Document:

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                                                                    Exhibit 10.2

                         REGISTRATION RIGHTS AGREEMENT
                         -----------------------------

          This Registration Rights Agreement (this "Agreement") is made and
                                                    ---------
entered into as of May 4, 2000, among Aquatic Cellulose International
Corporation, a Nevada corporation (the "Company"), and the investors signatory
                                        -------
hereto (each such investor is a "Purchaser" and all such investors are,
                                 ---------
collectively, the "Purchasers").
                   ----------

          This Agreement is made pursuant to the Secured Convertible Debenture
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
                 ------------------

          The Company and the Purchasers hereby agree as follows:

     1.   Definitions
          -----------

          Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. All references to $ (dollars) shall be to US$ (United
States dollars). As used in this Agreement, the following terms shall have the
following meanings:

          "Affiliate" means, with respect to any Person, any other Person that
           ---------
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
                                                    -------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
                  ----------    -----------       ----------
correlative to the foregoing.

          "Business Day" means any day except Saturday, Sunday and any day which
           ------------
shall be a federal legal holiday in the United States or Canada or a day on
which banking institutions in the State of New York or the province of British
Columbia, Canada are authorized or required by law or other government actions
to close.

          "Closing Date" shall have the meaning set forth in the Purchase
           ------------
Agreement.

          "Commission" means the Securities and Exchange Commission.
           ----------

          "Common Stock" means the Company's common stock, $.001 par value, or
           ------------
such securities that such stock shall hereafter be reclassified into.

          "Debentures" means the Company's 12% Secured Convertible Debentures in
           ----------
the aggregate principal amount of $1,500,000 issued to the Purchasers in
accordance with the Purchase Agreement.

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          "Effectiveness Date" means the 120/th/ day following the Closing Date.
           ------------------

          "Effectiveness Period" shall have the meaning set forth in Section
           --------------------
2(a).
          "Exchange Act" means the Securities Exchange Act of 1934, as amended.
           ------------

          "Filing Date" means the 60/th/ day following the Closing Date.
           -----------

          "Holder" or "Holders" means the holder or holders, as the case may be,
           ------      -------
from time to time, of Registrable Securities.

          "Indemnified Party" shall have the meaning set forth in Section 5(c).
           -----------------

          "Indemnifying Party" shall have the meaning set forth in Section 5(c).
           ------------------

          "Losses" shall have the meaning set forth in Section 5(a).
           ------

          "Person" means an individual or a corporation, partnership, trust,
           ------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

          "Proceeding" means an action, claim, suit, investigation or proceeding
           ----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

          "Prospectus" means the prospectus included in the Registration
           ----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

          "Registrable Securities" means the shares of Common Stock issuable
           ----------------------
upon conversion in full of the Debentures and exercise in full of the Warrants.

          "Registration Statement" means the registration statement and any
           ----------------------
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.

          "Rule 144" means Rule 144 promulgated by the Commission pursuant to
           --------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

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          "Rule 415" means Rule 415 promulgated by the Commission pursuant to
           --------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

          "Rule 424" means Rule 424 promulgated by the Commission pursuant to
           --------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

          "Securities Act" means the Securities Act of 1933, as amended, and the
           --------------
rules and regulations promulgated thereunder.

          "Special Counsel" means one special counsel to the Holders, for which
           ---------------
the Holders will be reimbursed by the Company pursuant to Section 4.

          "Warrants" shall mean the Common Stock purchase warrants issued to the
           --------
Purchasers pursuant to the Purchase Agreement.

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     2.   Shelf Registration
          ------------------

          (a)  On or prior to the Filing Date, the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering the resale of
all Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-1 (or such
other appropriate form as the Holders may consent for the registration of
Registrable Securities contemplated by this Agreement) and shall contain (except
if otherwise directed by the Holders) the "Plan of Distribution" attached hereto
as  Annex A, and cause the Registration Statement to become effective and remain
    -------
effective as provided herein. The Company shall use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the date which
is two years after the date that such Registration Statement is declared
effective by the Commission or such earlier date when all Registrable Securities
covered by such Registration Statement have been sold or may be sold without
volume restrictions pursuant to Rule 144(k) as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent and the affected Holders (the
"Effectiveness Period"), provided, that the Company shall not be deemed to have
---------------------    --------
used its best efforts to keep the Registration Statement effective during the
Effectiveness Period if it voluntarily takes any action that would result in the
Holders not being able to sell the Registrable Securities covered by such
Registration Statement during the Effectiveness Period, unless such action is
required under applicable law or the Company has filed a post-effective
amendment to the Registration Statement and the Commission has not declared it
effective. Not later than ten days after the Company first meets the
registration eligibility and transaction requirements for the use of Form S-3
(or any successor form) for registration of the offer and sale by the Purchasers
of Registrable Securities, the Company shall file a Registration Statement on
Form S-3 (or any successor form) with respect to the Registrable Securities
covered by the Registration Statement previously filed pursuant to this Section
2(a) or convert such previously filed Registration Statement pursuant to Rule
429 under the 1933 Act and use its best efforts to have such Registration
Statement (or such amendment) declared effective as soon as practicable
thereafter.

          (b)  The initial Registration Statement required to be filed hereunder
shall include (but not be limited to) a number of shares of Common Stock equal
to no less than the sum of (i) 200% of the number of shares of Common Stock
issuable upon conversion in full of the outstanding principal amount of the
Debentures, assuming all interest is paid in shares of Common Stock, that the
Debentures remain outstanding for one year, and that such conversion occurred at
a price equal to the lesser of (a) $0.60 and (b) 70% of the average of the
lowest three inter-day prices (which need not occur on consecutive Trading Days)
during the ten Trading Days immediately preceding the Closing Date and (ii) the
number of shares of Common Stock issuable upon exercise in full of the Warrants.

          (c)  If (a) the initial Registration Statement is not filed on or
prior to the Filing Date (if the Company files such Registration Statement
without affording the Holder the opportunity to review and comment on the same
as required by Section 3(a) hereof, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the

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Commission a request for acceleration in accordance with Rule 461 promulgated
under the Securities Act, within five days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not subject to further review,
or (c) the initial Registration Statement filed hereunder is not declared
effective by the Commission on or prior to the Effectiveness Date, or (d) after
a Registration Statement is filed with and declared effective by the Commission,
such Registration Statement ceases to be effective as to all Registrable
Securities at any time prior to the expiration of the Effectiveness Period
without being succeeded within ten Business Days by an amendment to such
Registration Statement or by a subsequent Registration Statement filed with and
declared effective by the Commission, or (e) the Common Stock shall not be
quoted on the OTC Bulletin Board or shall be suspended or delisted from trading
on the New York Stock Exchange, American Stock Exchange, the Nasdaq National
Market or the Nasdaq SmallCap Market (each, a "Subsequent Market") for more than
                                               -----------------
three days (which need not be consecutive days), or (f) the conversion rights of
the Holders pursuant to the Debentures are suspended for any reason, or (g) an
amendment to a Registration Statement is not filed by the Company with the
Commission within ten Business Days of the Commission's notifying the Company
that such amendment is required in order for such Registration Statement to be
declared effective (any such failure or breach being referred to as an "Event,"
                                                                        -----
and for purposes of clauses (a), (c), (f) the date on which such Event occurs,
or for purposes of clause (b) the date on which such five day period is
exceeded, or for purposes of clauses (d) and (g) the date which such 10 Business
Day-period is exceeded, or for purposes of clause (e) the date on which such
three day-period is exceeded, being referred to as "Event Date"), then, on the
                                                    ----------
Event Date and each monthly anniversary thereof, until the applicable Event is
cured, the Company shall pay to each Holder 2.0% of the purchase price paid by
such Holder pursuant to the Purchase Agreement, in cash or at the Holder's
option, in stock as liquidated damages and not as a penalty. If the Holder
elects to receive such liquidated damages in stock, then the number of shares
issuable to such Holder shall be determined based upon a price which is equal to
the average of the three lowest inter-day prices (as defined in the Debenture)
during the ten Trading Days immediately preceding the Event Date or the monthly
anniversary thereof. If the Company fails to pay any liquidated damages pursuant
to this Section in full within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the Holder,
accruing daily from the date such liquidated damages first were incurred until
such amounts, plus all such interest thereon, are paid in full. The liquidated
damages pursuant to the terms hereof shall apply on a pro-rata basis for any
portion of a month prior to the cure of an Event.

