Document:

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                                                                EXHIBIT 10.39.1

                                     WARRANT

                                   TO PURCHASE

                                    SHARES OF

                                  COMMON STOCK

                                       OF

                              NATURAL WONDERS, INC.

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                                TABLE OF CONTENTS
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                                                                                     Page
<S>                                                                                  <C>
1.       General Terms..................................................................1
         1.1        Right to Acquire Securities.........................................1
         1.2        Exercise of Warrant.................................................2
         1.3        Record Holder.......................................................2
         1.4        Payment of Taxes....................................................2
         1.5        Transfer and Exchange...............................................3

2.       Transfer of Securities.........................................................3
         2.1        Restrictions of Transfer............................................3
         2.2        Cooperation.........................................................5

3.       Registration Rights............................................................5
         3.1        Definitions.........................................................5
         3.2        Demand Registration.................................................6
         3.3        Piggyback Registration..............................................7
         3.4        Expenses............................................................9
         3.5        Company Responsibilities............................................9
         3.6        Indemnification....................................................10
         3.7        Holder's Obligations...............................................11
         3.8        Assignment.........................................................11

4.       Adjustments to Exercise Price and Warrant Shares..............................11
         4.1        Subdivision or Combination.........................................11
         4.2        Adjustment for Reorganization, Consolidation, Merger...............12
         4.3        Miscellaneous Exercise Matters.....................................13
         4.4        No Dilution or Impairment..........................................13
         4.5        Notice of Adjustment...............................................13
         4.6        Duty to Make Fair Adjustments in Certain Cases.....................13

5.       Miscellaneous.................................................................14
         5.1        Entire Agreement...................................................14
         5.2        Successors and Assigns.............................................14
         5.3        Governing Law......................................................14
         5.4        Notices, Etc.......................................................14
         5.5        Delays or Omissions................................................14
         5.6        Survival...........................................................14
         5.7        Waivers and Amendments.............................................15
         5.8        Cashless Exercise..................................................15
         5.9        Severability.......................................................16
         5.10       Registered Holder..................................................17
         5.11       Titles and Subtitles...............................................17
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                                     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 Peter G. Hanelt (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.

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                  1.2      EXERCISE OF WARRANT.

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

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

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

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

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                  1.5      TRANSFER AND EXCHANGE.

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

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

         2.       TRANSFER OF SECURITIES.

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

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

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

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

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

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

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

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

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

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

                                      -4-
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         the transferor or the contemplated transferee would be exempt from
         registration under the 1933 Act, or (iii) such securities may be sold
         in accordance with the provisions of Rule 144 promulgated under the
         1933 Act. When the restrictions on transfer contained in this Section
         2.1 have terminated as provided above, the holder of the securities as
         to which such restrictions shall have terminated or the transferee of
         such holder shall be entitled to receive promptly from the Company,
         without expense to him, new certificates not bearing the legend set
         forth in Section 2.1(a) hereof.

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

         3.       REGISTRATION RIGHTS.

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

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

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

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

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

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

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                  3.2      DEMAND REGISTRATION.

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

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

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

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

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

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

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

                  3.3      PIGGYBACK REGISTRATION.

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

                                      -7-
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         under such registration statement and included in any underwriting
         involved with respect thereto.

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

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

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

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

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                  3.4      EXPENSES.

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

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

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

                  3.5      COMPANY RESPONSIBILITIES.

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

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

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

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

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                  3.6      INDEMNIFICATION.

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

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

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

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

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

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

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

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

                                      -11-
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                  4.2      ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER.

