SECURED CONVERTIBLE PROMISSORY NOTE

 FOR VALUE RECEIVED, the adequacy of which is hereby acknowledged, the undersigned, Blue Holdings, Inc., a Nevada corporation having an address at 4901 Zambrano Street, Commerce, Ca 90040 (the “ Maker ” or “ Borrower ”), hereby promises to pay to Headgear, Inc., having an address at 3409 Chandler Creek Road, Virginia Beach, VA 23453 (the “ Lender ”), the aggregate sum of FIVE HUNDRED THOUSAND UNITED STATES DOLLARS ($500,000.00), subject to adjustment as provided herein.  This Note shall be due and payable in full, together with any other charges (if any), on March 15, 2009 (the “ Maturity Date ”).

Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Loan and Security Agreement executed of even date herewith (the “ Loan Agreement ”).

1.           Repayment Terms .   All sums due to Lender hereunder shall be made as per the terms of this Section 1.  The Lender has agreed to accept payment under this Note as follows:  the principal amount of this Note shall be utilized as a Purchase Order Credit that allows the Lender to acquire Five Hundred Thousand Dollars worth of Borrower’s goods at a discount of 22.5% to Borrower’s spring merchandise line wholesale price list (the “Spring Line Sheets”), which is attached hereto as Exhibit A.  The selection of the goods shall be in Lender’s sole and absolute discretion from the Spring Line Sheets, provided that Borrower has the right to change the Spring Line Sheets from time to time to substitute an item of comparable quality and style for any item currently on the Sheets.  If the Maker does not provide shipment of the goods ordered within thirty (30) days of the delivery date prescribed by Lender which in no event shall be prior to January 15, 2009, this Note shall be in Default and the Lender shall have the right to demand immediate payment and/or exercise any and all rights hereunder or under the Loan Agreement.

2.            Allocation .   Except as otherwise provided herein, all payments made hereunder (whether in prepayment or otherwise) shall be applied against principal.

3.            Events of Default .   Each and any of the following shall constitute Events of Default:

(a)           The Maker does not provide shipments of goods ordered by the Lender within sixty (60) days of the Delivery Date requested by Lender as set forth in Section 1 hereof.

(b)           The Borrower fails to comply in any material respect with any term, obligation, covenant, or condition contained in this Note or in the Loan and Security Agreement within ten (10) days after receipt of written notice from the Lender demanding such compliance.

(c)           Any warranty or representation made to the Lender by the Borrower under this Note or in the Loan and Security Agreement proves to have been false in any material respect when made or furnished.

(d)           Any event that results in acceleration of the maturity of any indebtedness of Borrower in the outstanding principal amount of $50,000 or more, under any note, indenture, contract, or agreement.

(e)           Any levy, seizure, attachment, lien, or encumbrance of or on the Collateral which is not discharged by the Borrower within twenty (20) days and is not being disputed by the Borrower in good faith, or any sale, transfer, or disposition of any interest in the Collateral, other than in the ordinary course of business, without the written consent of the Lender.

If an Event of Default should occur, Lender, at its option, may declare the outstanding principal balance of this Note, along with other fees (if any), to be immediately due and payable without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived.

Further, Maker agrees to pay all fees, costs and expenses, including reasonable attorneys’ fees and legal expenses, incurred by Lender in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise.

4.            Conversion .   If the Maker remains in default of this Note for over sixty (60) days,