Document:

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                                                                 EXHIBIT 10.37.1

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                                     WARRANT

                                   TO PURCHASE

                                    SHARES OF

                                  COMMON STOCK

                                       OF

                              NATURAL WONDERS, INC.

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                                TABLE OF CONTENTS

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                                                                                                            PAGE

<S>                                                                                                          <C>
1.       General Terms........................................................................................1
         1.1        Right to Acquire Securities...............................................................1
         1.2        Exercise of Warrant.......................................................................2
         1.3        Record Holder.............................................................................2
         1.4        Payment of Taxes..........................................................................2
         1.5        Transfer and Exchange.....................................................................3
2.       Transfer of Securities...............................................................................3
         2.1        Restrictions of Transfer..................................................................3
         2.2        Cooperation...............................................................................5
3.       Registration Rights..................................................................................5
         3.1        Definitions...............................................................................5
         3.2        Demand Registration.......................................................................6
         3.3        Piggyback Registration....................................................................7
         3.4        Expenses..................................................................................9
         3.5        Company Responsibilities..................................................................9
         3.6        Indemnification..........................................................................10
         3.7        Holder's Obligations.....................................................................11
         3.8        Assignment...............................................................................11
4.       Adjustments to Exercise Price and Warrant Shares....................................................11
         4.1        Subdivision or Combination...............................................................11
         4.2        Adjustment for Reorganization, Consolidation, Merger.....................................12
         4.3        Miscellaneous Exercise Matters...........................................................13
         4.4        No Dilution or Impairment................................................................13
         4.5        Notice of Adjustment.....................................................................13
         4.6        Duty to Make Fair Adjustments in Certain Cases...........................................13
5.       Miscellaneous.......................................................................................14
         5.1        Entire Agreement.........................................................................14
         5.2        Successors and Assigns...................................................................14
         5.3        Governing Law............................................................................14
         5.4        Notices, Etc.............................................................................14
         5.5        Delays or Omissions......................................................................14
         5.6        Survival.................................................................................14
         5.7        Waivers and Amendments...................................................................15
         5.8        Cashless Exercise........................................................................15
         5.9        Severability.............................................................................17
         5.10       Registered Holder........................................................................17
         5.11       Titles and Subtitles.....................................................................17

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                                     WARRANT
                      TO PURCHASE SHARES OF COMMON STOCK OF
                              NATURAL WONDERS, INC.

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) IN COMPLIANCE WITH
RULE 144 UNDER SUCH ACT, OR (C) THE COMPANY HAS BEEN FURNISHED WITH AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT NO REGISTRATION IS REQUIRED
FOR SUCH TRANSFER.

                                                    7,500 Shares of Common Stock

     1.   GENERAL TERMS.

          1.1  RIGHT TO ACQUIRE SECURITIES.

          (a) This Warrant certifies that for value received Julius Jensen III
     (the "Holder"), or registered assigns, are entitled at any time before 5:00
     p.m., San Francisco, California time, on the Expiration Date (as such term
     is defined herein) to purchase from NATURAL WONDERS, INC., a Delaware
     corporation (the "Company"), 7,500 shares (the "Warrant Shares") of the
     fully paid and non-assessable Common Stock of the Company ("Common Stock")
     as constituted on the date hereof (the "Issuance Date"), at a price of
     $1.50 per share (the "Exercise Price"), such number of shares and price per
     share subject to adjustment as provided herein and all subject to the
     conditions set forth herein. This Warrant may be exercised at any time on
     or before three years from the date hereof (the "Expiration Date").

     Upon any partial exercise hereof, there shall be issued to the Holder a new
Warrant or Warrants with respect to the shares of Common Stock not so exercised.
No fractions of a share of Common Stock will be issued upon the exercise of this
Warrant, but if a fractional share would be issuable upon exercise the Company
will pay in cash the fair market value thereof as determined by the Board of
Directors of the Company in good faith.

          (b) The Warrant may be subdivided, at the Warrantholder's option, into
     several warrants to purchase the Warrant Shares (collectively, also
     referred to as the "Warrant"). Such subdivision may be accomplished in
     accordance with the provisions of Section 1.5 hereof.

                                      -1-

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          1.2  EXERCISE OF WARRANT.

          (a) The Holder or any person or entity to whom the Holder has assigned
     its right under this Warrant (collectively referred to as the
     "Warrantholder") may exercise the Warrant, in whole or in part, at any time
     or from time to time, prior to its expiration, on any business day, by
     delivering a written notice in the form attached hereto (the "Exercise
     Notice") to the Company at the offices of the Company designated in Section
     5.4 hereof, exercising the Warrant and specifying (i) the total number of
     shares of Common Stock the Warrantholder will purchase pursuant to such
     exercise and (ii) a place and date not less than one nor more than 20
     business days from the date of the Exercise Notice for the closing of such
     purchase.

          (b) At any closing under Section 1.2(a) hereof, (i) the Warrantholder
     will surrender the Warrant and make payment to the Company of the aggregate
     Exercise Price for the shares of Common Stock so purchased by delivering:
     (x) a bank, cashier's or certified check; or (y) a written notice of an
     election to effect a Cashless Exercise (as defined in Section 5.8 hereof);
     and (ii) the Company will deliver to the Warrantholder a certificate or
     certificates for the number of shares of Common Stock issuable upon such
     exercise, together with cash, in lieu of any fraction of a share, as
     provided in Section 1.1(a) above. Upon any partial exercise, a new warrant
     or warrants of the same tenor and expiration date for the purchase of the
     number of such shares not purchased upon such exercise shall be issued by
     the Company to the registered holder thereof.

          1.3 RECORD HOLDER. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided in Section 1.2(b) above, and the person entitled to receive
the shares of Common Stock issuable upon such exercise shall be treated for all
purposes as the holder of such shares of record as of the close of business on
such date.

          1.4 PAYMENT OF TAXES. The Company shall pay all taxes and other
governmental charges that may be imposed in respect of the issue or delivery of
the Warrant Shares or any portion thereof. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for the Warrant Shares or any portion
thereof in any name other than that of the registered holder of the Warrant
surrendered in connection with the purchase of such shares, and in such case the
Company shall not be required to issue or deliver any certificate until such tax
or other charge has been paid or it has been established to the Company's
satisfaction that no tax or other charge is due.

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          1.5 TRANSFER AND EXCHANGE.

          (a) Subject to the terms hereof, including, without limitation,
     Section 2.1, the Warrant and all rights thereunder are transferable, in
     whole or in part, on the books of the Company maintained for such purpose
     at its office designated in Section 5.4 hereof by the registered holder
     hereof in person or by duly authorized attorney, upon surrender of the
     Warrant properly endorsed and upon payment of any necessary transfer tax or
     other governmental charge imposed upon such transfer. Upon any partial
     transfer, the Company will issue and deliver to such holder a new warrant
     or warrants with respect to the Warrant Shares not so transferred. Each
     taker and holder of the Warrant, by taking or holding the same, consents
     and agrees that the Warrant when endorsed in blank shall be deemed
     negotiable, and that when the Warrant shall have been so endorsed, the
     holder may be treated by the Company and all other persons dealing with the
     Warrant as the absolute owner of such Warrant for any purpose and as the
     person entitled to exercise the rights represented thereby, or to the
     transfer on the books of the Company, any notice to the contrary
     notwithstanding; but until such transfer on such books, the Company may
     treat the registered holder of the Warrant as the owner for all purposes.
     The term "Warrant" as used herein shall include the Warrant and, any
     warrants delivered in substitution or exchange therefor as provided herein.

          (b) The Warrant is exchangeable for a warrant or warrants for the same
     aggregate number of Warrant Shares, each new Warrant to represent the right
     to purchase such number of shares as the holder shall designate at the time
     of such exchange.

     2. TRANSFER OF SECURITIES.

          2.1 RESTRICTIONS OF TRANSFER. Neither the Warrant nor the Warrant
Shares shall be transferable except upon the conditions specified in this
Section 2.1, which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (the "1933 Act") in respect to the
transfer of the Warrant and the Warrant Shares.

          (a) Unless and until otherwise permitted by this Section 2.1, the
     Warrant and each certificate or other document evidencing any of the
     Warrant Shares shall be endorsed with a legend substantially in the
     following form:

     "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
     1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED
     UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT

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     UNDER SUCH ACT, (B) IN COMPLIANCE WITH RULE 144 UNDER SUCH ACT, OR (C) THE
     COMPANY HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL REASONABLY ACCEPTABLE
     TO THE COMPANY TO THE EFFECT THAT NO REGISTRATION IS REQUIRED FOR SUCH
     TRANSFER"

          (b) Neither the Warrant nor the Warrant Shares shall be transferred,
     and the Company shall not be required to register any such transfer, unless
     and until one of the following events shall have occurred:

               (i) the Company shall have received an opinion of counsel, in
          form and substance reasonably acceptable to the Company and its
          counsel, stating that the contemplated transfer is exempt from
          registration under the 1933 Act as then in effect, and the Rules and
          Regulations of the Securities and Exchange Commission (the
          "Commission") thereunder. Within five business days after delivery to
          the Company and its counsel of such an opinion, the Company either
          shall deliver to the proposed transferor a statement to the effect
          that such opinion is not satisfactory in the reasonable opinion of its
          counsel (and shall specify in detail the legal analysis supporting any
          such conclusion) or shall authorize the Company's transfer agent to
          make the requested transfer;

               (ii) the Company shall have been furnished with a letter from the
          Commission in response to a written request in form and substance
          acceptable to counsel for the Company setting forth all of the facts
          and circumstances surrounding the contemplated transfer, stating that
          the Commission will take no action with regard to the contemplated
          transfer;

               (iii) the Warrant or the Warrant Shares are transferred pursuant
          to a registration statement which has been filed with the Commission
          and has become effective; or

               (iv) the Warrant or the Warrant Shares are transferred in
          accordance with the provisions of Rule 144 promulgated by the
          Commission under the 1933 Act.

