Document:

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                                                                    Exhibit 10.6

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

          This Registration Rights Agreement (this "Agreement") is made and
                                                    ---------
entered into as of January [ ], 2001, 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.

          "Debentures" means the Convertible Debentures issued to the Purchasers
           ----------
in accordance with the Purchase Agreement.

          "Effectiveness Date" means with respect to the initial Registration
           ------------------
Statement required to be filed hereunder, the 120/th/ day following the Closing
Date and, with respect to any additional Registration Statements which may be
required pursuant to Section 3(c), the ninetieth
<PAGE>

(90/th/) day following the date that notice of the requirement to file such
additional Registration Statement is provided.

          "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 with respect to the initial Registration Statement
           -----------
to be filed hereunder, the 60/th/ day following the Closing Date and with
respect to any additional Registration Statements which may be required pursuant
to Section 3(c), the 30/th/ day following the date that notice of the
requirement to file such additional Registration Statement is provided.

          "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 3(c), 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.
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          "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.

          "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.

     2.   Shelf Registration.  (a)  On or prior to each 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 SB-2 (except if the Company is not then eligible to register for resale the
Registrable Securities on Form SB-2, in which case such registration shall be on
another appropriate form and shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" attached hereto as Annex A.  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)
(the "Effectiveness Period").
      --------------------

          (b) The initial Registration Statement 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 principal amount of Debentures assuming (i) the
full $500,000 of Debentures is issued on the Closing Date, (2) the conversion of
the full $500,000 of Debentures occurred on the Closing Date, (3) one full year
of interest had occurred on the Debentures and all such interest is paid in
shares of Common Stock and (4) the Conversion Price equaled the lessor of (a)
$0.083 and (b) 66.67% 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 Closing Date and (ii) the number of shares of Common
Stock issuable upon exercise in full of the Warrants.
<PAGE>

          (c) If (a) a Registration Statement is not filed on or prior its
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 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) a  Registration
Statement filed hereunder is not declared effective by the Commission on or
prior to its 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 to which it is required
to cover 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 Trading
                                 -----------------
Days (which need not be consecutive Trading 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 ten
Business Day-period is exceeded, or for purposes of clause (e) the date on which
such three Trading Day-period is exceeded, being referred to as "Event Date"),
                                                                 ----------
then, on each such Event Date and every 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 twenty Trading Days immediately preceding the Event
Date or the monthly anniversary thereof and shall be subject to Section 3(a) of
the Debenture and free of restrictive legends except as required by Section 3.1
of the Purchase Agreement. 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 15% 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 each
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any
<PAGE>

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 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, provided, the Company is notified
of such objection no later than 3 Business Days after the Holders have been so
furnished copies of such documents.

          (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 all their existing Registration Statements hereunder
which additional Registration Statement shall cover 120% or more of the number
of unregistered Registrable Securities.

          (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
<PAGE>

covering any or all of the Registrable Securities or the initiation of any
Proceedings for that purpose; (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) 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.

          (f) 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.

          (g) 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 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.

          (h) 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
<PAGE>

required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.

          (i)  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 applicable 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, and (v) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement.
<PAGE>

     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 any 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 such 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 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
<PAGE>

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
indemnification 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).
<PAGE>

          (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.

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

          (a) 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.
<PAGE>

          (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 would have the effect of impairing
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) 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(h), 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.

          (f) 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.
<PAGE>

          (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 this 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
                              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
<PAGE>

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.

          (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.

          (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.
<PAGE>

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                          SIGNATURE PAGES TO FOLLOW]
<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:  Gary Ackles
                            Title: Chief Executive Officer

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

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

                    By:_____________________________________
                        Name:  Glenn A. Arbeitman
                        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.

<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.  The Selling Stockholders have advised the Company
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their shares other
than ordinary course brokerage arrangements, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares by the
Selling Stockholders.

<PAGE>

     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 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 10.7

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. [_]                                                              [$________]

                  AQUATIC CELLULOSE INTERNATIONAL CORPORATION
                           12% CONVERTIBLE DEBENTURE
                        DUE TWELVE MONTHS FROM ISSUANCE

     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 twelve months from issuance, in the aggregate principal amount of Five
Hundred Thousand Dollars ($500,000) (the "Debentures").  All references to $
                                          ----------
(dollars) shall be to US$ (United States dollars).

