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                                                                   EXHIBIT 10(b)
                             WARRANTECH CORPORATION
                                150 WESTPARK WAY
                               EULESS, TEXAS 76040


                                   Dated: as of August 22, 2001


         RE:      NONQUALIFIED STOCK OPTIONS TO PURCHASE 2,000,000 SHARES AT $2
                  PER SHARE


To:      American International Group, Inc., Optionee
         70 Pine Street
         New York, NY 10207


         Pursuant to the terms of that certain Settlement Agreement and Release
of Claims, dated August 22, 2001, by and between Warrantech Corporation,
American International Group, Inc. ("Optionee"), and others, and by
authorization of the Board of Directors of Warrantech Corporation (the
"Company"), on August 17, 2001, the Company has been authorized to grant you
certain options to purchase shares of the Company's common stock, par value
$.007 per share (the "Common Stock"), upon the terms and conditions hereinafter
set forth. Capitalized terms used but not defined in the body of this letter
shall have the respective meanings set forth on Appendix 1 attached hereto and
made a part hereof.

        1.  The Company hereby gives and grants you, subject to all of the
provisions, terms and conditions contained herein, the rights and options to
purchase up to the aggregate number of shares of Common Stock of the Company,
and at the price per share, set forth above (the "Options").

        2.  The Options may be exercised by you from time to time as to any or
all of the shares at any time from the date hereof until August 22, 2006.

        3.  Unless otherwise permitted by Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and approved in advance by the Company,
the Options are not assignable or transferable by the Optionee. However, the
Optionee may assign or transfer the Options in whole or in part to any affiliate
of the Optionee. For purposes of this Section affiliate shall mean any
corporation, partnership, or other entity in which Optionee owns a controlling
interest, or which controls, or is under common control with, Optionee. In the
event of such a transfer or assignment to an affiliate, the Company's consent
shall not be necessary or required. In the event of a permissible assignment or
transfer under this Section, the rights and benefits of the Optionee shall inure
to assignee or transferee.

        4.  The exercise of an Option shall be made by the delivery of a written
notice of intention to exercise the Option (the "Exercise Notice"), specifying
the number of shares then to be purchased under the Option. The Optionee shall,
within ten (10) days after the delivery of the Exercise Notice, make payment in
cash, by certified check or wire transfer of the exercise price for the
aggregate number of shares of Common Stock covered by the Exercise Notice. In
the event that the Optionee fails to remit the required payment within the
specified time, the Exercise Notice shall be deemed void. Payment shall be a
condition of issuance of Common Stock pursuant to exercise of an Option.

        Upon receipt of a duly executed Exercise Notice and payment of the
aggregate exercise price for the shares of Common Stock covered by such Exercise
Notice, the Company shall issue or cause the issuance of, in the name of the
Optionee or the Optionee's legal representative, the shares of Common Stock
purchased by such exercise of such Option. Said issuance shall occur within
seven (7) days of receipt of payment as set forth above. The Company shall bear
and cover all expenses, fees, or other costs associated with the issuance of the
shares of Common Stock and the Company shall not pass on or charge the Optionee,
in any manner, any such expenses, fees, or costs.


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        The Optionee will have no rights as a shareholder with respect to any
shares covered by the Options until the issuance of the shares covered by the
Option. Except as otherwise provided in Section 6 hereof, no adjustment shall be
made for dividends or other rights for which the record date is prior to the
issuance of such shares.

        5.      The Company shall at all time reserve and keep available for
    issuance upon the exercise of the Options such number of its authorized but
    unissued shares of Common Stock as will be sufficient to permit the exercise
    in full of all of the shares under the Options. The Company shall not amend
    its certificate of incorporation or bylaws in any way to adversely affect
    your rights under the Options. The Company represents and warrants that this
    agreement and the Options do not conflict with the certificate of
    incorporation or bylaws of the Company. The Company further represents and
    warrants that this agreement and the Options are duly executed and
    delivered. All shares of Common Stock which shall be so issuable, when
    issued upon exercise of the Options shall be duly authorized, validly
    issued, fully paid and nonassessable, free and clear of all liens, security
    interests, charges and other encumbrances or restrictions.