          (c) The restrictions on transfer imposed by this Section 2.1 shall
     cease and terminate as to the Warrant and the Warrant Shares when (i) such
     securities shall have been effectively registered under the 1933 Act and
     sold by the holder thereof in accordance with such registration, (ii) an
     acceptable opinion as described in Section 2.l(b)(i) or a "no action"
     letter described in Section 2.l(b)(ii) states that future transfers of such
     securities by

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     the transferor or the contemplated transferee would be exempt from
     registration under the 1933 Act, or (iii) such securities may be sold in
     accordance with the provisions of Rule 144 promulgated under the 1933 Act.
     When the restrictions on transfer contained in this Section 2.1 have
     terminated as provided above, the holder of the securities as to which such
     restrictions shall have terminated or the transferee of such holder shall
     be entitled to receive promptly from the Company, without expense to him,
     new certificates not bearing the legend set forth in Section 2.1(a) hereof.

          2.2 COOPERATION. The Company shall cooperate in supplying such
information as may be reasonably requested by the Warrantholder to complete and
file any information reporting forms presently or subsequently required by the
Commission as a condition to the availability of an exemption, presently
existing or subsequently adopted, from the 1933 Act for the sale of the Warrant
or the Warrant Shares.

     3. REGISTRATION RIGHTS.

          3.1 DEFINITIONS. For purposes of Section 3 hereof, terms not otherwise
defined herein shall have the following meanings:

          (a) The terms "register," "registered" and "registration" refer to the
     preparation and filing of a registration statement in compliance with the
     1933 Act and the rules promulgated thereunder, and the declaration of the
     effectiveness of such registration statement, or the taking of similar
     action under a successor statute or regulation.

          (b) The term "Registrable Securities" means the shares of Common Stock
     issuable upon conversion of the Debenture or exercise of the Warrant, and
     any securities issued or issuable with respect to such Warrant Shares by
     way of a stock dividend or stock split or in connection with a combination
     or shares, recapitalization, merger, consolidation or other reorganization.

          (c) The term "Holder" means any registered holder or holders of
     Registrable Securities.

          (d) The term "Prospectus" means a prospectus that complies with
     applicable provisions of the 1933 Act.

          (e) The term "Debenture" refers to the Subordinated Convertible
     Debenture issued to Holders on September 11, 2000 along with the Warrants.

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          3.2 DEMAND REGISTRATION.

          (a) On any date after March 15, 2001, the Holders of at least fifty
     percent (50%) of the Registrable Securities then outstanding (the
     "Initiating Holders") may request in writing registration under the 1933
     Act (a "Demand Registration"). The Demand Registration request shall
     specify the amount of the Registrable Securities proposed to be sold, the
     intended method of disposition thereof and the jurisdictions in which
     registration is desired. Upon the receipt of the Demand Registration
     request, the Company promptly shall take such steps as are necessary or
     appropriate to prepare for the registration of the Registrable Securities
     to be registered. Within fifteen (15) days after the receipt of such
     request, the Company shall give written notice thereof to all other Holders
     and include in such registration all Registrable Securities held by a
     Holder from whom the Company has received a written request for inclusion
     therein at least ten (10) days prior to the filing of the registration
     statement. Each such request will also specify the number of Registrable
     Securities to be registered, the intended method of disposition thereof and
     the jurisdictions in which registration is desired.

          (b) The Company shall use its reasonable best efforts to cause any
     such Demand Registration to become effective not later than one hundred
     twenty (120) days after it receives a request under this Section 3.2. A
     registration requested pursuant to this Section 3.2 shall not count as the
     one Demand Registration to which the Holders are entitled to thereunder
     unless such registration statement is declared effective and remains
     effective for at least ninety (90) days.

          (c) If Holders of a majority of the Registrable Securities proposed to
     be registered by the Initiating Holders so elect, the offering of such
     Registrable Securities pursuant to such Demand Registration shall be in the
     form of a firm commitment underwritten offering. If any Demand Registration
     of Registrable Securities is in the form of an underwritten offering, the
     Holders holding a majority of the Registrable Securities proposed to be
     registered by the Initiating Holders shall select and obtain an investment
     banking firm of national reputation to act as the managing underwriter of
     the offering (the "Approved Underwriter"); provided, that the Approved
     Underwriter shall, in any case, be acceptable to the Company in its
     reasonable judgment.

          (d) The Company shall not be obligated to effect any registration
     under this Section 3.2 except in accordance with the following provisions:

               (i) The Company shall not be obligated to use its reasonable best
          efforts to file and cause to become effective more than

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          one registration statement with respect to Registrable Securities held
          by the Holders initiated pursuant to this Section 3.2; provided,
          however, that any registration proceeding begun pursuant to this
          Section 3.2 that is subsequently withdrawn at the request of the
          Holders shall not be so counted if such withdrawal is based upon
          material adverse information relating to the Company or its condition,
          business, or prospects which is different from that generally known to
          the Rights Holders at the time of their request.

               (ii) The Company may delay the filing or effectiveness of any
          registration statement for a period of up to ninety (90) days after
          the date of a request for registration pursuant to this Section 3.2 if
          (x) at the time of such request the Company is engaged, or has formal
          plans to engage within sixty (60) days of the time of such request, in
          an underwritten public offering of shares of Common Stock, (y) the
          Board of Directors of the Company determines in good faith that (A) it
          is in possession of material, non-public information concerning an
          acquisition, merger, recapitalization, consolidation, reorganization
          or other material transaction by or of the Company or concerning
          pending or threatened litigation and (B) disclosure of such
          information would jeopardize any such transaction or litigation or
          otherwise materially harm the Company, or (z) the Company shall
          furnish to the Holders a certificate signed by the Chief Executive
          Officer or President of the Company stating that, in the good faith
          judgment of the Board of Directors of the Company, it would otherwise
          be seriously detrimental to the Company and its investors for such
          registration statement to be filed and it is therefore essential to
          defer the filing of such registration statement.

         3.3 PIGGYBACK REGISTRATION.

          (a) If, at any time, through and including the third anniversary of
     the date of this Warrant, the Company proposes to register any of its
     securities under the 1933 Act (other than in connection with a merger,
     acquisition, reorganization or similar transaction pursuant to a Form S-4
     Registration Statement or an employee stock compensation plan pursuant to a
     Form S-8 Registration Statement), it will give written notice by registered
     mail, at least (30) days prior to the filing of each such registration
     statement, to the Holder of its intention to do so. If the Holder notifies
     the Company within 20 days after receipt of any such notice of its desire
     to include any Registrable Securities in such proposed registration
     statement, the Company shall afford such Holder the opportunity to have any
     of the Registrable Securities registered

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     under such registration statement and included in any underwriting involved
     with respect thereto.

          (b) Notwithstanding the provisions of Section 3.3 hereof: (i) the
     Company shall have the right at any time after it shall have given written
     notice pursuant to this Section 3 (irrespective of whether a written
     request for inclusion of any Registrable Securities shall have been made)
     to elect not to file any such proposed registration statement, or to
     withdraw the same after the filing but prior to the effective date thereof;
     and (ii) in the event a registration under Section 3.3 hereof relates to an
     underwritten public offering which does not include any securities being
     offered and sold on behalf of selling shareholders, the inclusion of any
     Registrable Securities may, at the election of the Company, be conditioned
     upon the Holder agreeing that the public offering of such Registrable
     Securities shall not commence until 90 days after the effective date of
     such registration.

          (c) The rights of the Holder pursuant to Section 3.3 hereof shall be
     conditioned upon such Holder's participation in the underwriting with
     respect thereto and the inclusion of such Holder's Registrable Securities
     in such underwriting (unless otherwise mutually agreed by the Company, the
     managing underwriter or, if none, a majority of the underwriters, and such
     Holder) to the extent provided herein.

          (d) Notwithstanding any other provision of this Warrant, if the
     managing underwriter or, if none, a majority of the underwriters,
     determines that marketing factors require a limitation of the number of
     shares to be underwritten or a complete exclusion of such shares, such
     underwriter or underwriters may limit the number of Registrable Securities
     that may be included in the registration and underwriting or exclude all of
     the Registrable Securities, as appropriate. In the case of an underwritten
     registration in which the number of Registrable Securities that may be
     included is limited, the Company shall advise the Holder of the limited
     number of Registrable Securities that may be included in the registration,
     and the number of Registrable Securities that may be included in the
     registration and underwriting shall be allocated among all Holders thereof
     in proportion, as nearly as practicable, to the respective amounts of
     Registrable Securities entitled to inclusion in such registration held by
     such Holders at the time of filing the registration statement.

          (e) The Company shall (together with all Holders proposing to
     distribute their securities through an underwriting) enter into an
     underwriting agreement in customary form with the underwriter or
     underwriters selected for the underwriting.

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          3.4 EXPENSES.

     All expenses incurred in connection with any registration pursuant to this
Warrant or Warrant Shares, including without limitation, all registration,
filing and qualification fees, printing expenses, fees and disbursements of
counsel for the Company, and expenses of any special audits incidental to or
required by such registration, shall be borne by the Company; provided however
the Company shall not be required to pay:

          (a) fees of legal counsel of any Holder, or underwriters' fees,
     discounts, commissions or expenses relating to Registrable Securities; and

          (b) for expenses that the Company is prohibited from paying under Blue
     Sky laws or by Blue Sky administrators.