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

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

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

                                      -12-
<PAGE>

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

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

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

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

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

                                      -13-
<PAGE>

         5.       MISCELLANEOUS.

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

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

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

                  5.4      NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be deemed
effectively given upon personal delivery or upon the seventh day following
mailing by registered air mail, postage prepaid, addressed (a) if to the
Warrantholder, at Peter G. Hanelt, 641 Sky High Circle, Lafayette, CA 94549, or
at such other address as it shall have furnished to the Company in writing, (b)
if to the Company, a copy should be sent to 4209 Technology Drive, Fremont, CA
94538, and addressed to the attention of the corporate secretary, or at such
other address as the Company shall have furnished in writing to the
Warrantholder, or (c) if to any other holder of any Warrant or of Warrant Shares
issued upon conversion of the Warrant, at such address as such holder shall have
furnished to the Company in writing, or, until such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Warrant or Warrant Shares who so furnished an address to the Company.

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

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

                                      -14-
<PAGE>

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

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

                  5.8      CASHLESS EXERCISE.

                           (a)      This Warrant may be exercised at any time or

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

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

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

                                      -15-
<PAGE>

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

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

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

                  5.9      SEVERABILITY. If one or more provisions of this
Warrant are held to be invalid, illegal or unenforceable under applicable law,
such provision shall be

                                      -16-
<PAGE>

modified in such manner as to be valid, legal and enforceable, but so as to most
nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement as if such
provision were not included, in either case, and the balance of this Warrant
shall not in any way be affected or impaired thereby and shall be enforceable in
accordance with its terms.

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

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

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

Dated:  September 11, 2000

                               NATURAL WONDERS, INC.

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

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

                                      -17-
<PAGE>

                                 EXERCISE NOTICE

                 (To be executed only upon exercise of Warrant)

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

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

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

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

Dated:
        -----------------------

                                         --------------------------------------
                                         Signature of Registered Owner

                                         --------------------------------------
                                         Street Address

                                         --------------------------------------
                                         City                   State       Zip

                                      -18-
<PAGE>

                               FORM OF ASSIGNMENT

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

Name of Assignee                  Address                         No. of Shares

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

Dated:
        -----------------------

                                         --------------------------------------
                                         Signature of Registered Owner

                                         --------------------------------------
                                         Witness

                                      -19-<PAGE>

                            SCOTT'S LIQUID GOLD-INC.
                             1998 STOCK OPTION PLAN
                       AS AMENDED THROUGH DECEMBER 4, 2000

                               SECTION 1: PURPOSE

     The purpose of the Scott's Liquid Gold-Inc. 1998 Stock Option Plan (the
"Plan") is to further the growth and development of Scott's Liquid Gold-Inc.
(the "Company") by affording an opportunity for stock ownership to selected
employees and Directors of the Company and its Subsidiaries who are responsible
for the performance of various duties for the Company or its Subsidiaries and/or
who are involved in endeavors significant to the success of the Company or its
Subsidiaries.

                             SECTION 2: DEFINITIONS

     Unless otherwise indicated, the following words when used herein shall have
the following meanings:

          (a) "Board of Directors" shall mean the Board of Directors of the
     Company.

          (b) "Code" shall mean the Internal Revenue Code of 1986, as amended
     from time to time.

          (c) "Common Stock" shall mean the Company's common stock (par value
     $0.10 per share) and any share or shares of the Company's capital stock
     hereafter issued or issuable in substitution for such shares.

          (d) "Director" shall mean a member of the Board of Directors.

          (e) "Incentive Stock Option" shall mean any option granted to an
     eligible employee under the Plan, which the Company intends at the time the
     option is granted to be an Incentive Stock Option within the meaning of
     Section 422 of the Code.

          (f) "Nonqualified Stock Option" shall mean any option granted to an
     eligible employee or Director under the Plan which is not an Incentive
     Stock Option.

          (g) "Option" shall mean and refer collectively to Incentive Stock
     Options and Nonqualified Stock Options.

          (h) "Option Agreement" shall mean the agreement specified in Section
     7.2.

                                       1
<PAGE>

          (i) "Optionee" shall mean any employee or Director who is granted an
     Option under the Plan. "Optionee" shall also mean the personal
     representative of an Optionee and any other person who acquires the right
     to exercise an Option by bequest or inheritance.