        6.      The aggregate number of shares subject to this Option and not
    theretofore delivered and the option price therefor will be appropriately
    adjusted if the number of issued shares of the Company is increased or
    reduced by change in par value, combination, split-up, reclassification,
    recapitalization, distribution of a dividend on the shares payable in stock,
    or the like after the date hereof. The foregoing adjustment shall be made so
    that Optionee shall receive, upon exercise of an Option, the number and
    class of securities or property that Optionee would have received in respect
    of the Common Stock issuable to Optionee if the Option had been exercised
    immediately prior to such event or the record date therefor, as applicable,
    and the agreements governing such transaction shall contain proper provision
    to effect that adjustment. The aggregate number of shares subject to this
    Option shall not be adjusted upon the issuance of any shares except as
    aforesaid. In the event of a "Change in Control," this Option shall be
    subject to the agreement of merger or reorganization or other applicable
    agreement. Such agreement may provide, without limitation, for the
    assumption of this Option by the surviving corporation or its parent, or for
    its continuation by the Company (if the Company is a surviving corporation).
    Alternatively, the Company may (i) upon written notice to the Optionee,
    provide that all shares which are the subject of the Option must be
    exercised, to the extent then exercisable, within a specified number of days
    of the date of such notice, at the end of which period the Option shall
    terminate; or (ii) terminate the Option in exchange for a cash payment equal
    to the excess of the fair market value of the shares subject to the Option
    (to the extent then exercisable) over the exercise price thereof.

        7.      The Options may be redeemed to the extent not previously
    exercised in whole or in part at the option of Company, subject to the
    conditions set forth below in this Section, at any time, by notice given
    within thirty (30) days, after the occurrence of a "Redemption Event" at a
    price per share equal to the "Redemption Price."

                (a)     The Company shall provide written notice to you of the
time, manner and place of redemption (the "Redemption Date") of the Redemption
Options and the Redemption Price (a "Redemption Notice") not less than sixty
(60) days prior to the Redemption Date. You may elect to exercise all or any
part of the Redemption Options on or before such Redemption Date pursuant to
Section 4 hereof.

                (b)     Unless there shall have been a failure to pay the
Redemption Price, on the Redemption Date all of your rights in the Redemption
Options will cease, except the right to receive the Redemption Price, without
interest, and the Redemption Options will not, from and after such Redemption
Date, be deemed to be outstanding.

        8.  Neither the Options nor the shares that shall be received upon the
exercise of the Options have been registered or qualified under the Securities
Act or any other applicable state securities laws and the shares obtained
pursuant to the exercise of an Option may be offered or sold only in compliance
with the terms and conditions of the Options, and only if registered or
qualified pursuant to said laws or if an exemption from such registration or
qualification is available.

        9.      You may be required to make an appropriate representation at the
time of any exercise of an Option that it is your intention to acquire the
shares being purchased for investment and not for resale or distribution. In
addition, you may be required to agree in writing not to sell any shares
acquired pursuant to an Option or any other shares of the Company that you may
now or hereafter acquire except in compliance with the Securities Act; provided,
however, that the Company shall be under no obligation to register any
securities obtained pursuant to your exercise of your rights hereunder with the
Commission, except as provided in Section 10 and Section 11 hereof. An
appropriate


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legend restricting the sale of any such shares may be placed upon the
certificates representing such shares and any resale must be in compliance with
the Securities Act and the rules and regulations thereunder.