          3.5 COMPANY RESPONSIBILITIES.

     In the case of a piggyback registration of Warrant Shares, the Company
shall use its best efforts to keep the Holder advised in writing as to the
initiation, effectiveness and completion of such registration. At its expense
the Company shall:

          (a) prepare and file a registration statement (and such amendments and
     supplements thereto) with respect to such Registrable Securities and use
     its best efforts to cause such registration statement to become and remain
     effective for a period of 180 days or until the Holder or Holders have
     completed the distribution described in the registration statement relating
     thereto, whichever first occurs;

          (b) furnish such number of copies of a Prospectus in conformity with
     the requirements of applicable law, and such other documents incident
     thereto as a Holder from time to time may reasonably request; and

          (c) use every reasonable effort to register or qualify the Registrable
     Securities covered by such registration statement under the state Blue Sky
     laws of such jurisdictions as the Company's Board of Directors may
     reasonably determine, and do any and all other acts and things which may be
     necessary under said Blue Sky laws to enable the sellers of the Registrable
     Securities to consummate the public sale or other disposition of the
     Registrable Securities owned by them in such jurisdictions, except that the
     Company shall not for any purpose be required to qualify to do business as
     a foreign corporation in any jurisdiction wherein the Registrable
     Securities are so qualified.

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          3.6 INDEMNIFICATION.

          (a) The Company shall indemnify the Holder, with respect to such
     registration effected pursuant to Section 3 hereof, against all claims,
     losses, damages and liabilities (or actions in respect thereto) arising out
     of or based on any untrue statement (or alleged untrue statement) of a
     material fact contained in any registration statement or related
     Prospectus, or based on any omission (or alleged omission) to state therein
     a material fact required to be stated therein or necessary to make the
     statements therein not misleading, or any violation by the Company of any
     rule or regulation promulgated under any securities law applicable to the
     Company and relating to action or inaction required of the Company in
     connection with any such registration, and shall reimburse the Holder, for
     any legal and any other expenses reasonably incurred in connection with
     investigating or defending any such claim, loss, damage, liability or
     action, provided that the Company shall not be liable in any such case to
     the extent that any such claim, loss, damage or liability arises out of or
     is based on any untrue statement or omission based upon written information
     furnished to the Company in an instrument duly executed by such Holder
     specifically for use therein.

          (b) The Holder shall, if Registrable Securities held by or issuable to
     the Holder are included in the securities as to which such registration is
     being effected, indemnify the Company, each of its directors and officers
     who sign such registration statement, each underwriter, if any, of the
     Company's securities covered by such a registration statement, each person
     who controls the Company within the meaning of the 1933 Act, and each other
     Holder, against all claims, losses, damages and liabilities (or actions in
     respect thereof) arising out of or based on any untrue statement (or
     alleged untrue statement) of a material fact contained in any such
     registration statement or related Prospectus, or any omission (or alleged
     omission) to state therein a material fact required to be stated therein or
     necessary to make the statements therein not misleading, and shall
     reimburse the Company and such Holders for any legal or any other expenses
     reasonably incurred in connection with investigating or defending any such
     claim, loss, damage, liability, or action, in each case to the extent, but
     only to the extent, that such untrue statement (or alleged untrue
     statement) or omission (or alleged omission) is made in such registration
     statement or related Prospectus in reliance upon and in conformity with
     written information furnished to the Company in an instrument duly executed
     by such Holder specifically for use therein.

          (c) Each party entitled to indemnification under this Section 3.4 (the
     "Indemnified Party") shall give notice to the party required to provide
     indemnification (the "Indemnifying Party") promptly after such

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     Indemnified Party has actual knowledge of any claim as to which indemnity
     may be sought, and shall permit the Indemnifying Party to assume the
     defense of any such claim or any litigation resulting therefrom, provided
     that counsel for the Indemnifying Party, who shall conduct the defense of
     such claim or litigation, shall be approved by the Indemnified Party (whose
     approval shall not be unreasonably withheld), and the Indemnified Party may
     participate in such defense at such party's expense; and provided further
     that the failure of any Indemnified Party to give notice as provided herein
     shall not relieve the Indemnifying Party of its obligations under this
     Section 3.4. No Indemnifying Party, in the defense of any such claim or
     litigation, shall, except with the consent of each Indemnified Party,
     consent to entry of any judgment or enter into any settlement, which does
     not include as an unconditional term thereof, the giving by the claimant or
     plaintiff to such Indemnified Party of a release from all liability in
     respect to such claim or litigation.

          3.7 HOLDER'S OBLIGATIONS. The Holder shall furnish to the Company such
written information regarding such Holder and the distribution proposed by such
Holder as the Company may reasonably request in writing and as shall be required
in connection with any registration referred to in this Warrant.

          3.8 ASSIGNMENT. The rights granted to the Holder pursuant to this
Warrant may be assigned to a transferee or assignee of the Warrant or any of the
Registrable Securities, provided that the transferee or assignee is an
affiliated entity of the Holder and the Company is given written notice at the
time of or within 10 days after said transfer, stating the name and address of
said transferee or assignee and identifying the Registrable Securities with
respect to which such registration rights are being assigned.

     4. ADJUSTMENTS TO EXERCISE PRICE AND WARRANT SHARES. The Exercise Price in
effect from time to time and the number of Warrant Shares shall be subject to
adjustment in certain cases as set forth in this Section 4.

          4.1 SUBDIVISION OR COMBINATION. In the event the outstanding Common
Stock shall be subdivided into a greater number of shares of Common Stock, the
Exercise Price for the Warrant Shares shall, simultaneously with the
effectiveness of such subdivision, be proportionately reduced and the number of
Warrant Shares proportionately increased, and conversely, in case the
outstanding Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price shall, simultaneously with the effectiveness of
such combination, be proportionately increased and the number of Warrant Shares
proportionately reduced.

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          4.2 ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER.

          (a) In case of any reorganization of the Company (or any other
     corporation the stock or other securities of which are receivable on the
     exercise of the Warrant) after the date on which this Warrant is first
     issued (the "Issuance Date"), or in case, after such date, the Company (or
     any such other corporation) shall consolidate with or merge into another
     corporation or convey all or substantially all of its assets to another
     corporation, then and in each such case the Warrantholder, upon exercise of
     the Warrant as provided in Section 1.2 hereof at any time after the
     consummation of such reorganization, consolidation, merger or conveyance,
     shall be entitled to receive, in lieu of the stock or other securities and
     property receivable upon the exercise of the Warrant prior to such
     consummation, the stock or other securities or property to which the
     Warrantholder would have been entitled upon such consummation if the
     Warrantholder had exercised or converted the Warrant immediately prior
     thereto; in each such case, the terms of this Warrant, including the
     exercise provisions of Section 1.2, shall be applicable to the shares of
     stock or other securities or property receivable upon the exercise or
     conversion of the Warrant after such consummation.

          (b) The Company shall not effect any consolidation, merger or
     conveyance of all or substantially all of its assets unless prior to the
     consummation thereof the successor corporation (if other than the Company)
     resulting from such consolidation or merger or the corporation into or for
     the securities of which the previously outstanding stock of the Company
     shall be changed in connection with such consolidation or merger, or the
     corporation purchasing such assets, as the case may be, shall assume by
     written instrument, in form and substance satisfactory to the
     Warrantholder, executed and delivered in accordance with Section 5.4
     hereof, the obligation to deliver to the Warrantholder such shares of
     stock, securities or assets as, in accordance with the foregoing
     provisions, the Warrantholder is entitled to purchase.

          (c) If a purchase, tender or exchange offer is made to and accepted by
     the holders of more than 50% of the outstanding shares of Common Stock of
     the Company, the Company shall not effect any consolidation, merger or sale
     with the Person having made such offer or with any Affiliate of such
     Person, unless prior to consummation of such consolidation, merger or sale
     the Warrantholder shall have been given a reasonable opportunity to then
     elect to receive either the stock, securities or assets then issuable upon
     the exercise or conversion of the Warrant or, if different, the stock,
     securities or assets, or the equivalent, issued to previous holders of the
     Common Stock in accordance with such offer, computed as though the
     Warrantholder hereof had been, at the time of such offer, a holder of

                                      -12-

<PAGE>

     the stock, securities or assets then purchasable upon the exercise or
     conversion of the Warrant. As used in this paragraph (c), the term "Person"
     shall mean and include an individual, a partnership, a corporation, a
     trust, a joint venture, an unincorporated organization and a government or
     any department or agency thereof, and an "Affiliate" of any Person shall
     mean any Person directly or indirectly controlling, controlled by or under
     direct or indirect common control with, such other Person. A Person shall
     be deemed to control a corporation if such Person possesses, directly or
     indirectly, the power to direct or cause the direction of the management
     and policies of such corporation, whether through the ownership of voting
     securities, by contract or otherwise.

          4.3 MISCELLANEOUS EXERCISE MATTERS. The Company shall at all times
reserve and keep available out of its authorized but unissued Common Stock the
full number of Warrant Shares deliverable upon exercise of the Warrant Shares,
as such number may change from time to time. Also, the Company shall, at its own
expense, take all such actions and obtain all such permits and orders as may be
necessary to enable the Company lawfully to issue the Warrant Shares upon the
exercise of the Warrant.

          4.4 NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of
its certificate of incorporation or through reorganization, consolidation,
merger, dissolution, issue or sale of securities, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the Warrantholder
against dilution or other impairment. Without limiting the generality of the
foregoing, the Company will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable shares upon the exercise or conversion of the Warrant.