          (j) "Parent" shall mean a parent corporation of the Company as defined
     in Section 424(e) of the Code.

          (k) "Subsidiary" shall mean a subsidiary corporation of the Company as
     defined in Section 424(f) of the Code.

          (l) "Termination for Cause" shall mean an involuntary severance of
     employment on account of: (1) refusal to obey written or verbal directions
     of a lawful and/or moral nature issued by a supervisor or corporate officer
     or by the Board of Directors; (2) fraud or dishonesty directed against the
     Company or any of its Subsidiaries; (3) breach of any material obligation
     of nondisclosure or confidentiality owed to the Company or any of its
     Subsidiaries, including any such breach pertaining to rules and regulations
     of the Securities and Exchange Commission; (4) commission of any criminal
     offense which constitutes a felony in the jurisdiction in which the offense
     is committed; or (5) violation of any Company rules or regulations, such as
     those pertaining to attendance, which constitutes grounds for dismissal.

                            SECTION 3: EFFECTIVE DATE

     The effective date of the Plan is November 9, 1998; provided, however, that
the adoption of the Plan by the Board of Directors is subject to approval and
ratification by the shareholders of the Company within twelve months of the
effective date. Options granted under the Plan prior to approval of the Plan by
the shareholders of the Company shall be subject to approval of the Plan by the
shareholders of the Company.

                            SECTION 4: ADMINISTRATION

     4.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by a Committee
appointed by and serving at the pleasure of the Board of Directors, consisting
of not fewer than two Directors (the "Committee"). The Committee may, but need
not, be the existing Compensation Committee of the Board of Directors. The Board
of Directors may from time to time remove members from or add members to the
Committee, and vacancies on the Committee, howsoever caused, shall be filled by
the Board of Directors.

     4.2 COMMITTEE MEETINGS AND ACTIONS. The Committee shall hold meetings at
such times and places as it may determine. A majority of the members of the
Committee shall constitute a quorum, and the acts of the majority of the members
present at a meeting or a consent in writing signed by all members of the
Committee shall be the acts of the Committee.

                                       2
<PAGE>

     4.3 POWERS OF COMMITTEE AND BOARD OF DIRECTORS. The Committee shall
recommend to the Board of Directors specific Option grants and the terms and
conditions of Options granted under the Plan. The Committee shall recommend to
the Board of Directors rules and regulations for administration of the Plan. In
recommending Option grants, the Committee shall take into consideration the
contribution the Optionee has made or may make to the success of the Company or
its Subsidiaries and such other factors as the Committee shall determine. The
Board of Directors, after considering recommendations by the Committee, shall
have the full and exclusive right to grant and determine terms and conditions of
all Options granted under the Plan and to prescribe, amend, and rescind rules
and regulations for administration of the Plan. The actions of the Board of
Directors with respect to the Plan shall be final, binding and conclusive upon
all persons, including the Company, its Subsidiaries, its shareholders, and all
persons having any interest in Options which may be or have been granted
pursuant to the Plan.

     4.4 INTERPRETATION OF PLAN. The determination of the Board of Directors as
to any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, binding and conclusive upon all
persons, including the Company, its Subsidiaries, its shareholders, and all
persons having any interest in Options which may be or have been granted
pursuant to the Plan.

     4.5 INDEMNIFICATION. Each person who is or shall have been a member of the
Committee or of the Board of Directors shall be indemnified and held harmless by
the Company against and from any loss, cost, liability or expense that may be
imposed upon or reasonably incurred in connection with or resulting from any
claim, action, suit or proceeding to which such person may be a party or in
which such person may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid in settlement
thereof, with the Company's approval, or paid in satisfaction of a judgment in
any such action, suit or proceeding against him, provided such person shall give
the Company an opportunity, at its own expense, to handle and defend the same
before undertaking to handle and defend it on such person's own behalf. The
foregoing right of indemnification shall not be exclusive of, and is in addition
to, any other rights of indemnification to which any person may be entitled
under the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.