     3.   Registration Procedures
          -----------------------

          In connection with the Company's registration obligations hereunder,
the Company shall:

          (a)  Not less than five Business Days prior to the filing of the
Registration Statement or any related Prospectus (other than a Prospectus filed
pursuant to Rule 424) and not less than two Business Days prior to the filing of
any amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall, (i) furnish to the Holders and their Special Counsel copies of all such
documents

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proposed to be filed, which documents (other than those incorporated or deemed
to be incorporated by reference) will be subject to the review of such Holders
and their Special Counsel, and (ii) cause its officers and directors, counsel
and independent certified public accountants to respond to such inquiries as
shall be necessary, in the reasonable opinion of respective counsel to, conduct
a reasonable investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities and their Special Counsel shall reasonably object.

          (b)    (i)  Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible, and in any event within ten Business
Days, to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and as promptly as reasonably
possible provide the Holders true and complete copies of all correspondence from
and to the Commission relating to the Registration Statement; and (iv) comply in
all material respects with the provisions of the Securities Act and the Exchange
Act with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.

          (c)    File additional Registration Statements if the number of
Registrable Securities at any time exceeds 85% of the number of shares of Common
Stock then registered in a Registration Statement. The Company shall have twenty
days to file and ninety days to have declared effective such additional
Registration Statements after notice of such requirement which is given by the
Holders.

          (d)    Notify the Holders of Registrable Securities to be sold and
their Special Counsel as promptly as reasonably possible (and, in the case of
(i)(A) below, not less than five Business Days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders); and (C) with respect to the Registration Statement or any post-
effective amendment, when the same has become effective; (ii) of any request by
the Commission or any other Federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
pur-

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pose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.

          (e)    Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.

          (f)    Furnish to each Holder and their Special Counsel, without
charge, at least one conformed copy of each Registration Statement and each
amendment thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference, and all exhibits
to the extent requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents with the
Commission.

          (g)    Promptly deliver to each Holder and their Special Counsel,
without charge, as many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as such Persons may
reasonably request. The Company hereby consents to the use of such Prospectus
and each amendment or supplement thereto by each of the selling Holders in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto.

          (h)    Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders and
their Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder requests in writing, to
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, that the
                                                            --------
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.

          (i)    Cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be delivered
to a transferee pursuant to a

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Registration Statement, which certificates shall be free, to the extent
permitted by the Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in such
names as any such Holders may request.

          (j)    Upon the occurrence of any event contemplated by Section
3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.

          (k)    Comply with all applicable rules and regulations of the
Commission.

          4.     Registration Expenses.   All fees and expenses incident to the
                 ---------------------
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with any Subsequent Market on which the Common Stock is then
listed for trading, and (B) in compliance with state securities or Blue Sky laws
(including, without limitation, fees and disbursements of counsel for the
Holders in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the Holders of
a majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company
and Special Counsel for the Holders, (v) Securities Act liability insurance, if
the Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit and the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.

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     5.   Indemnification
          ---------------

          (a) Indemnification by the Company.  The Company shall,
              ------------------------------
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
                ------
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that (1) such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
or (2) in the case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding of which the Company is
aware in connection with the transactions contemplated by this Agreement.

          (b) Indemnification by Holders.  Each Holder shall, severally and not
              --------------------------
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was

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reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 6(e). In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.

          (c)  Conduct of Indemnification Proceedings. If any Proceeding shall
               --------------------------------------
be brought or asserted against any Person entitled to indemnity hereunder (an

"Indemnified Party"), such Indemnified Party shall promptly notify the Person
------------------
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
                                    ------------------
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.

          An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.

          All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnifica-

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tion hereunder; provided, that the Indemnifying Party may require such
                --------
Indemnified Party to undertake to reimburse all such fees and expenses to the
extent it is finally judicially determined that such Indemnified Party is not
entitled to indemnification hereunder).

          (d)  Contribution.  If a claim for indemnification under Section 5(a)
               ------------
or 5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.

          The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
                                                              --- ----
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.

          The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.

                                       11
<PAGE>

     6.   Miscellaneous
          -------------

          (a)  Remedies.  In the event of a breach by the Company or by a
               --------
Holder,of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.

          (b)  No Inconsistent Agreements.  Neither the Company nor any of its
               --------------------------
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specified in Schedule 6(b)
                                                            -------------
hereto, neither the Company nor any of its subsidiaries has previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person.

          (c)  No Piggyback on Registrations.  Except as and to the extent
               -----------------------------
specified in Schedule 6(b) hereto, neither the Company nor any of its security
             -------------
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.

          (d)  Compliance.  Each Holder covenants and agrees that it will comply
               ----------
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.

          (e)  Beneficial Ownership of Common Stock.  The Company may require
               ------------------------------------
each selling Holder to furnish to the Company a certified statement as to the
number of shares of Common Stock beneficially owned by such Holder and, if
requested by the Commission, the controlling person thereof.

          (f)  Discontinued Disposition.  Each Holder agrees by its acquisition
               ------------------------
of such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Sections 3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(j), or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
                         ------
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.

                                       12
<PAGE>

          (g)  Piggy-Back Registrations.  If at any time during the
               ------------------------
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered.

          (h)  Amendments and Waivers.  The provisions of this Agreement,
               ----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
                                                    --------  -------
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.

          (i)  Notices.  Any and all notices or other communications or
               -------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 6:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:

     If to the Company:    Aquatic Cellulose International Corporation
                             3704 32/nd/ Street, Suite 301
                             Vernon, B.C.
                             Canada VIT 5N6
                             Facsimile No.: (250) 558-5470
                             Attn:  Chief Financial Officer

     With copies to:            Owen M. Naccarato, Esq.
                             19600 Fairchild, Suite 260
                             Irvine, CA 92612

                                       13
<PAGE>

                             Facsimile No.: (949) 851-9261

     If to a Purchaser:  To the address set forth under such Purchaser's name on
                         the signature pages hereto.

     If to any other Person who is then the registered Holder:

                         To the address of such Holder as it appears in the
                         stock transfer books of the Company

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

          (j)  Successors and Assigns.  This Agreement shall inure to the
               ----------------------
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.

          (k)  Counterparts.  This Agreement may be executed in any number of
               ------------
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.

          (l)  Governing Law.   All questions concerning the construction,
               -------------
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.