          4.5 NOTICE OF ADJUSTMENT. When any adjustment is required to be made
in either the Exercise Price or the number of shares issuable upon exercise of
the Warrant, the Company shall promptly notify the Warrantholder of such event,
of the calculation by which such adjustment is to be made and of the resulting
Exercise Price or conversion rate, as the case may be.

          4.6 DUTY TO MAKE FAIR ADJUSTMENTS IN CERTAIN CASES. If any event
occurs as to which in the opinion of the Board of Directors the other provisions
of this Section 4 are not strictly applicable or if strictly applicable would
not fairly protect the purchase and exercise rights of the Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.

                                      -13-

<PAGE>

          5. MISCELLANEOUS.

               5.1 ENTIRE AGREEMENT. This Warrant constitutes the full and
entire understanding and agreements between the parties hereto with respect to
the subjects hereof and thereof.

               5.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Warrant shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto, except as expressly provided
otherwise herein.

               5.3 GOVERNING LAW. This Warrant shall be governed by and
construed under the laws of the State of California.

               5.4 NOTICES, ETC. All notices and other communications required
or permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon the seventh day following mailing by registered
air mail, postage prepaid, addressed (a) if to the Warrantholder, at 15 Cliff
Road, Nantucket, MA 02554, Attention: Julius Jensen III, or at such other
address as it shall have furnished to the Company in writing, (b) if to the
Company, a copy should be sent to 4209 Technology Drive, Fremont, CA 94538, and
addressed to the attention of the corporate secretary, or at such other address
as the Company shall have furnished in writing to the Warrantholder, or (c) if
to any other holder of any Warrant or of Warrant Shares issued upon conversion
of the Warrant, at such address as such holder shall have furnished to the
Company in writing, or, until such holder so furnishes an address to the
Company, then to and at the address of the last holder of such Warrant or
Warrant Shares who so furnished an address to the Company.

               5.5 DELAYS OR OMISSIONS. No delay or omission to exercise any
right, power or remedy accruing to any holder of any securities issued or sold
or to be issued or sold hereunder, upon any breach or default of the Company
under this Agreement, shall impair any such right, power or remedy of such
holder nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence therein, or in any similar breach or default thereafter
occurring, nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
holder of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.

               5.6 SURVIVAL. The representations, warranties, covenants and
agreements made herein and or made pursuant to this Agreement shall survive the

                                      -14-

<PAGE>

execution and delivery of this Agreement, except as expressly provided otherwise
herein.

               5.7 WAIVERS AND AMENDMENTS. With the written consent of the
record or beneficial holders of more than 50% of the Warrant Shares (treated as
if converted), the obligations of the Company and the rights of the holders of
the Warrant and the Warrant Shares may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplemental agreement for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Warrant; provided,
however, that no such waiver or supplemental agreement shall reduce the
aforesaid percentage of the Warrant Shares, the holders of which are required to
consent to any waiver or supplemental agreement, without the consent of the
record or beneficial holders of all of the Warrant Shares (treated as if
converted). Upon the effectuation of each such waiver, consent, agreement of
amendment or modification, the Company promptly shall give written notice
thereof to the record holders of the Warrant and the Warrant Shares. This
Warrant or any provision hereof may not be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, except to the extent provided in this Section 5.7.

               5.8 CASHLESS EXERCISE.

               (a) This Warrant may be exercised at any time or from time to
          time prior to the Expiration Date, by presentation and surrender of
          this Warrant to the Company at its principal executive offices with a
          written notice of the Holder's intention to effect a cashless
          exercise, including a calculation of the number of shares of Common
          Stock to be issued upon such exercise in accordance with the terms
          hereof (a "Cashless Exercise"). In the event of a Cashless Exercise in
          lieu of paying the Exercise Price in cash, the holder shall surrender
          this Warrant for that number of shares of Common Stock determined by
          multiplying (i) the number of Warrant Shares to which it would
          otherwise be entitled by (ii) a fraction, the numerator of which shall
          be the difference between the then current Market Price per share of
          the Common Stock and the Exercise Price, and the denominator of which
          shall be the Market Price per share of Common Stock.

               (b) The following definitions shall apply to this Section 5.8.

                    (i) "Business Day" means any day, other than a Saturday or
               Sunday or a day on which banking institutions in the State of
               California are authorized or obligated by law, regulation or
               executive order to close.

                                      -15-

<PAGE>

                    (ii) "Closing Price" shall mean for the Common Stock as of
               any date, the last price of such security on the principal United
               States securities exchange or trading market on which such
               security is listed or traded as reported by the Research Service
               of Nasdaq Trading and Market Services (or a comparable reporting
               service of national reputation selected by the Holder and
               reasonably acceptable to the Company if the Research Service of
               Nasdaq Trading and Market Services is not then reporting last
               price of such security) (collectively, "NTMS"), or if the
               foregoing does not apply, the last reported sale price of such
               security in the over-the-counter market on the electronic
               bulletin board for such security as reported by NTMS, or, if no
               sale price is reported for such security by NTMS, the average of
               the bid prices of any market makers for such security as reported
               in the "pink sheets" by the National Quotation Bureau, Inc., in
               each case for such date or, if such date was not a Trading Day
               (as defined below) for such security, on the next preceding day
               which was a Trading Day. If the Closing Price cannot be
               calculated for a share of Common Stock as of either of such dates
               on any of the foregoing bases, the Closing Price of such security
               on such date shall be the fair market value as determined by an
               investment banking firm selected by mutual agreement of the
               Holder and the Company, with the costs of such appraisal to be
               borne equally by the Company and the Holder. The manner of
               determining the Closing Price of the Common Stock set forth in
               the foregoing definition shall apply with respect to any other
               security in respect of which a determination as to market value
               must be made.

                    (iii) "Market Price" shall mean, with respect to any date of
               determination, the average Closing Price during the ten (10)
               Trading Days ending on the Trading Day immediately preceding such
               date of determination, appropriately adjusted to reflect any
               stock dividend, stock split or similar transaction during either
               such relevant period. The manner of determining the Market Price
               of the Common Stock set forth in the foregoing definition shall
               apply with respect to any other security in respect of which a
               determination as to market value must be made hereunder.

                    (iv) "Trading Day" shall mean a Business Day on which at
               least 1,000 shares of Common Stock are traded on the principal
               United States securities exchange or trading market on which such
               security is listed or traded as reported by NTMS.

                                      -16-

<PAGE>

          5.9 SEVERABILITY. If one or more provisions of this Warrant are held
to be invalid, illegal or unenforceable under applicable law, such provision
shall be modified in such manner as to be valid, legal and enforceable, but so
as to most nearly retain the intent of the parties, and if such modification is
not possible, such provision shall be severed from this Agreement as if such
provision were not included, in either case, and the balance of this Warrant
shall not in any way be affected or impaired thereby and shall be enforceable in
accordance with its terms.

          5.10 REGISTERED HOLDER. The Company may deem and treat the registered
Holder(s) hereof as the absolute owner(s) of this Warrant (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise or conversion hereof, of any distribution to the Holder(s)
hereof, and for all other purposes, and the Company shall not be affected by any
notice to the contrary. Other than as set forth herein, this Warrant does not
entitle any Holder hereof to any rights of a stockholder of the Company.

          5.11 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Warrant are for convenience and are not to be considered in construing
this Warrant.

     IN WITNESS WHEREOF, Company has caused this Warrant to be signed by its
duly authorized officer and issued as of the date set forth below.

Dated:  September 11, 2000

                                     NATURAL WONDERS, INC.

                                     By:
                                        ---------------------------------------

                                     Its:
                                         --------------------------------------

                                      -17-

<PAGE>

                                 EXERCISE NOTICE

                 (To be executed only upon exercise of Warrant)

     The undersigned registered owner of a Warrant of NATURAL WONDERS, INC. (the
"Company"), originally issued to _________________ irrevocably exercises such
Warrant for the purchase of shares of Common Stock of the Company, purchasable
with the Warrant, and hereby sets the place and date for the closing of such
purchase as follows, all on the terms and conditions specified in the Warrant.

Place of Closing:
                  --------------------------

Date of Closing:
                  --------------------------

         The undersigned requests that a certificate for such shares be
registered in the name of __________________________________________________,
whose address is_______________________________________________________________.
If said number of shares is less than all of the shares of Common Stock
purchasable under the Warrant, the undersigned requests that a new Warrant
representing the remaining balance of such shares be registered in the name of
__________________________________________________, whose address is
_______________________________________________________.

Dated:  ____________________

                                          _____________________________________
                                          Signature of Registered Owner

                                          _____________________________________
                                          Street Address

                                          _____________________________________
                                          City            State            Zip

                                      -18-

<PAGE>

                               FORM OF ASSIGNMENT

     FOR VALUED RECEIVED, the undersigned registered owner of this Warrant
issued by NATURAL WONDERS, INC. hereby sells, assigns and transfers unto the
Assignee named below all of the rights of the undersigned under the within
Warrant, with respect to the number of Shares of Common Stock set forth below:

<TABLE>
<CAPTION>
Name of Assignee                    Address                       No. of Shares
<S>                                 <C>                           <C>

</TABLE>

and does hereby irrevocably constitute and appoint ____________________________
attorney to make such transfer on the books of _________________________
maintained for such purpose, with full power of substitution in the premises.

Dated:  ____________________

                                          _____________________________________
                                          Signature of Registered Owner

                                          _____________________________________
                                          Witness

                                      -19-<PAGE>
                                                                   EXHIBIT 10.38

                                                               Debenture No. 004

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.

                              NATURAL WONDERS, INC.