        10.     If, at any time more than one hundred and twenty (120) days and
less than three (3) years and one (1) day after the date hereof, you shall
request the Company in writing to effect the registration under the Securities
Act of all of your Registrable Shares (the "Registration Request"), then the
Company shall use its best efforts to effect the registration under the
Securities Act of such Registrable Shares. The Company shall be required to
effect only one (1) such registration on your behalf under this Section 10;
provided, however, that in the event that all of the shares requested by you to
be registered pursuant to the Registration Request are not registered (for
whatever reason), then you will be permitted to request the Company in writing
to effect a registration under the Securities Act as many times as necessary
until all Registrable Shares have been registered. However, notwithstanding the
foregoing obligation, (x) the Company shall not be required to file any
Registration Statement which would require the inclusion of audited financial
statements for a period other than the Company's fiscal year; (y) the Company
shall not be required to file any Registration Statement within one hundred
twenty (120) days after the effective date of any Registration Statement in
which you were entitled to have your Registrable Shares sold pursuant to your
rights under Section 11 hereof and declined to do so, and (z) the Company shall
have the right to defer any registration under this Section 10 for a period of
ninety (90) days if the Board of Directors shall determine that such
registration would interfere with a pending transaction of the Company.

                You shall bear the "Registration Expenses" incurred by the
Company in connection with the Registration Request. In the event any securities
in addition to the Registrable Shares are registered under the Securities Act in
the Registration Statement requested by you in a Registration Request, you shall
be responsible for the Registration Expenses of such registration pro-rata in
accordance with the number of your Registrable Shares included in such
registration.

        11.     Whenever the Company proposes to file a Registration Statement
(other than a Registration Statement covering shares to be sold solely for the
account of other holders of the Company's securities) at any time and from time
to time, it will, prior to such filing, give written notice to you of its
intention to do so; provided, that, to the extent relevant, such notice shall
describe any determination of the managing underwriter pursuant to Section 11(b)
hereof.

                (a)     Upon your written request given within twenty (20) days
after the Company provides such notice (which request shall state the intended
method of disposition of such Registrable Shares), the Company shall use its
best efforts to cause all Registrable Shares which the Company has been
requested by you to be registered under the Securities Act to the extent
necessary to permit their sale or other disposition in accordance with the
intended methods of distribution specified in your request; provided, that the
Company shall have the right to postpone or withdraw any registration effected
pursuant to this Section 11(a) without obligation to you.

                (b)     If the registration for which the Company gives notice
pursuant Section 11 above is an underwritten registered public offering, the
Company shall so advise you as a part of the written notice given pursuant to
said Section 11. In such event, your right to include your Registrable Shares in
such registration pursuant to this Section 11(a) shall be conditioned upon your
participation in such underwriting on the terms set forth herein. You (together
with the Company and all other holders of the Company's securities distributing
their securities through such underwriting) shall enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
the underwriting by the Company. In the event that (for any reason) the Company
limits the number of Registrable Shares to be included in the registration and
underwriting, the number of Registrable Shares that Optionee has requested for
registration and underwriting shall not be reduced or cut back.

                (c)     Notwithstanding the foregoing, the Company shall not be
required, pursuant to this Section 11, to include any Registrable Shares in a
Registration Statement if such Registrable Shares can then be sold pursuant to
Rule 144(k) under the Securities Act.

        12.     Any registration of Registrable Shares, whether pursuant to
Section 10 or Section 11 hereof, shall be effected in accordance with the
provisions of Annex 2 attached to this Agreement and made a part hereof.

        13.     All notices, requests, demands or other communications hereunder
shall be in writing, shall be deemed to have been duly given when delivered by
certified mail, return receipt requested, or confirmed facsimile transmission
(or to a changed address of which notice shall have been in a manner herein
provided) as follows:



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         If to the Company:

                  Joel San Antonio, Chairman and
                    Chief Executive Officer
                  Warrantech Corporation
                  150 Westpark Way
                  Euless, Texas 76040

                  Fax No.: (817) 685-5540



         With a copy to:

                                    Ralph A. Siciliano, Esq.
                                    Tannenbaum Helpern
                                    Syracuse & Hirschtritt LLP
                                    900 Third Avenue
                                    New York, New York 10022

                                    Fax No. (212) 371-1084

         If to Optionee:

                                    Peter A. Scarpato, Esq.
                                    Vice President & Counsel Off-Risk Management
                                    American International Group, Inc.
                                    70 Pine Street
                                    New York, New York 10270

                                    Fax No. (212) 943-4334


         With a copy to:

                                    Edward P. Krugman, Esq.
                                    Cahill Gordon & Reindel
                                    80 Pine Street
                                    New York, New York 10005

                                    Fax No. (212) 269-5420

        14. This Agreement concerning the Options shall be binding upon and
shall inure to the benefit of any successors or assigns of the Company, and, to
the extent herein provided, shall be binding upon and inure to the benefit of
your legal representatives.