                      SECTION 5: STOCK SUBJECT TO THE PLAN

     5.1 NUMBER. The aggregate number of shares of Common Stock which may be
issued under Options granted pursuant to the Plan shall not exceed 1,100,000
shares. Shares which may be issued under Options may consist, in whole or in
part, of authorized but unissued stock or treasury stock of the Company not
reserved for any other purpose.

                                       3
<PAGE>

     5.2 UNUSED STOCK. If any outstanding Option under the Plan expires or for
any other reason ceases to be exercisable, in whole or in part, other than upon
exercise of the Option, the shares which were subject to such Option and as to
which the Option had not been exercised shall continue to be available under the
Plan.

     5.3 ADJUSTMENT FOR CHANGE IN OUTSTANDING SHARES. If there is any change,
increase or decrease, in the outstanding shares of Common Stock which is
effected without receipt of additional consideration by the Company, by reason
of a stock dividend, recapitalization, merger, consolidation, stock split,
combination or exchange of stock, or other similar circumstances, then in each
such event, the Board of Directors shall make an appropriate adjustment in the
aggregate number of shares of stock available under the Plan, the number of
shares of stock subject to each outstanding Option and the Option prices in
order to prevent the dilution or enlargement of any Optionee's rights. In making
such adjustments, fractional shares shall be rounded to the nearest whole share.
The determinations of the Board of Directors in making adjustments shall be
final and conclusive.

     5.4 REORGANIZATION OR SALE OF ASSETS. If the Company is merged or
consolidated with another corporation and the Company is not the surviving
corporation, or if all or substantially all of the assets of the Company are
acquired by another entity, or if the Company is liquidated or reorganized (each
of such events being referred to hereinafter as a "Reorganization Event"), the
Board of Directors shall, as to outstanding Options, either: (1) make
appropriate provision for the protection of any such outstanding Options by the
substitution on an equitable basis of appropriate stock of the Company, or of
the merged, consolidated or otherwise reorganized corporation, which will be
issuable in respect of the Common Stock, provided that no additional benefits
shall be conferred upon Optionees as a result of such substitution, and provided
further that the excess of the aggregate fair market value of the shares subject
to the Options immediately after such substitution over the purchase price
thereof is not more than the excess of the aggregate fair market value of the
shares subject to such Options immediately before such substitution over the
purchase price thereof; or (2) upon written notice to all Optionees, which
notice shall be given not less than twenty days prior to the effective date of
the Reorganization Event, provide that all unexercised Options must be exercised
within a specified number of days (which shall not be less than ten) of the date
of such notice or such Options will terminate. In response to a notice provided
pursuant to clause (2) of the preceding sentence, an Optionee may make an
irrevocable election to exercise the Optionee's Option contingent upon and
effective as of the effective date of the Reorganization Event. The Board of
Directors may, in its sole discretion, accelerate the exercise dates of
outstanding Options in connection with any Reorganization Event.

                             SECTION 6: ELIGIBILITY

     All full-time employees of the Company and its Subsidiaries shall be
eligible to receive both Incentive Stock Options and Nonqualified Stock Options
under the Plan. For purposes of this Section 6, a full-time employee shall be
any employee of the

                                       4
<PAGE>

Company or any of its Subsidiaries who is regularly scheduled to work at least
forty hours per week. Directors who are not employees of the Company or its
Subsidiaries shall be eligible to receive Nonqualified Stock Options, but not
Incentive Stock Options, under the Plan. Any Director who is otherwise eligible
to participate, who makes an election in writing not to receive any grants under
the Plan, shall not be eligible to receive any such grants during the period set
forth in such election.