                     15% Convertible Subordinated Debenture
                    (convertible into shares of common stock)

$250,000                                                     Fremont, California
                                                              September 11, 2000

         NATURAL WONDERS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to RAYMOND JAMES and Associates, Inc. or
such other person in whose name this Debenture is registered on the Debenture
Register (as that term is defined below) (the "Holder"), the principal amount of
Two Hundred Fifty Thousand Dollars ($250,000), with simple interest on the
unpaid balance of such principal amount at the rate of fifteen percent (15%) per
annum from the date of this Debenture. Interest on the outstanding principal
balance shall be computed on the basis of a 360 day year of twelve 30-day months
and shall be paid to the Holder on March 15, 2001, September 15, 2001 and March
15, 2002 (each, an "Interest Payment Date"). Each Debenture delivered upon
registration of transfer or in exchange for or in lieu of this Debenture shall
carry the rights to interest accrued and unpaid, and to accrue, which were
carried by this Debenture.

         The full principal amount of this Debenture, plus interest, will be due
and payable on March 15, 2002 (the "Maturity Date"). Payment of interest and
principal shall be made in lawful money of the United States of America by wire
transfer to an account designated by the Holder appearing on the Debenture
Register.

         This Debenture is a duly authorized Debenture of the Company, limited
to the aggregate principal amount of $250,000.

<PAGE>

         1.   REPRESENTATIONS, WARRANTIES AND COVENANTS.

              1.1    ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business or properties.

              1.2    VALID ISSUANCE OF DEBENTURES AND SHARES. The Debenture,
when issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.0001 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.

              1.3    COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. The execution, delivery and issuance of
this Debenture will not result in: (a) any such violation or be in conflict with
or constitute, with or without the passage of time and giving of notice, a
default under any such provision, instrument or contract; or (b) an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.

         2.   SUBORDINATION.

              2.1    SUBORDINATION. The indebtedness evidenced by this Debenture
is subordinate and junior in right of payment to all Senior Debt (as such term
is defined below) to the extent provided herein, and the Holder, by such
Holder's acceptance hereof, agrees to the subordination herein provided and
shall be bound by the provisions hereof. Senior Debt shall continue to be Senior
Debt and entitled to the benefits of these subordination provisions irrespective
of any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt.

                                      -2-
<PAGE>

              2.2    SENIOR DEBT DEFINED. As used herein, the term "Senior Debt"
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the Company
or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money, including
without limitation, the indebtedness now or hereafter owing to (i) IBJ Whitehall
Retail Finance and each of the other Lenders, as set forth and defined in a
certain Loan Agreement dated September 11, 2000 entered into with the Company,
and (ii) Hilco Capital, LP; (b) such other indebtedness of the Company or its
subsidiaries to the extent that the instrument creating or evidencing such
indebtedness provides that it shall constitute Senior Debt; (c) any indebtedness
issued in exchange for such Senior Debt, or any indebtedness arising from the
satisfaction of such Senior Debt by a guarantor; and (d) any deferrals,
renewals, or extensions of any such Senior Debt.

              2.3    DEFAULT ON SENIOR DEBT. If an event of default occurs under
any Senior Debt, then, upon written notice of such default to the Company by the
Holders of Senior Debt or any trustee therefor, (a) the Holder may not take any
action to accelerate or enforce its rights and remedies until the holders of the
Senior Debt have confirmed in writing that such default shall have been cured or
duly waived or the Senior Debt has been paid in full or shall have ceased to
exist, and (b) no direct or indirect payment (in cash, property, securities, by
set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.

              2.4    PRIOR PAYMENT OF SENIOR DEBT.

                     (a) In the event of: (i) the acceleration by any holder of
         Senior Debt of the payment thereof or the commencement of an action to
         enforce the rights and remedies of any holder of Senior Debt upon a
         default under such Senior Debt; (ii) any insolvency, bankruptcy,
         receivership, liquidation, reorganization, readjustment, composition or
         other similar proceeding relating to the Company; (iii) any proceeding
         for the liquidation, dissolution or other winding up of the Company,
         voluntary or involuntary, whether or not involving insolvency or
         bankruptcy proceedings; (iv) any assignment by the Company for the
         benefit of creditors; or (v) any other marshalling of the assets of the
         Company, all Senior Debt (including any interest thereon accruing after
         the commencement of any such proceedings) shall first be paid in full
         before any payment or distribution, whether in cash, securities or
         other property, shall be made to any Holder on account of the principal
         or interest on this Debenture. Any payment or distribution, whether in
         cash, securities or other property (other

                                      -3-
<PAGE>

         than securities of the Company or any other corporation provided for by
         a plan of reorganization or readjustment the payment of which is
         subordinate, at least to the extent provided in these subordination
         provisions with respect to the indebtedness evidenced by this
         Debenture, to the payment of all Senior Debt at the time outstanding
         and to any securities issued in respect thereof under any such plan of
         reorganization or readjustment), which would otherwise (but for these
         subordination provisions) be payable or deliverable in respect of this
         Debenture shall be paid or delivered directly to the holders of Senior
         Debt in accordance with the priorities then existing among such holders
         until all Senior Debt (including any interest thereon accruing after
         the commencement of any such proceedings) shall have been paid in full.
         In the event of any such proceeding, after payment in full of all sums
         owing with respect to Senior Debt, the Holder of this Debenture,
         together with the holders of any obligations of the Company ranking on
         a parity with this Debenture, shall be entitled to be paid from the
         remaining assets of the Company the amounts at the time due and owing
         on account of unpaid principal of and interest on this Debenture and
         such other obligations before any payment or other distribution,
         whether in cash, property or otherwise, shall be made on account of any
         capital stock or any obligations of the Company ranking junior to this
         Debenture and such other obligations.

                     (b) In the event that, notwithstanding the foregoing, any
         payment or distribution of any character, whether in cash, securities
         or other property (other than securities of the Company or any other
         corporation provided for by a plan of reorganization or readjustment
         the payment of which is subordinate, at least to the extent provided in
         these subordination provisions with respect to the indebtedness
         evidenced by this Debenture, to the payment of all Senior Debt at the
         time outstanding and to any securities issued in respect thereof under
         any such plan of reorganization or readjustment), shall be received by
         any Holder in contravention of any of the terms hereof, such payment or
         distribution or security shall be received in trust for the benefit of,
         and shall be paid over or delivered and transferred to, the holders of
         the Senior Debt at the time outstanding in accordance with the
         priorities then existing among such holders for application to the
         payment of all Senior Debt remaining unpaid, to the extent necessary to
         pay all such Senior Debt in full. In the event of the failure of any
         such Holder to endorse or assign any such payment, distribution or
         security, each holder of Senior Debt is hereby irrevocably authorized
         to endorse or assign the same.

              2.5    NO IMPAIRMENT OF RIGHTS. Nothing contained herein shall
impair, as between the Company and the Holder, the obligation of the Company to
pay such

                                      -4-
<PAGE>

Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.

              2.6    SUBROGATION. Upon the payment in full of all Senior Debt,
the Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt until the indebtedness evidenced by the Debentures
shall have been paid in full, and such payments or distributions received by the
Holders thereof, by reason of such subrogation, of cash, securities or other
property which otherwise would be paid or distributed to the holders of Senior
Debt, shall, as between the Company and its creditors other than the holders of
Senior Debt, on the one hand, and such Holders on the other hand, be deemed to
be a payment by the Company on account of Senior Debt and not on account of the
Debentures.

              2.7    NO IMPAIRMENT OF SECURITY INTEREST. The provisions of this
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest. The securing of any
obligations of the Company otherwise ranking on a parity with the Debentures or
ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.

              2.8    AMENDMENT OF SUBORDINATION PROVISIONS. No modification or
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.

              2.9    UNDERTAKING. By its acceptance of this Debenture, the
Holder agrees to execute and deliver such documents as may be reasonably
requested from time to time by the Company or the lender of any Senior Debt in
order to implement the foregoing provisions of Section 2 hereof.

         3.   NO RESTRICTIONS ON ISSUANCE OF ADDITIONAL DEBT. Nothing contained
in this Debenture shall restrict the Company from creating, assuming or
incurring any additional indebtedness, whether ranking junior to, on par with,
or senior to, this Debenture, or require the Company to obtain the consent of
the Holder with respect thereto.

                                      -5-
<PAGE>

         4.   DEFAULT.

              4.1    EVENT OF DEFAULT. Each of the following events shall be an
Event of Default hereunder:

                     (a) Default in the payment of any interest on this
         Debenture when due, continued for two (2) business days.

                     (b) Default in the payment of the principal on the Maturity
         Date.

                     (c) Material default in the performance of any of the
         covenants or agreements of the Company contained in this Debenture
         continued for thirty (30) days after notice thereof (provided, however,
         that if the default cannot reasonably be corrected within such period,
         there shall be no event of default if corrective action is instituted
         promptly and is pursued diligently until the default is corrected).

                     (d) If a petition in involuntary bankruptcy is filed
         against the Company under any bankruptcy, reorganization, arrangement,
         insolvency, readjustment of debt, dissolution or liquidation under the
         law of any jurisdiction, whether now or hereafter in effect, and is not
         stayed or dismissed within thirty (30) days after such filing, or if
         the Company shall make an assignment for the benefit of creditors, or
         shall file a voluntary petition in bankruptcy, or shall be adjudicated
         a bankrupt or insolvent, or shall file any petition or answer seeking
         for itself any reorganization, arrangement, composition, readjustment,
         liquidation, dissolution or similar relief under any present or future
         statute, law or regulation, or shall seek or consent to or acquiesce in
         the appointment of any trustee, receiver or liquidator of the Company
         or of all or any substantial part of the properties of the Company, or
         commence voluntary or involuntary dissolution proceedings.

                     (e) Default under Senior Debt that gives the holder thereof
         the right to accelerate such Senior Debt, and such Senior Debt is in
         fact accelerated by such holder.

