Document:

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                                                                EXHIBIT 10.38.1

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                                     WARRANT

                                   TO PURCHASE

                                    SHARES OF

                                  COMMON STOCK

                                       OF

                              NATURAL WONDERS, INC.

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                                TABLE OF CONTENTS

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

                                       -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.

                                                   37,500 Shares of Common Stock

     1.   GENERAL TERMS.

          1.1   RIGHT TO ACQUIRE SECURITIES.

                (a)  This Warrant certifies that for value received RAYMOND
     JAMES and Associates, Inc. (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"), 37,500
     shares (the "Warrant Shares") of the fully paid and non-assessable Common
     Stock of the Company ("Common Stock") as constituted on the date hereof
     (the "Issuance Date"), at a price of $1.50 per share (the "Exercise
     Price"), such number of shares and price per share subject to adjustment
     as provided herein and all subject to the conditions set forth herein.
     This Warrant may be exercised at any time on or before three years from
     the date hereof (the "Expiration Date").

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

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

                                      -1-

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          1.2   EXERCISE OF WARRANT.

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

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

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

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

                                      -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
     2.1(b)(i) or a "no action" letter described in Section 2.1(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 of 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-

<PAGE>

          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-

<PAGE>

          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

                                     -12-

<PAGE>

     of 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 Raymond James and  Associates, Inc., 850 Carillon
Parkway, St. Petersburg, Florida 33716, Attention:  Tom Mullins, 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 consentto any waiver or supplemental agreement, without
the consent of the record or beneficial holders of all of the Warrant Shares
(treated as if converted). Upon the effectuation of each such Waiver,
consent, agreement of amendment or modification, the Company promptly shall
give  written notice thereof to the record  holders of the Warrant and the
Warrant Shares. This Warrant or any provision hereof may not be changed,
waived, discharged or terminated orally, but only by a statement in  writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, except to the extent provided in this
Section 5.7.

          5.8   CASHLESS EXERCISE.

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

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

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

                                      -15-

<PAGE>

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

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

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

                                     -16-

<PAGE>

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

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

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

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

Dated:  September 11, 2000

                                       NATURAL WONDERS, INC.

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

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

                                     -17-

<PAGE>

                                 EXERCISE NOTICE

                (To be executed only upon exercise of Warrant)

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

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

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

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

Dated:  ____________________

                                       ___________________________________
                                       Signature of Registered Owner

                                       ___________________________________
                                       Street Address

                                       ___________________________________
                                       City            State           Zip

                                     -18-

<PAGE>

                               FORM OF ASSIGNMENT

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

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 10.39

                                                               Debenture No. 005

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

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

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

<PAGE>

         1.       REPRESENTATIONS, WARRANTIES AND COVENANTS.

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

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

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

         2.       SUBORDINATION.

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

                                      -2-
<PAGE>

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

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

                  2.4      PRIOR PAYMENT OF SENIOR DEBT.

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

                                      -3-
<PAGE>

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

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

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

                                      -4-
<PAGE>

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

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

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

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

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

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

                                      -5-
<PAGE>

         4.       DEFAULT.

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

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

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

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

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

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

                  4.2      REMEDIES ON DEFAULT, ETC.

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

                                      -6-
<PAGE>

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

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

         5.       CONVERSION.

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

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

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

                                      -7-
<PAGE>

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

                  5.3      ADJUSTMENTS TO CONVERSION PRICE.

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

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

                                      -8-
<PAGE>

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

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

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

                                      -9-
<PAGE>

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

         6.       OPTIONAL REDEMPTION.

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

                  6.2      REDEMPTION PROCEDURES.

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

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

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

                                      -10-
<PAGE>

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

         7.       REGISTRATION OF TRANSFER AND EXCHANGE.

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

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

                  7.3      REPLACEMENT DEBENTURE.

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

                                      -11-
<PAGE>

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

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

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

         8.       LIMITATIONS ON DISPOSITION. The Holder understands that this
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued under this Debenture are "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable restrictions such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with Rule 144 under the Act and the limitations imposed thereby and by the Act.

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

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

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

                                      -12-
<PAGE>

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

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

         10.      REGISTRATION RIGHTS.

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

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

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

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

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

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

                                      -13-
<PAGE>

                  10.2     DEMAND REGISTRATION.

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

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

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

                                      -14-
<PAGE>

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

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

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

                  10.3     PIGGYBACK REGISTRATION.

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

                                      -15-
<PAGE>

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

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

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

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

                                      -16-
<PAGE>

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

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

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

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

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

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

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

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

                                      -17-
<PAGE>

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

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

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

                  10.6     INDEMNIFICATION.

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

                                      -18-
<PAGE>

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

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

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

                                      -19-
<PAGE>

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

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

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

         11.      MISCELLANEOUS.

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

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

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

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

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

                                      -20-
<PAGE>

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

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

                                   NATURAL WONDERS, INC.

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

                                      -21-
<PAGE>

                                   EXHIBIT "A"

                            Form of Conversion Notice

To Natural Wonders, Inc.:

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

Dated:
       --------------------------            ----------------------------------
                                             Signature

                                             ----------------------------------
                                             Taxpayer Identification Number

Principal Amount to be Converted: $_______________

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

Name:
       -----------------------------------------------------------

Address:
          --------------------------------------------------------

          --------------------------------------------------------

                                      A-1

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