                           SECTION 7: GRANT OF OPTIONS

     7.1 GRANT OF OPTIONS. The Board of Directors may from time to time in its
discretion determine which of the eligible employees and Directors of the
Company or its Subsidiaries should receive Options, the type of Options to be
granted (whether Incentive Stock Options or Nonqualified Stock Options), the
number of shares subject to such Options, and the dates on which such Options
are to be granted. No employee may be granted Incentive Stock Options to the
extent that the aggregate fair market value (determined as of the time each
Option is granted) of the Common Stock with respect to which any such Incentive
Stock Options are exercisable for the first time during a calendar year (under
all incentive stock option plans of the Company and its Parent and Subsidiaries)
would exceed $100,000.

     7.2 OPTION AGREEMENT. Each Option granted under the Plan shall be evidenced
by a written Option Agreement setting forth the terms upon which the Option is
granted. Each Option Agreement shall designate the type of Options being granted
(whether Incentive Stock Options or Nonqualified Stock Options), and shall state
the number of shares of Common Stock, as designated by the Board of Directors,
to which that Option pertains. More than one Option may be granted to an
eligible person.

     7.3 OPTION PRICE. The option price per share of Common Stock under each
Option shall be determined by the Board of Directors and stated in the Option
Agreement. The option price for Incentive Stock Options granted under the Plan
shall not be less than 100% of the fair market value (determined as of the day
the Option is granted) of the shares subject to the Option. The option price for
Nonqualified Stock Options granted under the Plan shall not be less than 85% of
the fair market value (determined as of the day the Option is granted) of the
shares subject to the Option. Notwithstanding the foregoing, in no event shall
the option price per share be less than the par value of the Common Stock.

     7.4 DETERMINATION OF FAIR MARKET VALUE. If the Common Stock (which is
currently listed on the New York Stock Exchange) is listed upon an
established stock exchange, then the fair market value per share shall be
deemed to be the quoted closing price of the Common Stock on such stock
exchange on the day for which the determination is made, or if no sales of
the Common Stock shall have been made on the stock exchange on that day, on
the next preceding day on which there was such a sale. If the Common Stock is
listed upon more than one established stock exchange, the fair market value
per share shall be deemed to be the average of the quoted closing prices of
the Common Stock on all such stock exchanges on the day for which the
determination

                                       5
<PAGE>

is made, determined for each such stock exchange in accordance with the
preceding sentence. If the Common Stock is not listed upon any established
stock exchange but is traded in the NASDAQ National Market System, the fair
market value per share shall be deemed to be the closing price of the Common
Stock in the National Market System on the day for which the determination is
made, or if there shall have been no trading of the Common Stock on that day,
on the next preceding day on which there was such trading. If the Common
Stock is not listed upon any established stock exchange and is not traded in
the National Market System, the fair market value per share shall be deemed
to be the mean between the dealer "bid" and "ask" closing prices of the
Common Stock on the NASDAQ System on the day for which the determination is
made, or if there shall have been no trading of the Common Stock on that day,
on the next preceding day on which there was such trading. If none of these
conditions apply, the fair market value per share shall be deemed to be an
amount as determined in good faith by the Board of Directors by applying any
reasonable valuation method.

     7.5 DURATION OF OPTIONS. Each Option shall be of a duration as specified in
the Option Agreement; provided, however, that the term of each Option shall be
no more than ten years from the date on which the Option is granted and shall be
subject to early termination as provided herein.

     7.6 ADDITIONAL LIMITATIONS ON GRANT. No Incentive Stock Option shall be
granted to an employee who, at the time the Incentive Stock Option is granted,
owns stock (as determined in accordance with Section 424(d) of the Code)
representing more than 10% of the total combined voting power of all classes of
stock of the Company or of any Parent or Subsidiary, unless the option price of
such Incentive Stock Option is at least 110% of the fair market value
(determined as of the day the Incentive Stock Option is granted) of the stock
subject to the Incentive Stock Option and the Incentive Stock Option by its
terms is not exercisable more than five years from the date it is granted.

