THIS OPTION AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS OPTION
HAVE NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR ANY
STATE  SECURITIES  LAWS. THIS OPTION AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS OPTION MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE  REGISTRATION STATEMENT AS TO THIS OPTION UNDER SAID ACT
AND ANY APPLICABLE  STATE  SECURITIES  LAWS OR AN OPINION OF COUNSEL  REASONABLY
SATISFACTORY TO AMERICAN  TECHNOLOGIES GROUP,  INC.THAT SUCH REGISTRATION IS NOT
REQUIRED.

                  Right to Purchase up to 140,250,000 Shares of
                Common Stock of American Technologies Group, Inc.
                   (subject to adjustment as provided herein)

                                     OPTION

No. _________________                             Issue Date:  September 7, 2005

      AMERICAN  TECHNOLOGIES GROUP, INC., a corporation organized under the laws
of the  State of  Nevada  (the  "Company"),  hereby  citifies  that,  for  value
received,  GRYPHON MASTER FUND,  L.P., or assigns (the  "Holder"),  is entitled,
subject to the terms set forth  below,  to purchase  from the  Company  from and
after  the  Issue  Date of this  Option,  up to the  numbers  of fully  paid and
nonassessable shares of Common Stock (as hereinafter defined), at the applicable
Exercise Price per share (as defined  below) as shall be determined  pursuant to
Section  1.1.  The number and  character  of such shares of Common Stock and the
applicable  Exercise  Price per share are  subject  to  adjustment  as  provided
herein.

      As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:

            (a) "Company" means American Technologies Group, Inc. and any person
      or entity which shall  succeed,  or assume the  obligations  of,  American
      Technologies Group, Inc. hereunder.

            (b) "Common Stock" means (i) the Company's  Common Stock,  par value
      $0.001 per share;  and (ii) any other  securities  into which or for which
      any  of the  securities  described  in the  preceding  clause  (i)  may be
      converted   or   exchanged   pursuant  to  a  plan  of   recapitalization,
      reorganization, merger, sale of assets or otherwise.

            (c) "Exercise Price" means $0.00001.

            (d) "Other Securities" means any stock (other than Common Stock) and
      other  securities  of  the  Company  or any  other  person  (corporate  or
      otherwise) which the holder of the Option at any time shall be entitled to
      receive, or shall have received, on the exercise of the Option, in lieu of
      or in addition to Common Stock,  or which at any time shall be issuable or
      shall have been issued in exchange for or in  replacement  of Common Stock
      or Other Securities pursuant to Section 4 or otherwise.
<PAGE>

            (e) "Security Agreement" means that certain Security Agreement dated
      as of the date  hereof  among the Holder,  the  Company  and the  Eligible
      Subsidiaries  named  and  as  defined  therein,   as  amended,   restated,
      supplemented and/or modified from time to time.

      1. Exercise of Option.

            1.1 Number of Shares Issuable upon Exercise. From and after the date
hereof through and including the  Expiration  Date, the Holder shall be entitled
to receive,  upon exercise of this Option in whole or in part, by delivery of an
original  or fax copy of an  exercise  notice  in the form  attached  hereto  as
Exhibit A (the  "Exercise  Notice"),  140,250,000  shares of Common Stock of the
Company, subject to adjustment pursuant to Section 4.

            1.2 Fair Market Value. For purposes hereof,  the "Fair Market Value"
of a share of Common Stock as of a particular  date (the  "Determination  Date")
shall mean:

            (a) If the  Company's  Common Stock is traded on the American  Stock
      Exchange  or another  national  exchange  or is quoted on the  National or
      SmallCap  Market of The Nasdaq Stock  Market,  Inc.  ("Nasdaq"),  then the
      closing or last sale price,  respectively,  reported for the last business
      day immediately preceding the Determination Date.

