Document:

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                                                                 Exhibit 10.35.1

                                     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.............................................................................16
   5.10     Registered Holder........................................................................17
   5.11     Titles and Subtitles.....................................................................17
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                                                   i

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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.

                                                   60,000 Shares of Common Stock

     1. GENERAL TERMS.

        1.1 RIGHT TO ACQUIRE SECURITIES.

                    (a) This Warrant certifies that for value received Michelle
          A. Factor (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"), 60,000
          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.

                                       -2-

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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

                                       -3-

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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

                                       -4-

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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.

                                      -5-

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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

                                       -6-
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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

                                       -7-

<PAGE>

          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.

                                       -8-

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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.

                                     -9-

<PAGE>

        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

                                  -10

<PAGE>

          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.

                                     -11-

<PAGE>

        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 200 W.
Madison Street, 34th Floor, Chicago, Illinois 60606, Attention: Michelle A.
Factor, 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.

        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

                                      -16-

<PAGE>

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:

Name of Assignee                  Address                      No. of Shares

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 10.36

                                                               Debenture No. 002

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 Centennial
Associates, L.P. 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.

                                       -1-

<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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