     7.7 OTHER TERMS AND CONDITIONS. The Option Agreement may contain such other
provisions, which shall not be inconsistent with the Plan, as the Board of
Directors shall deem appropriate, including, without limitation, provisions that
relate the Optionee's ability to exercise an Option to the passage of time or
the achievement of specific goals established by the Board of Directors or the
occurrence of certain events specified by the Board of Directors.

                         SECTION 8: EXERCISE OF OPTIONS

     8.1 MANNER OF EXERCISE. Subject to the limitations and conditions of the
Plan or the Option Agreement, an Option shall be exercisable, in whole or in
part, from time to time, by giving written notice of exercise to the Secretary
of the Company, which notice shall specify the number of shares of Common Stock
to be purchased and shall be accompanied by: (1) payment in full to the Company
of the purchase price of the shares to be purchased; plus (2) payment in full of
such amount as the Company shall determine to be sufficient to satisfy any
liability it may have for any withholding of federal, state or local income or
other taxes incurred by reason of the exercise of the

                                       6
<PAGE>

Option; and (3) a representation meeting the requirements of Section 11.2 if
requested by the Company.

     8.2 PAYMENT OF PURCHASE PRICE. Payment for shares and withholding taxes
shall be in the form of either: (1) cash; or (2) a personal check to the order
of the Company; or (3) in any combination thereof.

                 SECTION 9: EFFECT OF TERMINATION OF EMPLOYMENT

     9.1 TERMINATION OF EMPLOYMENT OTHER THAN UPON DEATH OR DISABILITY AND OTHER
THAN TERMINATION FOR CAUSE. Upon termination of an Optionee's employment with
the Company or a Subsidiary other than upon death or disability (within the
meaning of Section 22(e)(3) of the Code) and other than a Termination for Cause,
an Optionee may, at any time within three months after the date of termination
but not later than the date of expiration of the Option, exercise the Option to
the extent the Optionee was entitled to do so on the date of termination. Any
Options not exercisable as of the date of termination and any Options or
portions of Options of terminated Optionees not exercised within the period
specified herein shall terminate.

     9.2 TERMINATION BY DEATH OF OPTIONEE. If an Optionee shall die while in the
employ of the Company or a Subsidiary or within a period of three months after
the termination of employment with the Company or a Subsidiary under
circumstances to which Section 9.1 applies, the personal representatives of the
Optionee's estate or the person or persons who shall have acquired the Option
from the Optionee by bequest or inheritance may exercise the Option at any time
within the year after the date of death but not later than the expiration date
of the Option, to the extent the Optionee was entitled to do so on the date of
death. Any Options not exercisable as of the date of death and any Options or
portions of Options of deceased Optionees not exercised within the period
specified herein shall terminate.

     9.3 TERMINATION BY DISABILITY OF OPTIONEE. Upon termination of an
Optionee's employment with the Company or a Subsidiary by reason of the
Optionee's disability (within the meaning of Section 22(e)(3) of the Code), the
Optionee may exercise the Option at any time within one year after the date of
termination but not later than the expiration date of the Option, to the extent
the Optionee was entitled to do so on the date of termination. Any Options not
exercisable as of the date of termination and any Options or portions of Options
of disabled Optionees not exercised within the period specified herein shall
terminate.

     9.4 TERMINATION OF DIRECTORS. For purposes of this Section 9, a termination
of employment shall be deemed to include the termination of a Director's service
as a member of the Board of Directors.

     9.5 OTHER TERMINATIONS. Upon termination of an Optionee's employment with
the Company or a Subsidiary under circumstances other than those set forth in
Sections

                                       7
<PAGE>

9.1, 9.2 or 9.3, including without limitation a Termination for Cause, Options
granted to the Optionee shall terminate immediately.

     9.6 EXTENSION OF OPTION TERMINATION DATE. No Option granted under this Plan
may be extended by either the Committee or the Board of Directors.