          (m)  Cumulative Remedies.  The remedies provided herein are cumulative
               -------------------
and not exclusive of any remedies provided by law.

                                       14
<PAGE>

          (n)  Severability. If any term, provision, covenant or restriction of
               ------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

          (o)  Headings.  The headings in this Agreement are for convenience of
               --------
reference only and shall not limit or otherwise affect the meaning hereof.

          (p)  Shares Held by the Company and its Affiliates.  Whenever the
               ---------------------------------------------
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.

          (q)  Independent Nature of Purchasers' Obligations and Rights.  The
               --------------------------------------------------------
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
     SIGNATURE PAGES TO FOLLOW]

                                       15
<PAGE>

          IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

                    AQUATIC CELLULOSE
                    INTERNATIONAL CORPORATION

                    By:_________________________________
                      Name:
                      Title:

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
     SIGNATURE PAGES OF PURCHASER TO FOLLOW]

                                       16
<PAGE>

                    AJW PARTNERS, LLC
                    By: SMS Group, LLC

                    By:____________________________________
                          Name: Corey S. Ribotsky
                          Title:

                    Address for Notice:

                    AJW Partners, LLC
                    155 First Street
                    Suite B
                    Mineola, New York 11501
                    Facsimile No.:  (516) 739-7115

                    With copies to:
                    Robinson Silverman Pearce Aronsohn & Berman LLP
                    1290 Avenue of the Americas
                    New York, NY  10104
                    Facsimile No.:  (212) 541-4630 and (212) 541-1432
                    Attn: Eric L. Cohen, Esq.

                                       17
<PAGE>

                    NEW MILLENNIUM CAPITAL PARTNERS II, LLC
                    By: First Street Manager II, LLC

                    By____________________________________
                       Name: Corey S. Ribotsky
                       Title:

                    Address for Notice:

                    New Millennium Capital Partners II, LLC
                    155 First Street
                    Suite B
                    Mineola, New York 11501
                    Facsimile No.:  (516) 739-7115

                    With copies to:
                    Robinson Silverman Pearce Aronsohn & Berman LLP
                    1290 Avenue of the Americas
                    New York, NY  10104
                    Facsimile No.:  (212) 541-4630 and (212) 541-1432
                    Attn: Eric L. Cohen, Esq.

                                       18
<PAGE>

                             Annex A
                             -------

                             Plan of Distribution
                             --------------------

     The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:

 .    ordinary brokerage transactions and transactions in which the broker-dealer
     solicits purchasers;

 .    block trades in which the broker-dealer will attempt to sell the shares as
     agent but may position and resell a portion of the block as principal to
     facilitate the transaction;

 .    purchases by a broker-dealer as principal and resale by the broker-dealer
     for its account;

 .    an exchange distribution in accordance with the rules of the applicable
     exchange;

 .    privately negotiated transactions;

 .    Short Sales;

 .    broker-dealers may agree with the Selling Stockholders to sell a specified
     number of such shares at a stipulated price per share;

 .    a combination of any such methods of sale; and

 .    any other method permitted pursuant to applicable law.

     The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

     The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.

     Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling
<PAGE>

Stockholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The Selling
Stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.

     The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.

     The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.<PAGE>

                                                                    Exhibit 10.3

NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.

No. 1                                                           $250,000

                  AQUATIC CELLULOSE INTERNATIONAL CORPORATION
                           12% CONVERTIBLE DEBENTURE
                                DUE MAY 4, 2001

     THIS DEBENTURE is one of a series of duly authorized and issued debentures
of Aquatic Cellulose International Corporation, a Nevada corporation, having a
principal place of business at 3704 32/nd/ Street, Suite 301, Vernon, B.C.,
Canada VIT 5N6 (the "Company"), designated as its 12% Convertible Debentures,
                     -------
due May 4, 2001, in the aggregate principal amount of One Million Five  Hundred
Thousand Dollars ($1,500,000) (the "Debentures").  All references to $ (dollars)
                                    ----------
shall be to US$ (United States dollars).

     FOR VALUE RECEIVED, the Company promises to pay to AJW Partners, LLC, or
its registered assigns (the "Holder"), the principal sum of Two Hundred and
                             ------
Fifty Thousand Dollars ($250,000), on May 4, 2001 or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the

"Maturity Date") and to pay interest to the Holder on the aggregate unconverted
 -------------
and then outstanding principal amount of this Debenture at the rate of 12% per
annum, payable on a quarterly basis on March 31, June 30, September 30 and
December 31 of each year while such Debentures are outstanding (each an
"Interest Payment Date") and on each Conversion Date (as defined herein)for such
 ---------------------
principal amount, commencing on the earlier to occur of a Conversion Date for
such principal amount and June 30, 2000, in cash or shares of Common Stock (as
defined in Section 6).  Subject to the terms and conditions herein, the decision
whether to pay interest hereunder in shares of Common Stock or cash shall be at
the discretion of the Company.  Not less than ten Trading Days (as defined in
Section 6) prior to each Conversion Date, the Company shall provide the Holder
with written notice of its election to pay interest hereunder either in cash or
shares of Common Stock pursuant to the terms of Section 4(a)(i) (the Company may
indicate in such notice that the election contained in such
<PAGE>

notice shall continue for later periods until revised). Failure to timely
provide such written notice shall be deemed an election by the Company to pay
the interest on such Conversion Date in shares of Common Stock pursuant to the
terms of Section 4(a)(i). If interest is paid in shares of Common Stock, the
number of shares of Common Stock issuable on account of such interest shall
equal the cash amount of such interest on such Interest Payment Date divided by
the Conversion Price (as defined below) on such date. Interest shall be
calculated on the basis on a 360-day year and shall accrue daily commencing on
the Original Issue Date (as defined in Section 6) until payment in full of the
principal sum, together with all accrued and unpaid interest and other amounts
which may become due hereunder, has been made. Interest hereunder will be paid
to the Person (as defined in Section 6) in whose name this Debenture is
registered on the records of the Company regarding registration and transfers of
Debentures (the "Debenture Register"). All overdue accrued and unpaid interest
                 ------------------
to be paid in cash hereunder shall entail a late fee at the rate of 15% per
annum (or such lower maximum amount of interest permitted to be charged under
applicable law) (to accrue daily, from the date such interest is due hereunder
through and including the date of payment), payable in cash.

     This Debenture is subject to the following additional provisions:

     Section 1.  This Debenture is exchangeable for an equal aggregate principal
     ----------
amount of Debentures of different authorized denominations, as requested by the
Holder surrendering the same.  No service charge will be made for such
registration of transfer or exchange.

