        of
        certified public accountants), (ii) its Annual Report on Form 10-K and
        (iii) its Quarterly Reports on Form 10-Q (the foregoing, in each case,
        excluding exhibits);

       

      (b)    all
        exhibits excluded by the parenthetical to subparagraph (a) of this
        Section 11 as filed with the SEC and all other information that is made
        available to shareholders; and

       

      (c)    an
        adequate number of copies of the Prospectuses to supply to any other party
        requiring such Prospectuses; and upon the reasonable request of each Purchaser,
        the President or the principal financial officer of the Company (or an
        appropriate designee thereof) will meet with each Purchaser or a representative
        thereof at the Company’s headquarters to discuss all information relevant for
        disclosure in the Registration Statement covering the Shares and will otherwise
        cooperate with any Purchaser conducting an investigation for the purpose
        of
        reducing or eliminating such Purchaser’s exposure to liability under the
        Securities Act, including the reasonable production of information at the
        Company’s headquarters; provided, that the Company shall not be required to
        disclose any confidential information to or meet at its headquarters with
        any
        Purchaser until and unless each Purchaser shall have entered into a
        confidentiality agreement in form and substance reasonably satisfactory to
        the
        Company with the Company with respect thereto.

       

      Section
        12.    Legend;
        Restrictions on Transfer.
        The
        Notes and certificate or certificates for the Shares shall be subject to
        a
        legend or legends restricting transfer under the Securities Act and referring
        to
        restrictions on transfer herein, such legend to be substantially as
        follows:

       

      THIS
        SECURITY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
        UNDER
        THE UNITED STATES SECURITIES ACT OF 1933 (THE “SECURITIES
        ACT”),
        AND
        THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF
        MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, EXCEPT: (I) PURSUANT TO
        AN
        EFFECTIVE REGISTRATION STATEMENT RELATED THERETO; OR (II) IN ACCORDANCE WITH
        AN
        OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
        IS NOT REQUIRED UNDER THE SECURITIES ACT.

      
        
          
          

        

        
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      The
        Company and each Purchaser acknowledge and agree that each Purchaser may,
        as
        permitted by law, from time to time pledge pursuant to a bona fide margin
        agreement or grant a security interest in some or all of the Notes or Shares
        and, if required under the terms of such arrangement, each Purchaser may,
        as
        permitted by law, transfer pledged or secured Notes or Shares to the pledgees
        or
        secured parties. So long as each Purchaser is not an affiliate of the Company,
        such a pledge or transfer would not be subject to approval or consent of
        the
        Company, provided that, upon the request of the Company, a legal opinion
        of
        legal counsel to the pledgee, secured party or pledgor shall be obtained.
        At
        each Purchaser’s expense, so long as the Notes or Shares are subject to the
        legend required by this Section 12, the Company will use its reasonable
        commercial efforts to execute and deliver such reasonable documentation as
        a
        pledgee or secured party of Notes may reasonably request in connection with
        a
        pledge or transfer of the Notes or Shares including such amendments or
        supplements to the Registration Statement and Prospectus as may be reasonably
        required. The foregoing does not affect each Purchaser’s obligations pursuant to
        Section 4.

      

      The
        Purchaser expressly agrees that any sale by each Purchaser of Shares pursuant
        to
        the Registration Statement shall be sold in a manner described under the
        caption
“Plan of Distribution” in such Registration Statement and each Purchaser will
        deliver a copy of the Prospectus contained in the Registration Statement
        to the
        purchaser or purchasers, directly or through each Purchaser's broker, in
        connection with such sale, in each case in compliance with the requirements
        of
        the Securities Act and Exchange Act applicable to such sale. The Purchaser
        further agrees that the Shares will only be sold while the Registration
        Statement is effective, unless another exemption from registration is available.
        The Purchaser acknowledges that the removal of the restrictive legends from
        the
        Notes as provided in this Section 12 is predicated upon the Company’s
        reliance on the Purchaser’s compliance with its covenants in this
        Section 12.

      

      Section
        13. Notices.
        All
        notices, requests, consents and other communications hereunder shall be in
        writing, shall be mailed (A) if within the United States by first-class
        registered or certified airmail, or nationally recognized overnight express
        courier, postage prepaid, or by facsimile or electronic mail, or (B) if
        delivered from outside the United States, by International Federal Express
        (or
        other recognized international express courier) or facsimile, and shall be
        deemed given (i) if delivered by first-class registered or certified mail,
        three business days after so mailed, (ii) if delivered by nationally
        recognized overnight carrier, one business day after so mailed, (iii) if
        delivered by International Federal Express (or other recognized international
        express courier), two business days after so mailed, or (iv) if delivered
        by facsimile or electronic mail, upon electronic confirmation of receipt
        and
        shall be delivered as addressed as follows:

       

      
        	 	
                (a)

              	
                if
                  to the Company, to:

              

      

      

      Big
        Dog
        Holdings, Inc.