                    SECTION 10: NON-TRANSFERABILITY OF OPTION

     Options granted pursuant to the Plan are not transferable by the Optionee
other than by Will or the laws of descent and distribution and shall be
exercisable during the Optionee's lifetime only by the Optionee. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the
Option contrary to the provisions hereof, or upon the levy of any attachment or
similar process upon the Option, the Option shall immediately become null and
void.

                         SECTION 11: ISSUANCE OF SHARES

     11.1 TRANSFER OF SHARES TO OPTIONEE. As soon as practicable after the
Optionee has given the Company written notice of exercise of an Option and has
otherwise met the requirements of Section 8.1, the Company shall issue or
transfer to the Optionee the number of shares of Common Stock as to which the
Option has been exercised and shall deliver to the Optionee a certificate or
certificates therefor, registered in the Optionee's name. In no event shall the
Company be required to transfer fractional shares to the Optionee, and in lieu
thereof, the Company may pay an amount in cash equal to the fair market value
(as determined in accordance with Section 7.4) of such fractional shares on the
date of exercise. If the issuance or transfer of shares by the Company would for
any reason, in the opinion of counsel for the Company, violate any applicable
federal or state laws or regulations, the Company may delay issuance or transfer
of such shares to the Optionee until compliance with such laws can reasonably be
obtained. In no event shall the Company be obligated to effect or obtain any
listing, registration, qualification, consent or approval under any applicable
federal or state laws or regulations or any contract or agreement to which the
Company is a party with respect to the issuance of any such shares.

     11.2 INVESTMENT REPRESENTATION. Upon demand by the Company, the Optionee
shall deliver to the Company a representation in writing that the purchase of
all shares with respect to which notice of exercise of the Option has been given
by the Optionee is being made for investment only and not for resale or with a
view to distribution, and containing such other representations and provisions
with respect thereto as the Company may require. Upon such demand, delivery of
such representation promptly and prior to the transfer or delivery of any such
shares and prior to the expiration of the option period shall be a condition
precedent to the right to purchase such shares.

                                       8
<PAGE>

                             SECTION 12: AMENDMENTS

     The Board of Directors may at any time and from time to time alter, amend,
suspend or terminate the Plan or any part thereof as it may deem proper, except
that no such action shall diminish or impair the rights under an Option
previously granted. Unless the shareholders of the Company shall have given
their approval, the total number of shares for which Options may be issued under
the Plan shall not be increased, except as provided in Section 5.3, and no
amendment shall be made which reduces the price at which the Common Stock may be
offered under the Plan below the minimum required by Section 7.3, except as
provided in Section 5.3, or which materially modifies the requirements as to
eligibility for participation in the Plan. Subject to the terms and conditions
of the Plan, the Board of Directors may modify outstanding Options granted under
the Plan, or accept the surrender of outstanding Options to the extent not
theretofore exercised and authorize the granting of new Options in substitution
therefor, except that no such action shall diminish or impair the rights under
an Option previously granted without the consent of the Optionee.

                            SECTION 13: TERM OF PLAN

     This Plan shall terminate on November 8, 2008; provided, however, that the
Board of Directors may at any time prior thereto suspend or terminate the Plan.

                        SECTION 14: RIGHTS AS STOCKHOLDER

     An Optionee shall have no rights as a stockholder of the Company with
respect to any shares of Common Stock covered by an Option until the date of the
issuance of the stock certificate for such shares.

                        SECTION 15: NO EMPLOYMENT RIGHTS

     Nothing contained in this Plan or in any Option granted under the Plan
shall confer upon any Optionee any right with respect to the continuation of
such Optionee's employment by the Company or any Subsidiary or interfere in any
way with the right of the Company or any Subsidiary, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the Optionee from the
rate in existence at the time of the grant of the Option.

                            SECTION 16: GOVERNING LAW

     This Plan, and all Options granted under this Plan, shall be construed and
shall take effect in accordance with the laws of the State of Colorado, without
regard to the conflicts of laws rules of such State.

                                       9

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