              4.2    REMEDIES ON DEFAULT, ETC.

                     (a) If an Event of Default occurs and is continuing after
         the expiration of any applicable grace period, the Holder may declare
         the Debenture immediately due and payable.

                                      -6-
<PAGE>

                     (b) In case of a default in the payment of any principal or
         interest due on this Debenture, the Company shall pay to the Holder
         thereof the amount owing together with: (i) simple interest on the
         amount owing at the rate per annum equal to fifteen percent (15%) on
         the amounts past due; and (ii) such additional amount as shall be
         sufficient to cover the cost and expenses of collection, including,
         without limitation, reasonable attorneys' fees, expenses and
         disbursements.

                     (c) No right, power or remedy conferred by this Debenture
         upon any Holder shall be exclusive of any other right, power or remedy
         referred to herein or now or hereafter available at law, in equity, by
         statute or otherwise.

         5.   CONVERSION.

              5.1    CONVERSION RIGHTS. The Holder may at any time, and from
time to time, prior to the first to occur of the Maturity Date or the date fixed
by the Company for redemption of this Debenture (the "Redemption Date"), convert
this Debenture or any portion of the principal amount hereof which is $50,000 or
an integral multiple of $50,000, into Shares, at a conversion price of $1.50 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.

              The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion. In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption. In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.

              5.2    EFFECT OF CONVERSION; ISSUANCE OF SHARES ON CONVERSION.
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture. As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with

                                      -7-
<PAGE>

respect to the portion of the Debenture so converted to the date of conversion.
In addition, as soon as practicable after full or partial conversion of this
Debenture, the Company shall, at its expense, cause to be issued in the name of,
and delivered to, the Holder a certificate or certificates for the number of
Shares to which the Holder shall be entitled on such conversion, together with
any other securities and property to which the Holder is entitled on such
conversion under the terms of this Debenture. No fractional shares will be
issued on conversion of this Debenture. If on any conversion of this Debenture a
fraction of a share results, the Company will pay the cash value of that
fractional share, calculated on the basis of the then effective Conversion
Price.

              5.3    ADJUSTMENTS TO CONVERSION PRICE.

                     (a) If the Company shall at any time while this Debenture
         is outstanding subdivide the outstanding shares of its Common Stock,
         the Conversion Price then in effect immediately before that subdivision
         shall be proportionately decreased, and if the Company shall at any
         time while this Debenture is outstanding combine the outstanding shares
         of Common Stock, the Conversion Price then in effect immediately before
         that combination shall be proportionately increased. Except as
         otherwise provided below, any adjustment under this Section 5.3 shall
         become effective at the close of business on the date the subdivision
         or combination becomes effective. A dividend on any security of the
         Company payable in Common Stock, or a split of the Company's Common
         Stock, shall be considered a subdivision of Common Stock for purposes
         of this Section 5.3 at the close of business on the record date with
         respect to such dividend or stock split. A reverse split of the
         Company's Common Stock shall be considered a combination of Common
         Stock for purposes of this Section 5.3 at the close of business on the
         record date with respect to such reverse stock split.

                     (b) In the event the Company, at any time or from time to
         time while this Debenture is outstanding, shall make or issue, or fix a
         record date for the determination of holders of Common Stock entitled
         to receive, a dividend or other distribution with respect to the
         Company's Common Stock payable in securities of the Company other than
         shares of Common Stock, then and in each such event, provisions shall
         be made so that the Holder shall receive upon conversion hereof, in
         addition to the number of shares of Common Stock receivable thereupon,
         the amount of securities of the Company which he would have received
         had this Debenture been converted into Common Stock on the date of such
         event and had the Holder thereafter, during the period from the date of
         such event to and including the conversion date, retained such
         securities receivable by him.

                                      -8-
<PAGE>

                     (c) If while this Debenture is outstanding, the Shares
         issuable upon conversion of this Debenture shall be changed into the
         same or a different number of shares of any other class or classes of
         stock of the Company, whether by recapitalization, reclassification or
         other exchange (other than a subdivision or combination of shares, or a
         capital reorganization, merger or sale of assets, provided for
         elsewhere in this Section 5.3), the Holder shall, upon the conversion
         of this Debenture, be entitled to receive, in lieu of the Shares which
         the Holder would have become entitled to receive but for such change, a
         number of shares of such other class or classes of stock that would
         have been subject to receipt by the Holder if he had exercised his
         right of conversion of this Debenture immediately before that change.

                     (d) If while this Debenture is outstanding, there shall be
         a merger or consolidation of the Company with or into another
         corporation (other than a merger which does not result in any
         reclassification, conversion, exchange or cancellation of outstanding
         shares of Common Stock of the Company), or the sale of all or
         substantially all of the Company's properties and assets to any other
         person, then, as a part of such merger, consolidation or sale, lawful
         provision shall be made so that the Holder shall thereafter be entitled
         to receive upon conversion of this Debenture, during the period
         specified in this Debenture, the number of shares of stock or other
         securities or property of the Company, or of the successor corporation
         resulting from such merger, consolidation or sale, to which a holder of
         the Shares deliverable upon conversion of this Debenture would have
         been entitled on such merger, consolidation or sale if this Debenture
         had been converted immediately before such merger, consolidation or
         sale. In any such case, appropriate adjustment shall be made in the
         application of the provisions of this Section 5.3 with respect to the
         rights of the Holder after such merger, consolidation or sale to the
         end that the provisions of this Section 5.3 (including adjustments of
         the Conversion Price then in effect and number of shares purchasable
         upon conversion of this Debenture) shall continue to be applicable
         after that event and shall be as nearly equivalent to the provisions
         hereof as may be practicable.

                     (e) The Company shall promptly and in any case not later
         than ten (10) days after the date of any adjustment of the Conversion
         Price give written notice of such adjustment and the number of Shares
         or other securities issuable upon conversion of this Debenture, by
         first-class mail, postage prepaid, to the registered Holder at the
         Holder's address as shown on the Debenture Register. The certificate
         shall state such adjustment and show in reasonable detail the facts on
         which such adjustment is based.

                                      -9-
<PAGE>

                     (f) The form of this Debenture need not be changed because
         of any adjustment in the Conversion Price or in the number of Shares
         issuable upon its conversion. A Debenture issued after any adjustment
         on any partial conversion or upon replacement may continue to express
         the same Conversion Price and the same number of Shares (appropriately
         reduced in the case of partial conversion) as are stated on this
         Debenture as initially issued, and that Conversion Price and that
         number of Shares shall be considered to have been so changed as of the
         close of business on the date of the adjustment.

         6.   OPTIONAL REDEMPTION.

              6.1    RIGHT OF REDEMPTION. This Debenture may be redeemed at the
election of the Company, as a whole or from time to time in part, at any time,
at one hundred percent (100%) of the principal amount of this Debenture,
together with accrued interest to the Redemption Date.

              6.2    REDEMPTION PROCEDURES.

                     (a) Notice of redemption shall be given by first-class
         mail, postage prepaid, mailed not less than thirty (30) nor more than
         sixty (60) days prior to the Redemption Date, to the Holder, at the
         address appearing in the Debenture Register and to the Company at its
         principal place of business.

                     (b) The notice of redemption shall state: (a) the
         Redemption Date; (b) that on the Redemption Date the redemption price
         will become due and payable on the Debenture and that interest thereon
         will cease to accrue on and after said date; and (c) the place where
         the Debenture is to be surrendered for payment of the redemption price.
         Any notice that is mailed in the manner herein provided shall be
         conclusively presumed to have been given whether or not the Holder
         receives said notice.

                     (c) Notice of redemption having been given as aforesaid,
         the Debenture shall, on the Redemption Date, become due and payable at
         the redemption price therein specified, and from and after such date
         (unless the Company shall default in the payment of the redemption
         price and accrued interest) the Debenture shall cease to bear interest.
         Upon surrender of the Debenture for redemption in accordance with said
         notice, the Debenture shall be paid by the Company at the redemption
         price, together with accrued interest to the Redemption Date.

                                      -10-
<PAGE>

                     (d) If the Debenture shall not be so paid upon surrender
         thereof for redemption, the principal shall, until paid, bear interest
         from the Redemption Date at the rate borne by the Debenture.

         7.   REGISTRATION OF TRANSFER AND EXCHANGE.

              7.1    DEBENTURE REGISTER. The Company shall cause to be kept at
the principal office of the Company a register (the "Debenture Register") in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration and the transfer of the Debenture subject to
the provisions regarding transferability contained in this Debenture. Upon
surrender for registration of transfer of any Debenture at the principal office
of the Company, the Company shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Debentures in minimum
denominations of $50,000 and integral multiples of $50,000.

              7.2    TRANSFER OF DEBENTURES. At the time the Debenture is
presented or surrendered for registration of transfer it shall (if so required
by the Company) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company, duly executed by the Holder
thereof or his attorney duly authorized in writing. No service charge shall be
made for any registration of transfer, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer of the Debentures.

              7.3    REPLACEMENT DEBENTURE.

                     (a) If the Debenture is mutilated and is surrendered to the
         Company, the Company shall execute and deliver in exchange therefor a
         new Debenture of like tenor and principal amount and bearing a number
         not contemporaneously outstanding. If there shall be delivered to the
         Company: (i) evidence to its satisfaction of the destruction, loss or
         theft of the Debenture; and (ii) such security or indemnity as may be
         required by it to save the Company and any agent harmless. Then, in the
         absence of notice to the Company that the Debenture has been acquired
         by a bona fide purchaser, the Company shall execute and deliver, in
         lieu of any such destroyed, lost or stolen Debenture, a new Debenture
         of like tenor and principal amount and bearing a number not
         contemporaneously outstanding. In the event such mutilated, destroyed,
         lost or stolen Debenture has become or is about to become due and
         payable, the Company in its discretion may, instead of issuing a new
         Debenture, retire such Debenture.