            (b) If the  Company's  Common  Stock is not  traded on the  American
      Stock Exchange or another national exchange or on the Nasdaq but is traded
      on the NASD Over the Counter Bulletin Board,  then the mean of the average
      of the closing bid and asked  prices  reported  for the last  business day
      immediately preceding the Determination Date.

            (c) Except as provided in clause (d) below, if the Company's  Common
      Stock is not publicly traded,  then as the Holder and the Company agree or
      in the absence of agreement by  arbitration  in accordance  with the rules
      then in effect of the American  Arbitration  Association,  before a single
      arbitrator to be chosen from a panel of persons qualified by education and
      training to pass on the matter to be decided.

            (d)  If  the  Determination  Date  is  the  date  of a  liquidation,
      dissolution  or  winding  up,  or any event  deemed  to be a  liquidation,
      dissolution  or winding up pursuant  to the  Company's  charter,  then all
      amounts to be payable per share to holders of the Common Stock pursuant to
      the charter in the event of such  liquidation,  dissolution or winding up,
      plus all other  amounts to be  payable  per share in respect of the Common
      Stock in liquidation under the charter,  assuming for the purposes of this
      clause  (d) that all of the  shares of Common  Stock  then  issuable  upon
      exercise of the Option are outstanding at the Determination Date.


                                       2
<PAGE>

            1.3 Company  Acknowledgment.  The Company  will,  at the time of the
exercise of this Option,  upon the request of the holder hereof  acknowledge  in
writing its  continuing  obligation to afford to such holder any rights to which
such holder shall continue to be entitled after such exercise in accordance with
the  provisions  of this  Option.  If the  holder  shall  fail to make  any such
request,  such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.

            1.4  Trustee for Option  Holders.  In the event that a bank or trust
company  shall have been  appointed  as trustee  for the  holders of this Option
pursuant to Subsection 3.2, such bank or trust company shall have all the powers
and duties of a Option agent (as hereinafter described) and shall accept, in its
own name for the  account  of the  Company  or such  successor  person as may be
entitled  thereto,  all  amounts  otherwise  payable  to  the  Company  or  such
successor,  as the case may be, on  exercise  of this  Option  pursuant  to this
Section 1.

      2. Procedure for Exercise.

            2.1 Delivery of Stock  Certificates,  Etc. on Exercise.  The Company
agrees that the shares of Common Stock  purchased  upon  exercise of this Option
shall be deemed to be issued to the Holder as the record owner of such shares as
of the  close of  business  on the date on which  this  Option  shall  have been
surrendered and payment made for such shares in accordance herewith.  As soon as
practicable  after the  exercise of this  Option in full or in part,  and in any
event  within  three (3) business  days  thereafter,  the Company at its expense
(including  the payment by it of any  applicable  issue  taxes) will cause to be
issued in the name of and  delivered  to the  Holder,  or as such  Holder  (upon
payment  by  such  Holder  of any  applicable  transfer  taxes)  may  direct  in
compliance with applicable  securities  laws, a certificate or certificates  for
the number of duly and validly issued,  fully paid and  nonassessable  shares of
Common  Stock (or Other  Securities)  to which such Holder  shall be entitled on
such exercise,  plus, in lieu of any fractional share to which such holder would
otherwise be entitled,  cash equal to such fraction  multiplied by the then Fair
Market  Value  of one  full  share,  together  with  any  other  stock  or other
securities and property  (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.

            2.2 Exercise.

            (a)  Payment  may be made  (i)  either  in cash or by  certified  or
      official  bank  check  payable  to the order of the  Company  equal to the
      applicable  aggregate  Exercise Price, (ii) by delivery of Common Stock of
      the Company having a Fair Market Value equal to the Exercise Price,  (iii)
      by delivery of this Option,  or shares of Common Stock and/or Common Stock
      receivable upon exercise of this Option in accordance with the formula set
      forth in  subsection  (b) below,  or (iv) by a  combination  of any of the
      foregoing  methods,  for the  number of Common  Shares  specified  in such
      Exercise  Notice (as such exercise number shall be adjusted to reflect any
      adjustment  in the total number of shares of Common Stock  issuable to the
      Holder per the terms of this  Option) and the Holder  shall  thereupon  be
      entitled  to  receive  the  number  of duly  authorized,  validly  issued,
      fully-paid and non-assessable shares of Common Stock (or Other Securities)
      determined as provided herein.