        15. This Agreement concerning the Options may be amended only by written
instrument executed by you and the Company.

        16. This Agreement concerning the Options shall be construed in
accordance with the laws of the State of Delaware, applicable to contracts
performed within such State, without giving effect to conflicts to law
principles.

        17. This Agreement concerning the Options may be signed in counterparts.


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        If the foregoing is in accordance with your understanding and approved
by you, please so confirm by signing and returning the duplicate of this letter
enclosed for that purpose.


                                         Very truly yours,

                                         WARRANTECH CORPORATION



                                         By:  s/Joel San Antonio
                                              ------------------
                                              Name:  Joel San Antonio
                                              Title: CEO Warrantech Corporation

                The undersigned hereby confirms that the foregoing is in
accordance with its understanding and is hereby agreed and accepted in its
entirety as of the date of the above letter.

American International Group, Inc., Optionee

By: s/Charles R. Schader
    --------------------
Name: Charles R. Schader
Title: Senior Vice President


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                                   APPENDIX 1
                                   Definitions

        1. "CHANGE IN CONTROL" shall mean the occurrence of any "person" (as
defined in Section 13(d) of the Exchange Act), other than the Company, its
parent or subsidiary or employee benefit plan or trust maintained by the
Company, its parent or subsidiary,

                (a)     becoming the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of more than 50% of the
shares of Common Stock of the Company outstanding at such time on a fully
diluted basis, without the prior approval of the Board of Directors of the
Company, and

                (b)     acquiring majority control of the Board of Directors of
the Company.

        2. "COMMISSION" means the Securities and Exchange Commission.

        3. "EXCHANGE ACT" means the Securities Act of 1934, as amended, or any
successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.

        4. "FAIR MARKET VALUE" shall mean the market price of shares of Common
Stock, determined by the board of directors as follows:

                           (a)      If the shares of Common Stock were traded
                over-the-counter on the date in question but were not classified
                as a national market issue, then the Fair Market Value shall be
                equal to the mean between the last reported representative bid
                and asked prices quoted by the NASDAQ system for such date;

                           (b)      If the shares of Common Stock were traded
                over-the-counter on the date in question but were classified as
                a national market issue, then the Fair Market Value shall be
                equal to the last-transaction price quoted by the NASDAQ system
                for such date;

                           (c)      If the shares of Common Stock were traded on
                a stock exchange on the date in question, then the Fair Market
                Value shall be equal to the closing price reported by the
                applicable composite transactions report for such date; and

                           (d)      If none of the foregoing provisions is
                applicable, then the Fair Market Value shall be determined by
                the board of directors of the Company in good faith on such
                basis as it deems appropriate.

                           (e)      When possible, the determination of Fair
                Market Value by the Board of Directors of the Company shall be
                based on the prices reported in The Wall Street Journal. The
                determination on the Board of Directors of the Company shall be
                conclusive and binding on all persons.

        5. "PROSPECTUS" means the prospectus included in any Registration
Statement, as amended or supplemented by an amendment or prospectus supplement,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.

        6. "REDEMPTION EVENT" shall be deemed to occur if the Common Stock has
been trading for any five (5) consecutive trading days at $3.00 or more per
share, determined by taking the average between the bid and the ask of the
Common Stock on each such day as provided in Section 4 of this Annex 1 in
connection with the calculation of the Fair Market Value of a share of Common
Stock.

        7. "REDEMPTION OPTIONS" means those Options that the Company requests to
redeem pursuant to a Redemption Notice.


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        8. "REDEMPTION PRICE" is $.001 times the number of Options that the
Company requests to redeem pursuant to a Redemption Notice, plus any dividends
declared but unpaid thereon, subject to appropriate adjustment in the event of
any stock dividend, stock split, combination or other similar recapitalization
affecting such shares.