     Section 2.  This Debenture has been issued subject to certain investment
     ----------
representations of the original Holder set forth in the Purchase Agreement (as
defined in Section 6) and may be transferred or exchanged only in compliance
with the Purchase Agreement.  Prior to due presentment to the Company for
transfer of this Debenture, the Company and any agent of the Company may treat
the Person (as defined in Section 6) in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

     Section 3.  Events of Default.
     ----------  -----------------

             (a) "Event of Default", wherever used herein, means any one of the
                  ----------------
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):

                 (i)   any default in the payment of the principal of, interest
     on or liquidated damages in respect of, any Debentures, free of any claim
     of subordination, as and when the same shall become due and payable
     (whether on a Conversion Date or the Maturity Date or by acceleration or
     otherwise);

                                      -2-
<PAGE>

                 (ii)  the Company shall fail to observe or perform any other
     covenant, agreement or warranty contained in, or otherwise commit any
     breach of any of the  Transaction Documents (as defined in Section 6), and
     such failure or breach shall not have been remedied within five days after
     the date on which notice of such failure or breach shall have been given;

                 (iii) the Company or any of its subsidiaries shall commence, or
     there shall be commenced against the Company or any such subsidiary a case
     under any applicable bankruptcy or insolvency laws as now or hereafter in
     effect or any successor thereto, or the Company commences any other
     proceeding under any reorganization, arrangement, adjustment of debt,
     relief of debtors, dissolution, insolvency or liquidation or similar law of
     any jurisdiction whether now or hereafter in effect relating to the Company
     or any subsidiary thereof or there is commenced against the Company or any
     subsidiary thereof any such bankruptcy, insolvency or other proceeding
     which remains undismissed for a period of 60 days; or the Company or any
     subsidiary thereof is adjudicated insolvent or bankrupt; or any order of
     relief or other order approving any such case or proceeding is entered; or
     the Company or any subsidiary thereof suffers any appointment of any
     custodian or the like for it or any substantial part of its property which
     continues undischarged or unstayed for a period of 60 days; or the Company
     or any subsidiary thereof makes a general assignment for the benefit of
     creditors; or the Company shall fail to pay, or shall state that it is
     unable to pay, or shall be unable to pay, its debts generally as they
     become due; or the Company or any subsidiary thereof shall call a meeting
     of its creditors with a view to arranging a composition, adjustment or
     restructuring of its debts; or the Company or any subsidiary thereof shall
     by any act or failure to act expressly indicate its consent to, approval of
     or acquiescence in any of the foregoing; or any corporate or other action
     is taken by the Company or any subsidiary thereof for the purpose of
     effecting any of the foregoing;

                 (iv)  the Company shall default in any of its obligations under
     any other Debenture or any mortgage, credit agreement or other facility,
     indenture agreement, factoring agreement or other instrument under which
     there may be issued, or by which there may be secured or evidenced any
     indebtedness for borrowed money or money due under any long term leasing or
     factoring arrangement of the Company in an amount exceeding fifty thousand
     dollars ($50,000), whether such indebtedness now exists or shall hereafter
     be created and such default shall result in such indebtedness becoming or
     being declared due and payable prior to the date on which it would
     otherwise become due and payable;

                 (v)   the Common Stock shall not be eligible for quotation on
     and quoted for trading on the OTC Bulletin Board ("OTC') or listed for
                                   ---
     trading on the Nasdaq SmallCap Market, New York Stock Exchange, American
     Stock Exchange or the Nasdaq National Market (each, a "Subsequent Market")
                                                            -----------------
     and shall not again be eligible for and quoted or listed for trading
     thereon within five Trading Days;

                                      -3-
<PAGE>

                 (vi)   the Company shall be a party to any Change of Control
     Transaction (as defined in Section 6), shall agree to sell or dispose all
     or in excess of 33% of its assets in one or more transactions (whether or
     not such sale would constitute a Change of Control Transaction), or shall
     redeem or repurchase more than a de minimis number of shares of Common
     Stock or other equity securities of the Company (other than redemptions of
     Underlying Shares (as defined in Section 6));

                 (vii)  an Underlying Shares Registration Statement (as defined
     in Section 6) shall not have been declared effective by the Commission (as
     defined in Section 6) on or prior to the 120/th/ day after the Original
     Issue Date;

                 (viii) if, during the Effectiveness Period (as defined in the
     Registration Rights Agreement (as defined in Section 8)), the effectiveness
     of the Underlying Shares Registration Statement lapses for any reason or
     the Holder shall not be permitted to resell Registrable Securities (as
     defined in the Registration Rights Agreement) under the Underlying Shares
     Registration Statement, in either case, for more than five consecutive
     Trading Days or an aggregate of eight Trading Days (which need not be
     consecutive Trading Days);

                 (ix)   an Event (as defined in the Registration Rights
     Agreement) shall not have been cured to the satisfaction of the Holder
     prior to the expiration of thirty days from the Event Date (as defined in
     the Registration Rights Agreement) relating thereto (other than an Event
     resulting from a failure of an Underlying Shares Registration Statement to
     be declared effective by the Commission on or prior to the 120/th/ day
     after the Original Issue Date, which shall be covered by Section
     3(a)(vii));

                 (x)    the Company shall fail for any reason to deliver
     certificates to a Holder prior to the third Trading Day after a Conversion
     Date pursuant to and in accordance with Section 4(b) or the Company shall
     provide notice to the Holder, including by way of public announcement, at
     any time, of its intention not to comply with requests for conversions of
     any Debentures in accordance with the terms hereof;

                 (xi)   the Company shall fail for any reason to deliver the
     payment in cash pursuant to a Buy-In (as defined herein) within five days
     after notice is deemed delivered hereunder; or

                 (xii)  the Company shall fail for any reason to legally effect
     its change of name as required by the Purchase Agreement within sixty days
     following the Original Issue Date; or

                 (xiii) there shall have occurred a breach of the Pledge
Agreement which shall not have been remedied prior to the tenth day following
notice thereof.

           (b)   During the time that any portion of this Debenture remains
outstanding, if any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and,

                                      -4-
<PAGE>

at the Holder's option, all other Debentures then held by such Holder), together
with interest and other amounts owing in respect thereof, to the date of
acceleration shall become, immediately due and payable in cash. The aggregate
amount payable upon an Event of Default shall be equal to the sum of (i) the
Mandatory Prepayment Amount (as defined in Section 6) plus (ii) the product of
(A) the number of Underlying Shares issued in respect of conversions hereunder
within thirty (30) days of the date of a declaration of an Event of Default and
then held by the Holder and (B) the Per Share Market Value (as defined in
Section 6) on the date prepayment is due or the date the full prepayment price
is paid, whichever is greater. Interest shall accrue on the prepayment amount
hereunder from the seventh day after such amount is due (being the date of an
Event of Default) through the date of prepayment in full thereof at the rate of
15% per annum (or such lesser maximum amount that is permitted to be paid by
applicable law), to accrue daily from the date such payment is due hereunder
through and including the date of payment. All Debentures and Underlying Shares
for which the full prepayment price hereunder shall have been paid in accordance
herewith shall promptly be surrendered to or as directed by the Company. The
Holder need not provide and the Company hereby waives any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such
declaration may be rescinded and annulled by Holder at any time prior to payment
hereunder. No such rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon.

     Section 4.  Conversion.
     ----------  ----------

            (a)  (i)   Conversion at Option of Holder. (A) This Debenture shall
                       ------------------------------
be convertible into shares of Common Stock  at the option of the Holder, in
whole or in part at any time and from time to time, after the Original Issue
Date (subject to the limitations on conversion set forth in Section 4(a)(iii)
hereof).   The number of shares of Common Stock  issuable upon a conversion
hereunder shall be determined by adding the sum of (i) the quotient obtained by
dividing (x) the outstanding principal amount of this Debenture to be converted
and (y) the Conversion Price (as defined herein), and (ii) the amount equal to
(I) the product of (x) the outstanding principal amount of this Debenture to be
converted and (y) the product of (1) the quotient obtained by dividing .12 by
360 and (2) the number of days for which such principal amount was outstanding,
divided by (II) the Conversion Price on the Conversion Date, provided, that if
                                                             --------
the Company shall have timely elected to pay the interest due on a Conversion
Date in cash pursuant to the terms hereof, subsection (ii) shall not be used in
the calculation of the number of shares of Common Stock  issuable upon a
conversion hereunder.