     FOR VALUE RECEIVED, the Company promises to pay to [____________], or its
registered assigns (the "Holder"), the principal sum of [______________], on
                         ------
[________][_], 2002/2/ 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 this Debenture is 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
[________]/3/, in cash or shares of Common Stock (as defined in Section 6).
Subject to the terms and conditions herein, the Holder may elect to receive
interest hereunder in shares of Common Stock or cash.  If interest is paid by
the Company in shares of its Common Stock, then the number of shares of Common
Stock issuable

_________________
/2/  The date which is twelve months from the Original Issue Date for the
     Debenture.

/3/  The last day of the first quarterly period following the Original Issue
     Date for this Debenture.
<PAGE>

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) ("Late Fee") (which will accrue
                                                --------
daily, from the date such interest is due hereunder through and including the
date of payment), payable in cash or, at the option of the Holder, in shares of
Common Stock. If such Late Fee is paid by the Company in shares of its Common
Stock, then the number of shares of Common Stock issuable on account of such
Late Fee shall equal the cash amount of such Late Fee on such Late Fee payment
date divided by the Conversion Price on such date.

     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
     (including any Late Fees) on or liquidated damages in respect of, this
     Debenture, 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);

               (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
<PAGE>

     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 (with respect to cases not commenced by the Company) 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;

               (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%
<PAGE>

     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 Closing Date
     (as defined in the Purchase Agreement);]/4/

               (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))];/3/

               (x)    the Company shall fail for any reason to deliver
     certificates to a Holder by the expiration of 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

          (b)  If any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, 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

_________________
/4/  Only applies to Debentures issued on the first settlement date and second
     settlement date.
<PAGE>

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. The Late Fee shall commence to 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,
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 and the
Holder shall have all rights as a Debenture Holder until such time, if any, as
the full payment under this Section shall have been received by it. 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)(ii)
hereof).   The number of shares of Common Stock  issuable upon a conversion
hereunder equals the sum of (i) the quotient obtained by dividing (x) the
outstanding principal amount of this Debenture to be converted by (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 Holder shall have elected to receive the interest due on a Conversion Date
in cash, subsection (ii) shall not be used in the calculation of the number of
shares of Common Stock  issuable upon a conversion hereunder.

                 (B)  The Holder shall effect conversions by delivering to the
Company a completed notice in the form attached hereto as Exhibit A (a
                                                          ----------
"Conversion Notice") including a completed Conversion Schedule in the form of
 -----------------
Schedule 1 to the Conversion Notice (on each Conversion Date, the "Conversion
----------                                                         ----------

Schedule"). The Conversion Schedule shall set forth the remaining principal
--------
amount of this Debenture and all accrued and unpaid interest thereon subsequent
to the conversion at issue. The date on which a Conversion Notice is delivered
is the "Conversion Date." Unless the Holder is converting the entire principal
        ---------------
amount outstanding under this Debenture, the Holder is not be required to
physically surrender this Debenture to the Company in order to effect
conversions. Subject to Section 4(b), each Conversion Notice, once given, shall
be irrevocable. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture plus all accrued and unpaid
interest thereon in an amount equal to the applicable conversion, which shall be
evidenced by entries set forth in the Conversion Schedule. The Holder and the
Company shall maintain records showing the principal amount converted and the
date of such conversions. In the event of any dispute or
<PAGE>

discrepancy, the records of the Holder shall be controlling and determinative in
the absence of manifest error.

                 (ii)  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 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
<PAGE>

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 three 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 issuable upon such conversion in accordance with the
terms hereof (subject to the limitations set forth in Section 4(a)(ii) hereof),
(ii)   if the Holder has elected to receive accrued interest in cash, the
Company will deliver to the Holder a bank check, payable to Holder, in the
amount of accrued and unpaid interest.  If requested by a Holder, the Company
will use its best efforts to deliver conversion shares electronically through
the Depository Trust Corporation or another established clearing corporation
performing similar functions.  If shares of Common Stock issuable following a
Conversion Notice are not delivered to or as directed by the Holder by the third
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 shares, to
rescind such conversion, in which event the Company shall immediately return to
the Holder a Debenture in principal amount equal to the principal amount,
interest and all other amounts due in respect of the Conversion Notice (provided
the Holder is converting the entire principal amount outstanding under this
Debenture).