                                      -11-
<PAGE>

                     (b) Upon the issuance of any new Debenture under this
         Section 7.3, the Company may require the payment of a sum sufficient to
         cover any tax or other governmental charge that may be imposed in
         relation thereto and any other expenses connected therewith.

                     (c) Any new Debenture issued pursuant to this Section 7.3
         in lieu of any destroyed, lost or stolen Debenture shall constitute an
         original additional contractual obligation of the Company, whether or
         not the destroyed, lost or stolen Debenture shall be at any time
         enforceable by anyone.

                     (d) The provisions of this Section 7.3 are exclusive and
         shall preclude (to the extent lawful) all other rights and remedies
         with respect to the replacement or payment of mutilated, destroyed,
         lost or stolen Debentures.

         8.   LIMITATIONS ON DISPOSITION. The Holder understands that this
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued under this Debenture are "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 restrictions such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with Rule 144 under the Act and the limitations imposed thereby and by the Act.

              The Holder further agrees not to make any disposition of all or
any portion of this Debenture, the Shares or any other securities issued
hereunder unless and until: (a) there is then in effect a Registration Statement
under the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (b) the Holder shall have (i)
notified the Company of the proposed disposition and shall have furnished the
Company with a reasonably detailed statement of the circumstances surrounding
the proposed disposition; and (ii) furnished the Company with an opinion of
counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.

              The Holder understands that this Debenture, the Shares and any
other securities issued hereunder may bear the following legend, together with
any other legend required by law:

              "The securities represented hereby have not been registered under
              the Securities Act of 1933, or any state securities laws. These
              securities may not be sold or transferred in the

                                      -12-
<PAGE>

              absence of an effective registration statement or qualification
              under such securities laws or an opinion of counsel, satisfactory
              to the Company, that the sale or transfer is pursuant to an
              exemption from the registration or qualification requirements of
              any applicable securities laws."

         9.   LIMITATIONS ON DIVIDENDS AND DISTRIBUTIONS. So long as this
Debenture is outstanding, the Company shall not declare, pay, make or set apart
any sum for a dividend or other distribution (whether in cash or other property)
with respect to any class of capital stock of the Company (other than dividends
or distributions payable in its capital stock), or for the redemption,
retirement, purchase or other acquisition for value of any share of any class of
capital stock of the Company or any warrants or rights to purchase any class of
capital stock of the Company.

         10.  REGISTRATION RIGHTS.

              10.1   DEFINITIONS. For purposes of Section 10 hereof, terms not
otherwise defined herein shall have the following meanings:

                     (a) The terms "register," "registered" and "registration"
         refer to the preparation and filing of a registration statement in
         compliance with the Act and the rules promulgated thereunder, and the
         declaration of the effectiveness of such registration statement, or the
         taking of similar action under a successor statute or regulation.

                     (b) The term "Registrable Securities" means the Shares
         issuable upon conversion of the Debenture or exercise of the Warrant,
         and any securities issued or issuable with respect to such Shares by
         way of a stock dividend or stock split or in connection with a
         combination or shares, recapitalization, merger, consolidation or other
         reorganization.

                     (c) The term "Rights Holder" or "Rights Holders" means any
         registered holder or holders of Registrable Securities.

                     (d) The term "Prospectus" means a prospectus that complies
         with applicable provisions of the Act.

                     (e) The term "Warrant" refers to the Warrant issued to
         Rights Holders by the Company on September 11, 2000 concurrently with
         the offer and sale of the Debentures.

                                      -13-
<PAGE>

              10.2   DEMAND REGISTRATION.

                     (a) On any date after March 15, 2001, the holders of at
         least fifty percent (50%) of the Registrable Securities then
         outstanding (the "Initiating Rights Holders") may request in writing
         registration under the Act (a "Demand Registration"). The Demand
         Registration request shall specify the amount of the Registrable
         Securities proposed to be sold, the intended method of disposition
         thereof and the jurisdictions in which registration is desired. Upon
         the receipt of the Demand Registration request, the Company promptly
         shall take such steps as are necessary or appropriate to prepare for
         the registration of the Registrable Securities to be registered. Within
         fifteen (15) days after the receipt of such request, the Company shall
         give written notice thereof to all other Rights Holders and include in
         such registration all Registrable Securities held by a Rights Holder
         from whom the Company has received a written request for inclusion
         therein at least ten (10) days prior to the filing of the registration
         statement. Each such request will also specify the number of
         Registrable Securities to be registered, the intended method of
         disposition thereof and the jurisdictions in which registration is
         desired.

                     (b) The Company shall use its reasonable best efforts to
         cause any such Demand Registration to become effective not later than
         one hundred twenty (120) days after it receives a request under this
         Section 10.2. A registration requested pursuant to this Section 10.2
         shall not count as the one Demand Registration to which the Rights
         Holders are entitled to thereunder unless such registration statement
         is declared effective and remains effective for at least ninety (90)
         days.

                     (c) If Rights Holders of a majority of the Registrable
         Securities proposed to be registered by the Initiating Rights Holders
         so elect, the offering of such Registrable Securities pursuant to such
         Demand Registration shall be in the form of a firm commitment
         underwritten offering. If any Demand Registration of Registrable
         Securities is in the form of an underwritten offering, the Rights
         Holders holding a majority of the Registrable Securities proposed to be
         registered by the Initiating Rights Holders shall select and obtain an
         investment banking firm of national reputation to act as the managing
         underwriter of the offering (the "Approved Underwriter"); provided,
         that the Approved Underwriter shall, in any case, be acceptable to the
         Company in its reasonable judgment.

                                      -14-
<PAGE>

                     (d) The Company shall not be obligated to effect any
         registration under this Section 10.2 except in accordance with the
         following provisions:

                         (i)    The Company shall not be obligated to use its
                reasonable best efforts to file and cause to become effective
                more than one registration statement with respect to
                Registrable Securities held by the Rights Holders initiated
                pursuant to this Section 10.2; provided, however, that any
                registration proceeding begun pursuant to this Section 10.2
                that is subsequently withdrawn at the request of the Rights
                Holders shall not be so counted if such withdrawal is based
                upon material adverse information relating to the Company or
                its condition, business, or prospects which is different from
                that generally known to the Rights Holders at the time of
                their request.

                         (ii)    The Company may delay the filing or
                effectiveness of any registration statement for a period of
                up to ninety (90) days after the date of a request for
                registration pursuant to this Section 10.2 if (x) at the time
                of such request the Company is engaged, or has formal plans
                to engage within sixty (60) days of the time of such request,
                in an underwritten public offering of Shares, (y) the Board
                of Directors of the Company determines in good faith that (A)
                it is in possession of material, non-public information
                concerning an acquisition, merger, recapitalization,
                consolidation, reorganization or other material transaction
                by or of the Company or concerning pending or threatened
                litigation and (B) disclosure of such information would
                jeopardize any such transaction or litigation or otherwise
                materially harm the Company, or (z) the Company shall furnish
                to the Rights Holders a certificate signed by the Chief
                Executive Officer or President of the Company stating that,
                in the good faith judgment of the Board of Directors of the
                Company, it would otherwise be seriously detrimental to the
                Company and its investors for such registration statement to
                be filed and it is therefore essential to defer the filing of
                such registration statement.

              10.3   PIGGYBACK REGISTRATION.

                     (a) If, at any time, through and including the third
         anniversary date of the issuance of this Debenture, the Company
         proposes to register any of its securities under the Act (other than in
         connection with a merger pursuant to a Form S-4 Registration Statement
         or an employee stock compensation plan pursuant to a Form S-8
         Registration Statement), it will give written notice by

                                      -15-
<PAGE>

         registered mail, at least thirty (30) days prior to the filing of each
         such registration statement, to the Rights Holder of its intention to
         do so. If the Rights Holder notifies the Company within twenty (20)
         days after receipt of any such notice of its desire to include any
         Registrable Securities in such proposed registration statement, the
         Company shall afford such Rights Holder the opportunity to have any of
         the Registrable Securities registered under such registration statement
         and included in any underwriting involved with respect thereto.

                     (b) Notwithstanding the provisions of this Section 10.3:
         (i) the Company shall have the right at any time after it shall have
         given written notice pursuant to this Section 10.3 (irrespective of
         whether a written request for inclusion of any Registrable Securities
         shall have been made) to elect not to file any such proposed
         registration statement, or to withdraw the same after the filing but
         prior to the effective date thereof; and (ii) in the event a
         registration under Section 10 hereof relates to an underwritten public
         offering which does not include any securities being offered and sold
         on behalf of selling shareholders, the inclusion of any Registrable
         Securities may, at the election of the Company, be conditioned upon the
         Rights Holder agreement that the public offering of such Registrable
         Securities shall not commence until ninety (90) days after the
         effective date of such registration.

                     (c) The rights of the Rights Holder pursuant to Section 10
         hereof shall be conditioned upon such Rights Holder's participation in
         the underwriting with respect thereto and the inclusion of such Rights
         Holder's Registrable Securities in such underwriting (unless otherwise
         mutually agreed by the Company, the managing underwriter or, if none, a
         majority of the underwriters, and such Rights Holder) to the extent
         provided herein.