                 (B)   Notwithstanding anything to the contrary contained
herein, if on any Conversion Date:

                 (1)   the number of shares of Common Stock at the time
     authorized, unissued and unreserved for all purposes, or held as treasury
     stock, is insufficient to pay interest hereunder in shares of Common Stock;

                                      -5-
<PAGE>

                 (2)   after the Interest Effectiveness Date (as defined in
     Section 6) such shares of Common Stock (x) are not registered for resale
     pursuant to an effective Underlying Shares Registration Statement and (y)
     may not be sold without volume restrictions pursuant to Rule 144(k)
     promulgated under the Securities Act (as defined in Section 6), as
     determined by counsel to the Company pursuant to a written opinion letter,
     addressed to the Company's transfer agent in the form and substance
     acceptable to the applicable Holder and such transfer agent (if the shares
     of Common Stock are permitted by the Holder to be delivered under this
     clause (2) prior to the Effectiveness Date (as defined in the Registration
     Rights Agreement) and thereafter an Underlying Shares Registration
     Statement shall be declared effective by the Commission, the Company shall,
     within five Trading Days after the date of such declaration of
     effectiveness, exchange such shares for shares of Common Stock that are
     free of restrictive legends of any kind);

                 (3)   the Common Stock is not listed or quoted for trading on
     the OTC or on a Subsequent Market;

                 (4)   the Company has failed to timely satisfy its conversion
     obligations hereunder; or

                 (5)   the issuance of such shares of Common Stock would result
     in a violation of Sections 4(a)(iii),

                 then, at the option of the Holder, the Company, in lieu of
delivering shares of Common Stock pursuant to Section 4(a)(i)(A)(ii), shall
deliver, within three Trading Days of each applicable Conversion Date, an amount
in cash equal to the product of (a) the outstanding principal amount of the
Debentures to be converted on such Conversion Date and (b) the product of (x)
the quotient obtained by dividing .12 by 360 and (y) the number of days for
which such principal amount was outstanding.

                 (C)   The Holder shall effect conversions by surrendering the
Debentures (or such portions thereof) to be converted, together with the form of
conversion notice attached hereto as Exhibit A (a "Conversion Notice") to the
                                     ---------     -----------------
Company. Each Conversion Notice shall specify the principal amount of Debentures
to be converted and the date on which such conversion is to be effected, which
date may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (a "Conversion Date"). If no Conversion Date is specified in
                        ---------------
a Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.

                                      -6-
<PAGE>

               (ii)   Automatic Conversion.  Subject to the provisions in this
                      --------------------
paragraph, the  principal amount of Debentures for which conversion notices have
not previously been received or for which prepayment has not been made or
required hereunder shall be automatically converted on the first anniversary of
the Original Issue Date (the "Automatic Conversion Date") pursuant to Section
                              -------------------------
4(a)(i), at the Conversion Price on such date.  The conversion contemplated by
this paragraph shall not occur if (a) (1) an Underlying Securities Registration
Statement is not then effective that names the Holder as a selling stockholder
thereunder and (2) the Holder is not permitted to resell Underlying Shares
pursuant to Rule 144(k) promulgated under the Securities Act, without volume
restrictions, as evidenced by an opinion letter of counsel acceptable to the
Holder and the transfer agent for the Common Stock; or (b) there are not
sufficient shares of Common Stock authorized and reserved for issuance upon such
conversion.  Notwithstanding anything herein to the contrary, the Automatic
Conversion Date shall be extended (on a day-for-day basis) for any Trading Days
that the Holder is unable to resell Underlying Shares due to (a) the Common
Stock not being listed or granted for trading on the OTC or any Subsequent
Market, (b) the failure of an Underlying Securities Registration Statement to be
declared effective by the Commission or, if so declared, to remain effective
during the Effectiveness Period as to all Underlying Shares, or (c) the
suspension of the Holder's right  to resell Underlying Shares thereunder.
Notwithstanding anything to the contrary contained herein, a conversion pursuant
to this Section shall not be subject to the provisions of Section 4(a)(iii).

               (iii)  Certain Conversion Restrictions.
                      --------------------------------

                      (A)  A Holder may not convert Debentures or receive shares
of Common Stock as payment of interest hereunder to the extent such conversion
or receipt of such interest payment would result in the Holder, together with
any affiliate thereof, beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act and the rules promulgated thereunder) in
excess of 4.999% of the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of, and payment of interest on, the
Debentures held by such Holder after application of this Section. Since the
Holder will not be obligated to report to the Company the number of shares of
Common Stock it may hold at the time of a conversion hereunder, unless the
conversion at issue would result in the issuance of shares of Common Stock in
excess of 4.999% of the then outstanding shares of Common Stock without regard
to any other shares which may be beneficially owned by the Holder or an
affiliate thereof, the Holder shall have the authority and obligation to
determine whether the restriction contained in this Section will limit any
particular conversion hereunder and to the extent that the Holder determines
that the limitation contained in this Section applies, the determination of
which portion of the principal amount of Debentures are convertible shall be the
responsibility and obligation of the Holder. If the Holder has delivered a
Conversion Notice for a principal amount of Debentures that, without regard to
any other shares that the Holder or its affiliates may beneficially own, would
result in the issuance in excess of the permitted amount hereunder, the Company
shall notify the Holder of this fact and shall honor the conversion for the
maximum principal amount permitted to be converted on such Conversion Date in
accordance with the periods described in Section 4(b) and, at the option of the
Holder, either retain any principal

                                      -7-
<PAGE>

amount tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess principal amount to the Holder. The
provisions of this Section may be waived by a Holder (but only as to itself and
not to any other Holder) upon not less than 61 days prior notice to the Company.
Other Holders shall be unaffected by any such waiver.

               (B)    A Holder may not convert Debentures or receive shares of
Common Stock as payment of interest hereunder to the extent such conversion or
receipt of such interest payment would result in the Holder, together with any
affiliate thereof, beneficially owning (as determined in accordance with Section
13(d) of the Exchange Act and the rules promulgated thereunder) in excess of
9.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of, and payment of interest on, the Debentures
held by such Holder after application of this Section. Since the Holder will not
be obligated to report to the Company the number of shares of Common Stock it
may hold at the time of a conversion hereunder, unless the conversion at issue
would result in the issuance of shares of Common Stock in excess of 9.999% of
the then outstanding shares of Common Stock without regard to any other shares
which may be beneficially owned by the Holder or an affiliate thereof, the
Holder shall have the authority and obligation to determine whether the
restriction contained in this Section will limit any particular conversion
hereunder and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of Debentures are convertible shall be the responsibility and
obligation of the Holder. If the Holder has delivered a Conversion Notice for a
principal amount of Debentures that, without regard to any other shares that the
Holder or its affiliates may beneficially own, would result in the issuance in
excess of the permitted amount hereunder, the Company shall notify the Holder of
this fact and shall honor the conversion for the maximum principal amount
permitted to be converted on such Conversion Date in accordance with the periods
described in Section 4(b) and, at the option of the Holder, either retain any
principal amount tendered for conversion in excess of the permitted amount
hereunder for future conversions or return such excess principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as to
itself and not to any other Holder) upon not less than 61 days prior notice to
the Company. Other Holders shall be unaffected by any such waiver.