        9. "REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Section 10 of this Option, including, without
limitation, all registration and filing fees, exchange listing fees, printing
expenses, reasonable fees and expenses of counsel selected by you to represent
you, state Blue Sky fees and expenses, and the expense of any special audits
incident to or required by any such registration. Registration Expenses shall
not include underwriting discounts, selling commissions and the fees and
expenses.

        10. "REGISTRATION STATEMENT" means a registration statement filed by the
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).

        11. "REGISTRABLE SHARES" means

                  (a)      the shares of Common Stock issued or issuable upon
exercise of the Options; and

                  (b)      any other shares of Common Stock issued in respect of
such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon any
sale pursuant to a Registration Statement or Rule 144 under the Securities Act.

        10.     "SECURITIES ACT" means the Securities Act of 1933, as amended,
or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.

ANNEX 2

REGISTRATION PROCEDURES

            1. If and whenever the Company is required by the provisions of this
            Agreement to use its best efforts to effect the registration of any
            Registrable Shares under the Securities Act, the Company shall:

                (a)     file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become effective as soon as practicable;

                (b)     as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to comply
with the provisions of the Securities Act (including the anti-fraud provisions
thereof) and to keep the Registration Statement effective for eight (8) months
from the effective date or such lesser period until all such Registrable Shares
are sold;

                (c)     as expeditiously as possible furnish to you such
reasonable numbers of copies of the Prospectus, including any preliminary
Prospectus, in conformity with the requirements of the Securities Act, and such
other documents as you may reasonably request in order to facilitate the public
sale or other disposition of the Registrable Shares owned by you;

                (d)     as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as you shall reasonably
request, and do any and all other acts and things that may be necessary or
desirable to enable you to consummate the public sale or other disposition in
such states of the Registrable Shares owned by you; provided, however, that the
Company shall not be required in connection with this Section 1(d) to qualify as
a foreign corporation or execute a general consent to service of process in any
jurisdiction;

                (e)     as expeditiously as possible, cause all such Registrable
Shares to be listed on each securities exchange or automated quotation system on
which similar securities issued by the Company are then listed;


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                (f)     promptly provide a transfer agent and registrar for all
such Registrable Shares not later than the effective date of such Registration
Statement;

                (g)     promptly make available for inspection by you, any
managing underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant or other agent retained
by any such underwriter or selected by you, all financial and other records,
pertinent corporate documents and properties of the Company and cause the
Company's officers, directors, employees and independent accountants to supply
all information reasonably requested by you, any such, underwriter, attorney,
accountant or agent in connection with such Registration Statement;

                (h)     as expeditiously as possible, notify you, promptly after
it shall receive notice thereof, of the time when such Registration Statement
has become effective or a supplement to any Prospectus forming a part of such
Registration Statement has been filed; and

                (i)     as expeditiously as possible following the effectiveness
of such Registration Statement, notify you of any request by the Commission for
the amending or supplementing of such Registration Statement or Prospectus.

        2. If the Company has delivered a Prospectus to you and after having
done so the Prospectus is amended to comply with the requirements of the
Securities Act, the Company shall promptly notify you and, if requested, you
shall immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide you with revised
Prospectuses and, following receipt of the revised Prospectuses, you shall be
free to resume making offers of the Registrable Shares.

        3. In the event that, in the judgment of the Company, it is advisable to
suspend use of a Prospectus included in a Registration Statement due to pending
material developments or other events that have not yet been publicly disclosed
and as to which the Company believes public disclosure would be detrimental to
the Company, the Company shall notify you to such effect, and, upon receipt of
such notice, you shall immediately discontinue any sales of Registrable Shares
pursuant to such Registration Statement until you have received copies of a
supplemented or amended Prospectus or until you are advised in writing by the
Company that the then current Prospectus may be used and has received copies of
any additional or supplemental filings that are incorporated or deemed
incorporated by reference in such Prospectus. Notwithstanding anything to the
contrary herein, the Company shall not exercise its rights under this Section 3
to suspend sales of Registrable Shares for a period in excess of sixty (60) days
in any 365-day period.