      121
        Gray
        Avenue

      Santa
        Barbara, CA 93101

      Attention:
        Anthony J. Wall

      Facsimile:
        (805) 963-8727 x1215

      Email:
        TonyW@BigDogs.com

      
        
          
          

        

        
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                (b)

              	
                with
                  a copy to:

              

      

      

      Fulbright &
        Jaworski L.L.P.

      555
        South
        Flower Street

      Forty-First
        Floor

      Los
        Angeles, CA 90071

      Attention:
        Victor Hsu

      Facsimile:
        (213) 892-9494

      Email:
        vhsu@fulbright.com 

      

      
        	 	
                (c)

              	
                if
                  to each Purchaser, at its address on the signature page hereto,
                  or at such
                  other address or addresses as may have been furnished to the Company
                  in
                  writing.

              

      

      

      Notwithstanding
        anything in this Agreement to the contrary, (a) the Company may deliver any
        documents, information or notices required to be delivered to an Purchaser
        under
        this Agreement by email, in any recognized electronic format, including Portable
        Document Format (PDF) or Microsoft Word document format, and (b) with respect
        to
        any documents, exhibits, filings, furnishings or other submissions (other
        than
        any Registration Statement, Prospectus, or Preliminary Prospectus pursuant
        to
        Section 7 of this Agreement) publicly available on the SEC’s EDGAR system (each,
        an “EDGAR
        Filing”),
        such
        EDGAR Filing shall be deemed furnished by the Company to such Purchaser,
        in each
        case as of the date first publicly available on the EDGAR system.

      

      Section
        14.    Changes.
        This
        Agreement may be modified, amended or waived only pursuant to a written
        instrument signed by the Company and (a) Purchasers holding a majority of
        the
        Notes issued and sold in the Offering, provided
        that
        such
        modification, amendment or waiver is made with respect to all Agreements
        and
        does not adversely affect each Purchaser without adversely affecting all
        Purchasers in a similar manner; or (b) each Purchaser.

       

      Section
        15.    Headings.
        The
        headings of the various sections of this Agreement have been inserted for
        convenience of reference only and shall not be deemed to be part of this
        Agreement.

       

      Section
        16.    Severability.
        In case
        any provision contained in this Agreement should be invalid, illegal or
        unenforceable in any respect, the validity, legality and enforceability of
        the
        remaining provisions contained herein shall not in any way be affected or
        impaired thereby.

       

      Section
        17.    Governing
        Law.
        This
        Agreement 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.

       

      
        
          
          

        

        
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      Section
        18.    Counterparts.
        This
        Agreement may be executed in two or more counterparts, each of which shall
        constitute an original, but all of which, when taken together, shall constitute
        but one instrument, and shall become effective when one or more counterparts
        have been signed by each party hereto and delivered to the other
        parties.

       

      Section
        19.    Entire
        Agreement.
        This
        Agreement and the other Transaction Documents constitute the entire agreement
        between the parties hereto and supersedes any prior understandings or agreements
        concerning the purchase and sale of the Notes and the resale registration
        of the
        Shares.

       

      Section
        20.    Rule
        144.
        The
        Company covenants that it will timely file the reports required to be filed
        by
        it under the Securities Act and the Exchange Act and the rules and regulations
        adopted by the SEC thereunder (or, if the Company is not required to file
        such
        reports, it will, upon the request of any Purchaser holding Notes purchased
        hereunder, or Shares issued under any Notes, made after the first anniversary
        of
        the Closing Date, make publicly available such information as necessary to
        permit sales pursuant to Rule 144 under the Securities Act), and it will
        take
        such further action as any such Purchaser may reasonably request, all to
        the
        extent required from time to time to enable such Purchaser to sell such Notes
        and Shares without registration under the Securities Act within the limitation
        of the exemptions provided by (a) Rule 144 under the Securities Act, as such
        Rule may be amended from time to time, or (b) any similar rule or regulation
        hereafter adopted by the SEC. Upon the request of any Purchaser, the Company
        will deliver to such holder a written statement as to whether it has complied
        with such information and requirements.