          (b)  (i)  Not later than five Trading Days after any Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the conversion of Debentures (subject
to the limitations set forth in Section 4(a)(iii) hereof), (ii) Debentures in a
principal amount equal to the principal amount of Debentures not converted, and
(iii) a bank check in the amount of accrued and unpaid interest (if the Company
has timely elected or is required to pay accrued interest in cash), provided,
                                                                    --------
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon conversion of the principal amount of
Debentures until Debentures are delivered for conversion to the Company, or the
Holder notifies the Company that such Debentures have been lost, stolen or
destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith.  The

                                      -8-
<PAGE>

Company shall, upon request of the Holder, if available, use its best efforts to
deliver any certificate or certificates required to be delivered by the Company
under this Section electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions. If in the
case of any Conversion Notice such certificate or certificates are not delivered
to or as directed by the applicable Holder by the fifth Trading Day after a
Conversion Date, the Holder shall be entitled by written notice to the Company
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the principal amount of
Debentures tendered for conversion.

               (ii)   If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 4(b)(i) by the fifth Trading Day
after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $2,500 for each Trading Day after such
fifth Trading Day until such certificates are delivered. Nothing herein shall
limit a Holder's right to pursue actual damages or declare an Event of Default
pursuant to Section 3 herein for the Company's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages pursuant to any other
Section hereof or under applicable law. Further, if the Company shall not have
delivered any cash due in respect of conversions of Debentures or as payment of
interest thereon by the third Trading Day after the Conversion Date, the Holder
may, by notice to the Company, require the Company to issue shares of Common
Stock pursuant to Section 4(c), except that for such purpose the Conversion
Price applicable thereto shall be the lesser of the Conversion Price on the
Conversion Date and the Conversion Price on the date of such Holder demand. Any
such shares will be subject to the provision of this Section.

               (iii)  In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 4(b)(i) by the fifth Trading Day after the Conversion Date,
and if after such fifth Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
such Holder of the Underlying Shares which the Holder anticipated receiving upon
such conversion (a "Buy-In"), then the Company shall (A) pay in cash to the
                    ------
Holder (in addition to any remedies available to or elected by the Holder) the
amount by which (x) the Holder's total purchase price (including brokerage
commissions, if any) for the Common Stock so purchased exceeds (y) the product
of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the market
price of the Common Stock at the time of the sale giving rise to such purchase
obligation and (B) at the option of the Holder, either reissue Debentures in
principal amount equal to the principal amount of the attempted conversion or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its delivery requirements under
Section 4(b)(i). For example, if the Holder purchases Common Stock having a
total purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with

                                      -9-
<PAGE>

respect to which the market price of the Underlying Shares on the date of
conversion was a total of $10,000 under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In. Notwithstanding anything contained herein to
the contrary, if a Holder requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay such
Holder liquidated damages under Section 4(b)(ii) in respect of the certificates
resulting in such Buy-In.

          (c)  (i)  The conversion price (the "Conversion Price") in effect on
                                                 ----------------
any Conversion Date shall be the lesser of (1) $0.60 (the "Initial Conversion
                                                           ------------------
Price"), and (2) 70% of the average of the lowest three inter-day prices (which
-----
need not occur on consecutive Trading Days) during the twenty Trading Days
immediately preceding the applicable Conversion Date (which may include Trading
Days prior to the Original Issue Date), provided, that such twenty Trading Day
                                        --------
period shall be extended for the number of Trading Days during such period in
which (A) trading in the Common Stock is suspended by the OTC or a Subsequent
Market on which the Common Stock is then listed, or (B) after the date declared
effective by the Commission, the Underlying Shares Registration Statement is
either not effective, the Prospectus included in the Underlying Shares
Registration Statement may not be used by the Holder for the resale of
Underlying Shares.

                    (ii)  If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then the Initial
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.

                    (iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Value at the
record date mentioned below, then the Conversion Price shall be multiplied by a
fraction, of which the denominator shall be the number of shares of the

                                      -10-
<PAGE>

Common Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However, upon
the expiration of any such right, option or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Conversion
Price pursuant to this Section, if any such right, option or warrant shall
expire and shall not have been exercised, the Conversion Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Conversion Price made pursuant to the provisions of
this Section after the issuance of such rights or warrants) had the adjustment
of the Conversion Price made upon the issuance of such rights, options or
warrants been made on the basis of offering for subscription or purchase only
that number of shares of the Common Stock actually purchased upon the exercise
of such rights, options or warrants actually exercised.

              (iv)  If the Company or any subsidiary thereof, as applicable with
respect to Common Stock Equivalents (as defined below), at any time while
Debentures are outstanding shall issue either (i) shares of Common Stock at a
price per share less than the Conversion Price (the "Issuance Price") or (ii)
                                                     --------------
rights, warrants, options or other securities or debt that are convertible into
or exchangeable for shares of Common Stock ("Common Stock Equivalents"),
                                             ------------------------
entitling any Person to acquire shares of Common Stock at an Issuance Price less
than the Conversion Price (if the holder of the Common Stock Equivalent so
issued shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or otherwise
be entitled to receive shares of Common Stock at a conversion or exercise price
less than the Conversion Price, such issuance shall be deemed to have occurred
for less than the Conversion Price), then, the Conversion Price shall be reduced
to the Issuance Price.  Such adjustment shall be made whenever Common Stock or
Common Stock Equivalents are issued at a price below the Conversion Price.
However, upon the expiration of any Common Stock Equivalents the issuance of
which resulted in an adjustment in the Conversion Price pursuant to this
Section, if any such Common Stock Equivalents shall expire and shall not have
been exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such Common Stock Equivalents) had the adjustment of the Conversion
Price made upon the issuance of such Common Stock Equivalents been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such Common Stock
Equivalents actually exercised.

              (v)   If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Conversion
Price at which Debentures shall thereafter be convertible shall be

                                      -11-
<PAGE>

determined by multiplying the Conversion Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

               (vi)    In case of any reclassification of the Common Stock or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, the Holders shall have the right
thereafter to, at their option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of the Common Stock following such reclassification or share exchange,
and the Holders of the Debentures shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay the aggregate of its outstanding principal amount of
Debentures, plus all interest and other amounts due and payable thereon, at a
price determined in accordance with Section 3(b). The entire prepayment price
shall be paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.

               (vii)   All calculations under this Section 4 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.  No
adjustments in either the Conversion Price or the Initial Conversion Price shall
be required if such adjustment is less than $0.01, provided, however, that any
                                                   --------
adjustments which by reason of this Section are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.

               (viii)  Whenever either the Initial Conversion Price or the
Conversion Price is adjusted pursuant to any of Section 4(c)(ii) - (v), the
Company shall promptly mail to each Holder a notice setting forth the Initial
Conversion Price or Conversion Price (as applicable) after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.

               (ix)    If (A) the Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock; (C) the
Company shall authorize the granting

                                      -12-
<PAGE>

to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection with
any reclassification of the Common Stock, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property; (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company; then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of conversion of the
Debentures, and shall cause to be mailed to the Holders at their last addresses
as they shall appear upon the stock books of the Company, at least 20 calendar
days prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of the Common Stock of record
to be entitled to such dividend, distributions, redemption, rights or warrants
are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to exchange their shares of the Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange,
provided, that the failure to mail such notice or any defect therein or in the
--------
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice. Holders are entitled to convert Debentures
during the 20-day period commencing the date of such notice to the effective
date of the event triggering such notice.