                    (ii)  If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 4(b)(i) by the third 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
third 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
<PAGE>

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 for any reason to deliver to the Holder such
certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day
after the Conversion Date, and if after such third 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 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) $0.083 (the "Initial Conversion
                                                            ------------------
Price"), and (2) 67.67% of the average of the lowest three inter-day sales
-----
prices of the Common Stock (which need not occur on consecutive Trading Days but
which may not include prices that are sales by the Holder) 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 the 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
<PAGE>

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 the 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 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 shares of Common Stock or
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 a price per share less
than the Conversion Price (if the holder of the Common Stock or 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, or due to warranty options or rights per share which are issued in
connection with such issuance, be entitled to receive shares
<PAGE>

of Common Stock at a price per share which is less than the Conversion Price,
such issuance shall be deemed to have occurred for less than the Conversion
Price), then, at the sole option of the Holder, the Conversion Price shall be
adjusted to mirror the conversion, exchange or purchase price for such Common
Stock or Common Stock Equivalents (including any reset provisions thereof) at
issue. Such adjustment shall be made whenever such Common Stock or Common Stock
Equivalents are issued. The Company shall notify the Holder and the Escrow Agent
in writing, no later than the business day following the issuance of any Common
Stock or Common Stock Equivalent subject to this section, indicating therein the
applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms. No adjustment under this Section shall
be made as a result of (i) issuances of Common Stock or Common Stock Equivalents
to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement, (ii)
issuances and exercises of options to purchase shares of Common Stock issued for
compensatory purposes pursuant to any of the Company's stock option or stock
purchase plans, or (iii) exercises under the Warrants (as defined in the
Purchase Agreement).

               (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 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).
<PAGE>

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 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 in one or a series of related
transactions, a Holder shall have the right to (A) exercise
<PAGE>

any rights under Section 3(b), (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, require the surviving entity to issue to
the Holder convertible debentures with a principal amount 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 convertible
debentures shall have terms identical (including with respect to conversion) to
the terms of this Debenture, 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. 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
<PAGE>

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.

          (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
<PAGE>

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
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
<PAGE>

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 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, $0.001 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.
           ------------

          "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.
<PAGE>

          "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.

          "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 (as reported by
Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for
regular session trading on such day), or if there is no such price on such date
(as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales
price for regular session trading on such day), 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 Securities Purchase Agreement, dated as
           ------------------
of January [__], 2001, 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 January [__], 2001,  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, and the
           --------------
rules and regulations promulgated thereunder.
<PAGE>

          "Trading Day" means (a) a day on which the shares of Common Stock are
           -----------
traded on the OTC or on such 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 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
<PAGE>

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.

     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.  Nothing contained herein shall be
deemed to limit in any way any right to serve process in any manner permitted by
law. Each party irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby.  If either party shall commence an action or proceeding to enforce any
provisions of a Transaction Document, then the prevailing party in such action
or proceeding shall be reimbursed by the other party for its' attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.

     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
<PAGE>

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. The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law or other law which would prohibit or
forgive the Company from paying all or any portion of the principal of or
interest on the Debentures as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been enacted.

     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).

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                            SIGNATURE PAGE FOLLOWS]
<PAGE>

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

                              AQUATIC CELLULOSE
                              INTERNATIONAL CORPORATION

                              By:_______________________________________
                                 Name:    Gary Ackles
                                 Title:   Chief Executive Officer
<PAGE>

                                   EXHIBIT A

                             NOTICE OF CONVERSION

The undersigned hereby elects to convert principal and, if specified, interest
under the 12% Secured Convertible Debenture of the Company due twelve months
from issuance into shares of common stock, $0.001 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 the 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

                                  Payment of Interest in Kind   [_] Yes
                                                                          [_] No
                                         If yes, $ _______ of Interest Accrued
                                         on Account of Conversion at Issue

                                  ______________________________________________
                                  Number of shares of Common Stock to be Issued

                                  ______________________________________________
                                  Applicable Conversion Price

                                  ______________________________________________
                                  Signature

                                  ______________________________________________
                                  Name

                                  ______________________________________________
                                  Address
<PAGE>

                                  Schedule 1

                              CONVERSION SCHEDULE

                  Aquatic Cellulose International Corporation
  12% Secured Convertible Debentures due January [ ], 2002, in the aggregate
 principal amount of $500,000 issued by Digital Descriptor Systems, Inc. This
  Conversion Schedule reflects conversions made under Section 4(a)(i) of the
                         above referenced Debentures.

                                    Dated:

================================================================================

                                  Aggregate
                                  Principal
      Date of                       Amount
     Conversion                   Remaining
   (or for first   Amount of    Subsequent to   Company Attest
  entry, Original  Conversion     Conversion
    Issue Date)                  (or original
                                  Principal
                                   Amount)
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                                  Aggregate
                                  Principal
      Date of                       Amount
     Conversion                   Remaining
   (or for first   Amount of    Subsequent to   Company Attest
  entry, Original  Conversion     Conversion
    Issue Date)                  (or original
                                  Principal
                                   Amount)
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