       

      Section
        21.    Press
        Release; 8-K.
        On the
        Closing Date, the Company shall issue a press release disclosing information
        provided by the Company or any person acting on its behalf that the Company
        believes constitutes material and non-public information, if any. The Company
        shall, within two (2) business day of the Closing Date, file with the SEC
        a Form
        8-K disclosing the material terms of the transactions contemplated hereby
        (including at least the number of Notes sold and proceeds therefrom). The
        Company shall not publicly disclose the name of each Purchaser or any beneficial
        owner of Notes held by each Purchaser, or include the name of each Purchaser
        or
        such beneficial owner in any filing with the SEC or any state and federal
        regulatory agency or the Nasdaq (other than the filing of the Agreements
        with
        the SEC pursuant to the Exchange Act), without the prior written consent
        of each
        Purchaser, except to the extent such disclosure is required by law, regulation
        or Nasdaq regulations.

       

      Section
        22.    No
        Third-Party Beneficiaries.
        Other
        than as set forth in Section 9, this Agreement is intended for the benefit
        of
        the parties hereto and their respective successors and permitted assigns
        and is
        not for the benefit of, nor may any provision hereof be enforced by, any
        other
        person.

       

      Section
        23.    Debt
        Obligation.
        So long
        as any portion of the Notes are outstanding, the Company shall cause its
        books
        and records to reflect the Notes as a debt of the Company in its unpaid
        principal amount, shall cause its financial statements to reflect the Note
        as a
        debt of the Company in such amount as shall be the greatest amount permitted
        in
        accordance with GAAP and as a valid debt obligation of the Company for money
        borrowed.

       

      
        
          
          

        

        
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            24 -

          
            

          

        

        
          
          

        

      

      Section
        24.    Costs
        and Expenses.
        The
        Company agrees to pay the reasonable fees and expenses of
        Goodwin | Procter LLP, counsel for
        Thomas Weisel Partners LLP, as Placement Agent, subject to the
        agreement between the Company and the Placement Agent.

       

      Section
        25.    Independent
        Nature of Purchasers’ Obligations and Rights.
        The
        obligations of each Purchaser under this Agreement are several and not joint
        with the obligations of any other Purchaser, and no Purchaser shall be
        responsible in any way for the performance of the obligations of any other
        Purchaser under this Agreement. Nothing contained herein or in any other
        document, and no action taken by any Purchaser pursuant thereto, shall be
        deemed
        to constitute each Purchaser as a partnership, an association, a joint venture
        or any other kind of entity, or create a presumption that each Purchaser
        are in
        any way acting in concert or as a group with respect to such obligations
        or the
        transactions contemplated by this Agreement. Each Purchaser shall be entitled
        to
        independently protect and enforce its rights, including without limitation,
        the
        rights arising out of this Agreement or out of the other related documents,
        and
        it shall not be necessary for any other Purchaser to be joined as an additional
        party in any proceeding for such purpose. Each Purchaser has been represented
        by
        its own separate legal counsel in their review and negotiation of this
        Agreement. The Company has elected to provide all Purchasers with the same
        terms
        and documents for the convenience of the Company and not because it was required
        or requested to do so by each Purchaser.

       

      
        	 	
                Section
                  26.

              	
                Dispute
                  Resolution.

              

      

       

      (a)    All
        disputes, claims, or controversies arising out of or relating to (i) this
        Agreement or any other agreement executed and delivered pursuant to this
        Agreement or the negotiation, breach, termination, validity or performance
        hereof or the transactions contemplated hereby or (ii) each Purchaser’s loan to
        the Company, that are not resolved by mutual agreement shall be resolved
        by
        litigation, or if the Company and each Purchaser agree to resolve any particular
        dispute by arbitration, then such arbitration shall be conducted in accordance
        with the procedures set forth in Section 26(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.

       

      
        
          
          

        

        
          -
            25 -

          
            

          

        

        
          
          

        

      

      Section
        27.    ACKNOWLEDGEMENTS.
        THE
        PURCHASER 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 PURCHASER 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 PURCHASER 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.

       

      
        
          
          

        

        
          -
            26 -

          
            

          

        

        
          
          

        

      

      AGREED
        AND ACCEPTED: 

      

      BIG
        DOG
        HOLDINGS, INC. 

      

      
        	
                By:
                  

              	
                /s/
                  Anthony Wall

              	 
	 	 	 
	
                Print
                  Name: 

              	
                Anthony
                  Wall

              	 
	 	 	 
	
                Title:
                  

              	
                Executive
                  Vice PresidentExhibit 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:

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