               (x)   In case of any (1) merger or consolidation of the Company
with or into another Person, or (2) sale by the Company of more than one-half of
the assets of the Company (on an as valued basis) in one or a series of related
transactions, a Holder shall have the right to (A) if permitted under Section
3(b) hereof, exercise its rights of prepayment under Section 3(b) with respect
to such event, (B) convert its aggregate principal amount of Debentures then
outstanding into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and such Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the shares of Common Stock into which such aggregate principal
amount of Debentures could have been converted immediately prior to such merger,
consolidation or sales would have been entitled, or (C) in the case of a merger
or consolidation, (x) require the surviving entity to issue shares of
convertible preferred stock or convertible debentures with such aggregate stated
value or in such face amount, as the case may be, equal to the aggregate
principal amount of Debentures then held by such Holder, plus all accrued and
unpaid interest and other amounts owing thereon, which newly issued shares of
preferred stock or debentures shall have terms identical (including with respect
to conversion) to the terms of this Debenture (except, in the case of preferred
stock, as may be required to reflect the differences between equity and debt)
and shall be entitled to all of the rights and privileges of a Holder of
Debentures set forth herein and the agreements pursuant to which the Debentures
were issued (including, without limitation, as such rights relate to the
acquisition, transferability,

                                      -13-
<PAGE>

registration and listing of such shares of stock other securities issuable upon
conversion thereof), and (y) simultaneously with the issuance of such
convertible preferred stock or convertible debentures, shall have the right to
convert such instrument only into shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such merger or consolidation. In the case of clause (C), the
conversion price applicable for the newly issued shares of convertible preferred
stock or convertible debentures shall be based upon the amount of securities,
cash and property that each share of Common Stock would receive in such
transaction and the Conversion Price in effect immediately prior to the
effectiveness or closing date for such transaction. The terms of any such
merger, sale or consolidation shall include such terms so as to continue to give
the Holders the right to receive the securities, cash and property set forth in
this Section upon any conversion or redemption following such event. This
provision shall similarly apply to successive such events.

          (d)  The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of the Debentures and payment of
interest on the Debentures, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder.  The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.

          (e)  Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of the Common Stock,
but may if otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the Per Share Market Value at such time.  If the
Company elects not, or is unable, to make such a cash payment, the Holder shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.

          (f)  The issuance of certificates for shares of the Common Stock on
conversion of the Debentures shall be made without charge to the Holders thereof
for any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.

                                      -14-
<PAGE>

               (g)   Any and all notices or other communications or deliveries
to be provided by the Holders hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by certified
or registered mail, postage prepaid, addressed to the Company, at 3704 32/nd/
Street, Suite 301 Vernon, B.C., Canada, VIT 5N6, Facsimile No.: (250) 558-5470,
attention Chief Financial Officer, or such other address or facsimile number as
the Company may specify for such purposes by notice to the Holders delivered in
accordance with this Section, with a copy to (other than for Conversion Notices)
Owen M. Naccarato, Esq. (facsimile number (949) 851-9262). Any and all notices
or other communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to each Holder at the facsimile telephone number or
address of such Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 6:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days
after deposit in the United States mail, (iv) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.

       Section 5.   Optional Prepayment.
       ----------   -------------------

               (a)  Subject to Section 5(b) below, the Company shall have the
right, exercisable at any time and from time to time after the Original Issue
Date, in accordance with the terms hereof and upon ten Trading Days' prior
written notice to the Holders to be prepaid (an "Optional Prepayment Notice"),
                                                 --------------------------
to prepay all or any portion of the outstanding principal amount of the
Debentures which has not previously been repaid or for which Conversion Notices
have not previously been delivered. The prepayment price applicable to
prepayments under this Section 5(a) shall equal the Prepayment Price and shall
be paid in cash. Any such prepayment shall be free of any claim of
subordination. The Holders shall have the right to tender, and the Company shall
honor, Conversion Notices delivered prior to the expiration of the tenth Trading
Day after receipt by the Holders of an Optional Prepayment Notice for such
Debentures (the tenth Trading Day after receipt by the Holders of an Optional
Prepayment Notice is referred to herein as the "Optional Prepayment Date")
                                                ------------------------

               (b)  The Company shall not be entitled to deliver an Optional
Prepayment Notice to the Holder (and, if after delivery thereof and prior to the
Optional Prepayment Date, any of the following conditions shall cease to be met,
such notice, at the option of the Holders, shall be deemed no longer effective)
if:  (i) the number of shares of Common Stock at the time authorized, unissued
and unreserved for all purposes is insufficient to satisfy the Company's

                                      -15-
<PAGE>

conversion obligations of the aggregate principal amount of Debentures then
outstanding, or (ii) there is neither an effective Underlying Shares
Registration Statement under which the Holders can resell all of the issued
Underlying Shares and all of the Underlying Shares as are issuable upon
conversion in full of the principal amount of Debentures subject to an Optional
Prepayment Notice nor may all of such issued and issuable Underlying Shares be
sold by the Holders subject to such prepayment without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act, as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Company's transfer agent in the form and substance acceptable to the Holders and
such transfer agent, or (iii) the Common Stock is not then listed or quoted for
trading on the OTC or on a Subsequent Market.

               (c)  If any portion of the Prepayment Price shall not be paid by
the Company by the second (2/nd/) Trading Day following the Optional Prepayment
Date, the Prepayment Price shall be increased by 15% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to accrue daily
from the date such interest is due hereunder through and including the date of
payment (which amount shall be paid as liquidated damages and not as a penalty).
In addition, if any portion of the Prepayment Price remains unpaid through the
expiration of the Optional Prepayment Date, the Holder subject to such
prepayment may elect by written notice to the Company to either (x) demand
conversion in accordance with the formula and the time period therefor set forth
in Section 4 of any portion of the principal amount of Debentures for which the
Prepayment Price, plus accrued liquidated damages and accrued interest thereon,
has not been paid in full (the "Unpaid Prepayment Principal Amount"), in which
                                ----------------------------------
event the applicable Per Share Market Value shall be the lower of the Per Share
Market Value calculated on the Optional Prepayment Date and the Per Share Market
Value as of the Holder's written demand for conversion, or (y) invalidate ab
initio such optional prepayment, notwithstanding anything herein contained to
the contrary. If the Holder elects option (x) above, the Company shall, within
five Trading Days after such election is deemed delivered hereunder, deliver to
the Holder the shares of Common Stock issuable upon conversion of the Unpaid
Prepayment Principal Amount subject to such conversion demand and otherwise
perform its obligations hereunder with respect thereto. If the Holder elects
option (y) above, the Company shall promptly, and in any event not later than
five Trading Days from receipt of notice of such election, return to the Holder
new Debentures for the full Unpaid Prepayment Principal Amount and shall no
longer have any prepayment rights under this Debenture. If, upon an election
under option (x) above, the Company fails to deliver certificates representing
the shares of Common Stock issuable upon conversion of the Unpaid Prepayment
Principal Amount within the time period set forth in this Section, the Company
shall pay to the Holder in cash, as liquidated damages and not as a penalty,
$2,500 per day until the Company delivers such certificates to the Holder.

