[FORM OF CONVERTIBLE NOTE]

[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

        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.

     (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.

          (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 (2 ^nd ) 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 (3 ^rd )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.

               (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.

                    (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.

               (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;

               (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) is