                     (d) Notwithstanding any other provision of this Debenture,
         if the managing underwriter or, if none, a majority of the
         underwriters, determines that marketing factors require a limitation of
         the number of shares to be underwritten or a complete exclusion of such
         shares, such underwriter or underwriters may limit the number of
         Registrable Securities that may be included in the registration and
         underwriting or exclude all of the Registrable Securities, as
         appropriate. In the case of an underwritten registration in which the
         number of Registrable Securities that may be included is limited, the
         Company shall advise the Rights Holder of the limited number of
         Registrable Securities that may be included in the registration, and
         the number of Registrable Securities that may be included in the
         registration and underwriting shall be allocated among all Rights
         Holders thereof in proportion, as nearly as

                                      -16-
<PAGE>

         practicable, to the respective amounts of Registrable Securities
         entitled to inclusion in such registration held by such Rights Holders
         at the time of filing the registration statement.

                     (e) The Company shall (together with all Rights Holders
         proposing to distribute their securities through an underwriting) enter
         into an underwriting agreement in customary form with the underwriter
         or underwriters selected for the underwriting.

                     (f) If, after the third anniversary date of the issuance of
         this Debenture, the Registrable Securities owned by the Holder continue
         to be subject to a legend or other transfer restriction which treats
         the Holder as having affiliate status as that term is used in Rule 144
         of the Act, then the Holder shall continue to have a one-time right to
         include any Registrable Securities in a proposed registration statement
         subject to the procedures described in Section 10.2 hereof. This
         registration right shall expire on the earlier of: (i) the conclusion
         of the Holder's affiliate status; or (ii) the sixth anniversary date of
         the issuance of this Debenture.

              10.4   EXPENSES. All expenses incurred in connection with any
registration pursuant to this Debenture, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:

                     (a) fees of legal counsel of any Rights Holder, or
         underwriters' fees, discounts, commissions or expenses relating to
         Registrable Securities; and

                     (b) for expenses that the Company is prohibited from paying
         under Blue Sky laws or by Blue Sky administrators.

              10.5   COMPANY RESPONSIBILITIES. In the case of a registration
effected by the Company pursuant to this Debenture, the Company shall use its
best efforts to keep the Rights Holder advised in writing as to the initiation,
effectiveness and completion of such registration. At its expense the Company
shall:

                     (a) prepare and file a registration statement (and such
         amendments and supplements thereto) with respect to such Registrable
         Securities and use its best efforts to cause such registration
         statement to become and remain effective for a period of one hundred
         eighty (180) days or until the

                                      -17-
<PAGE>

         Rights Holder or Rights Holders have completed the distribution
         described in the registration statement relating thereto, whichever
         first occurs;

                     (b) furnish such number of copies of a Prospectus in
         conformity with the requirements of applicable law, and such other
         documents incident thereto as a Rights Holder from time to time may
         reasonably request; and

                     (c) use every reasonable effort to register or qualify the
         Registrable Securities covered by such registration statement under the
         state Blue Sky laws of such jurisdictions as the Company's Board of
         Directors may reasonably determine, and do any and all other acts and
         things which may be necessary under said Blue Sky laws to enable the
         sellers of the Registrable Securities to consummate the public sale or
         other disposition of the Registrable Securities owned by them in such
         jurisdictions, except that the Company shall not for any purpose be
         required to qualify to do business as a foreign corporation in any
         jurisdiction wherein the Registrable Securities are so qualified.

              10.6   INDEMNIFICATION.

                     (a) The Company shall indemnify the Rights Holder, each of
         the Rights Holder's officers and directors, and each person controlling
         such Rights Holder, with respect to such registration effected pursuant
         to Sections 10.2 and 10.3 hereof, and each underwriter, if any, and
         each person who controls any underwriter of the Registrable Securities,
         against all claims, losses, damages and liabilities (or actions in
         respect thereto) arising out of or based on any untrue statement (or
         alleged untrue statement) of a material fact contained in any
         registration statement or related Prospectus, or based on any omission
         (or alleged omission) to state therein a material fact required to be
         stated therein or necessary to make the statements therein not
         misleading, or any violation by the Company of any rule or regulation
         promulgated under any securities law applicable to the Company and
         relating to action or inaction required of the Company in connection
         with any such registration, and shall reimburse the Rights Holder, each
         of the Rights Holder's officers and directors, and each person
         controlling such Rights Holder, each such underwriter and each person
         who controls any such underwriter, for any legal and any other expenses
         reasonably incurred in connection with investigating or defending any
         such claim, loss, damage, liability or action, provided that the
         Company shall not be liable in any such case to the extent that any
         such claim, loss, damage or liability arises out of or is based on any
         untrue statement or omission based

                                      -18-
<PAGE>

         upon written information furnished to the Company in an instrument duly
         executed by such Rights Holder or underwriter specifically for use
         therein.

                     (b) The Rights Holder shall, if Registrable Securities held
         by or issuable to the Rights Holder are included in the securities as
         to which such registration is being effected, indemnify the Company,
         each of its directors and officers who sign such registration
         statement, each underwriter, if any, of the Company's securities
         covered by such a registration statement, each person who controls the
         Company within the meaning of the Act, and each other Rights Holder,
         each of such Rights Holder's officers and directors and each person
         controlling such Rights Holder, against all claims, losses, damages and
         liabilities (or actions in respect thereof) arising out of or based on
         any untrue statement (or alleged untrue statement) of a material fact
         contained in any such registration statement or related Prospectus, or
         any omission (or alleged omission) to state therein a material fact
         required to be stated therein or necessary to make the statements
         therein not misleading, and shall reimburse the Company, such Rights
         Holders, such directors, officers, persons, or underwriters for any
         legal or any other expenses reasonably incurred in connection with
         investigating or defending any such claim, loss, damage, liability, or
         action, in each case to the extent, but only to the extent, that such
         untrue statement (or alleged untrue statement) or omission (or alleged
         omission) is made in such registration statement or related Prospectus
         in reliance upon and in conformity with written information furnished
         to the Company in an instrument duly executed by such Rights Holder
         specifically for use therein.

                     (c) Each party entitled to indemnification under this
         Section 10.6 (the "Indemnified Party") shall give notice to the party
         required to provide indemnification (the "Indemnifying Party") promptly
         after such Indemnified Party has actual knowledge of any claim as to
         which indemnity may he sought, and shall permit the Indemnifying Party
         to assume the defense of any such claim or any litigation resulting
         therefrom, provided that counsel for the Indemnifying Party, who shall
         conduct the defense of such claim or litigation, shall be approved by
         the Indemnified Party (whose approval shall not be unreasonably
         withheld), and the Indemnified Party may participate in such defense at
         such party's expense; and provided further that the failure of any
         Indemnified Party to give notice as provided herein shall not relieve
         the Indemnifying Party of its obligations under this Section 10.6. No
         Indemnifying Party, in the defense of any such claim or litigation,
         shall, except with the consent of each Indemnified Party, consent to
         entry of any judgment or enter into any settlement, which does not
         include as an unconditional term thereof,

                                      -19-
<PAGE>

         the giving by the claimant or plaintiff to such Indemnified Party of a
         release from all liability in respect to such claim or litigation.

              10.7   RIGHTS HOLDER'S OBLIGATIONS. The Rights Holder shall
furnish to the Company such written information regarding such Rights Holder and
the distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration
referred to in this Debenture.

              10.8   ASSIGNMENT. The rights granted to the Rights Holder
pursuant to this Debenture may be assigned to a transferee or assignee of the
Debenture or any of the Registrable Securities, provided that the transferee or
assignee is an affiliated entity of the Rights Holder and the Company is given
written notice at the time of or within 10 days after said transfer, stating the
name and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.

         11.  MISCELLANEOUS.

              11.1   AMENDMENT. The provisions of this Debenture may be amended
or modified only with the written consent of the Company and the Holder.

              11.2   ENTIRE AGREEMENT. This Debenture constitutes the entire
agreement among the parties with regard to the subject matter hereof, and
supersedes and replaces any and all prior to contemporaneous agreements, written
or oral. The terms and conditions of this Debenture shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties.
Nothing in this Debenture is intended to confer on any third party any rights,
liabilities or obligations, except as specifically provided.

              11.3   HEADINGS. The titles and subtitles used in this Debenture
are for convenience only and are not to be used in construing or interpreting
this Debenture.

              11.4   SEC FILINGS. During the term of this Debenture the Company
shall promptly forward to the Holder annual and periodic reports and proxy
statements required to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.

              11.5   GOVERNING LAW. This Debenture shall be governed by the laws
of the State of Delaware.

                                      -20-
<PAGE>

              11.6   ATTORNEYS' FEES. The prevailing party in any action or
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys, fees and costs, incurred in connection with any such action or
proceeding.

              IN WITNESS WHEREOF, the undersigned have executed this Debenture
on the date first above written.

                                            NATURAL WONDERS, INC.

                                            By:
                                               ---------------------------------
                                               Peter G. Hanelt
                                               Chief Executive Officer

                                      -21-
<PAGE>

                                   EXHIBIT "A"

                            Form of Conversion Notice

To Natural Wonders, Inc.:

The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $50,000
and in increments of not less than $50,000 thereafter) below designated, into
shares of the Company's Common Stock, $.0001 par value per share, in accordance
with the terms of the Debenture, and directs that the shares issuable and
deliverable upon such conversion, together with any check in payment for
fractional shares and any Debentures representing any unconverted principal
amount hereof, be issued and delivered to the undersigned unless a different
name has been indicated below. If shares or Debentures are to be issued in the
name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. Any amount required to be paid by
the undersigned on account of interest accompanies this Debenture.

Dated:_________________________________        _______________________________
                                               Signature

                                               _______________________________
                                               Taxpayer Identification Number

Principal Amount to be Converted: $_______________

If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:

Name:_____________________________________________________________

Address:__________________________________________________________

        __________________________________________________________

                                      A-1

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