       Section 6.   Definitions.  For the purposes hereof, the following terms
       ----------  -----------
shall have the following meanings:

          "Business Day" means any day except Saturday, Sunday and any day which
           ------------
shall be a federal legal holiday in the United States or Canada or a day on
which banking institutions

                                      -16-
<PAGE>

in the State of New York or the province of British Columbia, Canada are
authorized or required by law or other government action to close.

          "Change of Control Transaction"  means the occurrence of any of (i) an
           -----------------------------
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger of the Company with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
50% or more of the assets of the Company in one or a series of related
transactions, or (iv) the execution by the Company of an agreement to which the
Company  is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).

          "Commission" means the Securities and Exchange Commission.
           ----------

          "Common Stock" means the common stock, no par value per share, of the
           ------------
Company and stock of any other class into which such shares may hereafter have
been reclassified or changed.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.
           ------------

          "Interest Effectiveness Date" means the earlier to occur of (x) the
           ---------------------------
Effectiveness Date and (y) the date that an Underlying Shares Registration
Statement is declared effective by the Commission.

          "Mandatory Prepayment Amount" for any Debentures shall equal the sum
           ---------------------------
of (i) the

greater of (A) 130% of the principal amount of Debentures to be prepaid, plus
all accrued and unpaid interest thereon, and (B) the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided
by the Conversion Price on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is
paid in full, whichever is less, multiplied by the Per Share Market Value on (x)
the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
date the Mandatory Prepayment Amount is paid in full, whichever is greater, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such Debentures.

          "Original Issue Date" shall mean the date of the first issuance of the
           -------------------
Debentures regardless of the number of transfers of any Debenture and regardless
of the number of instruments which may be issued to evidence such Debenture.

                                      -17-
<PAGE>

          "Per Share Market Value" means on any particular date (a) the closing
           ----------------------
bid price per share of Common Stock on such date on the Subsequent Market on
which the shares of Common Stock are then listed or quoted, or if there is no
such price on such date, then the closing bid price on the Subsequent Market on
the date nearest preceding such date, or (b) if the shares of Common Stock are
not then listed or quoted on  a Subsequent Market, the closing bid price for a
share of Common Stock in the OTC, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation Bureau Incorporated
(or similar organization or agency succeeding to its functions of reporting
prices), then the average of the "Pink Sheet" quotes for the relevant conversion
period, as determined in good faith by the Holder, or (d) if the shares of
Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the Holders
of a majority in interest of the principal amount of Debentures then
outstanding.

          "Person" means a corporation, an association, a partnership,
           ------
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.

          "Prepayment Price" for any Debentures shall equal the sum of (i) the
           ----------------
greater of (A) 130% of the principal amount of Debentures to be prepaid, plus
all accrued and unpaid interest thereon, and (B) the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided
by the Conversion Price on (x) the date the Mandatory Prepayment Amount is
demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is
paid in full, whichever is less, multiplied by the Per Share Market Value on (x)
the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
date the Mandatory Prepayment Amount is paid in full, whichever is greater, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such Debentures.

          "Purchase Agreement" means the Secured Convertible Debenture Purchase
           ------------------
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.

          "Registration Rights Agreement" means the Registration Rights
           -----------------------------
Agreement, dated as of the Original Issue Date,  to which the Company and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.

          "Securities Act" means the Securities Act of 1933, as amended.
           --------------

          "Trading Day" means (a) a day on which the shares of Common Stock are
           -----------
traded on a Subsequent Market on which the shares of Common Stock are then
listed or quoted, or (b) if the shares of Common Stock are not listed on a
Subsequent Market, a day on which the shares of Common Stock are traded in the
over-the-counter market, as reported by the OTC, or (c) if the shares of Common
Stock are not quoted on the OTC, a day on which the shares of Common

                                      -18-
<PAGE>

Stock are quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); provided, that in the event that the shares
                                    --------
of Common Stock are not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except a Business Day.

          "Transaction Documents" shall have the meaning set forth in the
           ---------------------
Purchase Agreement.

          "Underlying Shares" means the shares of Common Stock issuable upon
           -----------------
conversion of Debentures or as payment of interest in accordance with the terms
hereof.

          "Underlying Shares Registration Statement" means a registration
           ----------------------------------------
statement meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Underlying Shares and
naming the Holder as a "selling stockholder" thereunder.

       Section 7.   Except as expressly provided herein, no provision of this
       ----------
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, interest and liquidated damages (if
any) on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed.  This Debenture is a direct obligation of the
Company.  This Debenture ranks pari passu with all other Debentures now or
                               ---- -----
hereafter issued under the terms set forth herein.  As long as there are
Debentures outstanding, the Company shall not and shall cause it subsidiaries
not to, without the consent of the Holders, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holders; (ii) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock or other equity securities other
than as to the Underlying Shares to the extent permitted or required under the
Transaction Documents; or (iii) enter into any agreement with respect to any of
the foregoing.  The Company may only voluntarily prepay the outstanding
principal amount on the Debentures in accordance with Section 5 hereof.

       Section 8.   This Debenture shall not entitle the Holder to any of the
       ----------
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.

       Section 9.   If this Debenture shall be mutilated, lost, stolen or
       ----------
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.

                                      -19-
<PAGE>

       Section 10.  No indebtedness of the Company is senior to this Debenture
       -----------
in right of payment, whether with respect to interest, damages or upon
liquidation or dissolution or otherwise. The Company will not and will not
permit any of its subsidiaries to, directly or indirectly, enter into, create,
incur, assume or suffer to exist any indebtedness of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or any
interest therein or any income or profits therefrom that is senior in any
respect to the Company's obligations under the Debentures.

       Section 11.  This Debenture shall be governed by and construed in
       -----------
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.  The Company and the Holder hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
the City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or that such suit, action or proceeding is
improper.  Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under this instrument and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.

       Section 12.  Any waiver by the Company or the Holder of a breach of any
       -----------
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of  any breach of any other provision
of this Debenture.  The failure of the Company or the Holder to insist upon
strict adherence to any term of this Debenture on one or more occasions shall
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Debenture.
Any waiver must be in writing.

       Section 13.  If any provision of this Debenture is invalid, illegal or
       -----------
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.  If it shall be found
that any interest or other amount deemed interest due hereunder shall violate
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.

       Section 14.  Whenever any payment or other obligation hereunder shall be
       -----------
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.

       Section 15.  The payment obligations under this Debenture and the
       -----------
obligations of the Company to the Holder arising upon the conversion of all or
any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreement (as defined in the Purchase Agreement).

                                      -20-
<PAGE>

       [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
       SIGNATURE PAGE FOLLOWS]

                                      -21-
<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.

                              AQUATIC CELLULOSE
                              INTERNATIONAL CORPORATION

                              By: _____
                                  Name:
                                  Title:

<PAGE>

     EXHIBIT A

     NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert the Debenture)

The undersigned hereby elects to convert the attached Debenture into shares of
common stock, no par value per share (the "Common Stock"), of Aquatic Cellulose
International Corporation (the "Company") according to the conditions hereof, as
of the date written below.  If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith.  No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:
                         _______
                         Date to Effect Conversion

                         _______
                         Principal Amount of Debentures to be Converted

                         _______
                         Number of shares of Common Stock to be Issued

                         _______
                         Applicable Conversion Price

                         _______
                         Signature

                         _______
                         Name

                         _______
                         Address

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