Document:

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                                                                 EXHIBIT 10.36.1

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                                     WARRANT

                                   TO PURCHASE

                                    SHARES OF

                                  COMMON STOCK

                                       OF

                              NATURAL WONDERS, INC.

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                                TABLE OF CONTENTS

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

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

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

                                                   37,500 Shares of Common Stock

     1. GENERAL TERMS.

        1.1      RIGHT TO ACQUIRE SECURITIES.

                  (a) This Warrant certifies that for value received Centennial
     Associates, L.P. (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.

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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.

                                      -5-
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         3.2      DEMAND REGISTRATION.

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

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

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

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

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

                                      -6-
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        one registration statement with respect to Registrable Securities held
        by the Holders initiated pursuant to this Section 3.2; provided,
        however, that any registration proceeding begun pursuant to this Section
        3.2 that is subsequently withdrawn at the request of the Holders shall
        not be so counted if such withdrawal is based upon material adverse
        information relating to the Company or its condition, business, or
        prospects which is different from that generally known to the Rights
        Holders at the time of their request.

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

        3.3       PIGGYBACK REGISTRATION.

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

                                      -7-
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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.

                                      -9-
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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

                                      -10-
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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 Centennial Associates, L.P., 900 3rd Avenue, Suite 1801, New York, New
York 10022, or at such other address as it shall have furnished to the
Company in writing, (b) if to the Company, a copy should be sent to 4209
Technology Drive, Fremont, CA 94538, and addressed to the attention of the
corporate secretary, or at such other address as the Company shall have
furnished in writing to the Warrantholder, or (c) if to any other holder of
any Warrant or of Warrant Shares issued upon conversion of the Warrant, at
such address as such holder shall have furnished to the Company in writing,
or, until such holder so furnishes an address to the Company, then to and at
the address of the last holder of such Warrant or Warrant Shares who so
furnished an address to the Company.

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

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

                                      -14-
<PAGE>

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

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

         5.8      CASHLESS EXERCISE.

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

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

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

                                      -15-
<PAGE>

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

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

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

                                      -16-
<PAGE>

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

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

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

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

Dated:  September 11, 2000

                                    NATURAL WONDERS, INC.

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

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

                                      -17-
<PAGE>

                                 EXERCISE NOTICE

                 (To be executed only upon exercise of Warrant)

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

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

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

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

_________________________________________________________.

Dated:  ____________________

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

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

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

                                      -18-
<PAGE>

                               FORM OF ASSIGNMENT

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

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 10.37

                                                               Debenture No. 003

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)

$50,000                                                     Fremont, California
                                                            September 11, 2000

        NATURAL WONDERS, INC., a Delaware corporation (the "Company"), for value
received, hereby promises to pay to Julius Jensen III 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 Fifty Thousand Dollars
($50,000), 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 $50,000.

<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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