                                       3
<PAGE>

            (b)  Notwithstanding  any provisions herein to the contrary,  if the
      Fair  Market  Value of one  share of  Common  Stock  is  greater  than the
      Exercise Price (at the date of calculation as set forth below), in lieu of
      exercising  this Option for cash,  the Holder may elect to receive  shares
      equal to the value (as  determined  below) of this  Option (or the portion
      thereof  being  exercised)  by surrender  of this Option at the  principal
      office of the Company together with the properly  endorsed Exercise Notice
      in which event the Company shall issue to the Holder a number of shares of
      Common Stock computed using the following formula:

      X=          Y(A-B)
                  ------
                     A

      Where X =   The  number  of  shares  of  Common  Stock to be issued to the
                  Holder

      Y =         the number of shares of Common  Stock  purchasable  under this
                  Option  or,  if  only  a  portion  of  this  Option  is  being
                  exercised,  the portion of this Option being exercised (at the
                  date of such calculation)

      A =         the Fair  Market  Value of one share of the  Company's  Common
                  Stock (at the date of such calculation)

      B =         The Exercise  Price per share (as adjusted to the date of such
                  calculation)

      3. Effect of Reorganization, Etc.; Adjustment of Exercise Price.

            3.1 Reorganization,  Consolidation, Merger, Etc. In case at any time
or from  time to time,  the  Company  shall  (a)  effect a  reorganization,  (b)
consolidate  with or  merge  into  any  other  person,  or (c)  transfer  all or
substantially all of its properties or assets to any other person under any plan
or arrangement  contemplating the dissolution of the Company, then, in each such
case,  as a condition  to the  consummation  of such a  transaction,  proper and
adequate  provision  shall be made by the Company  whereby  the  Holder,  on the
exercise  hereof as provided in Section 1 at any time after the  consummation of
such  reorganization,  consolidation  or  merger or the  effective  date of such
dissolution,  as the case may be, shall receive, in lieu of the Common Stock (or
Other  Securities)  issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property  (including cash) to
which  such  Holder  would  have  been  entitled  upon such  consummation  or in
connection  with such  dissolution,  as the case may be, if such  Holder  had so
exercised  this  Option,  immediately  prior  thereto,  all  subject  to further
adjustment thereafter as provided in Section 4.

            3.2  Dissolution.  In the event of any  dissolution  of the  Company
following the transfer of all or substantially  all of its properties or assets,
the Company,  concurrently with any distributions  made to holders of its Common
Stock,  shall at its expense  deliver or cause to be delivered to the Holder the
stock and other  securities  and property  (including  cash,  where  applicable)
receivable  by the Holder  pursuant to Section  3.1,  or, if the Holder shall so
instruct the  Company,  to a bank or trust  company  specified by the Holder and
having its principal office in New York, New York as trustee for the Holder (the
"Trustee").


                                       4
<PAGE>

            3.3 Continuation of Terms. Upon any  reorganization,  consolidation,
merger or transfer (and any dissolution  following any transfer)  referred to in
this  Section 3, this  Option  shall  continue  in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities and
property   receivable   on  the  exercise   after  the   consummation   of  such
reorganization,  consolidation  or merger or the effective  date of  dissolution
following any such  transfer,  as the case may be, and shall be binding upon the
issuer of any such stock or other securities, including, in the case of any such
transfer,  the person  acquiring all or  substantially  all of the properties or
assets of the Company,  whether or not such person shall have expressly  assumed
the terms as provided  in Section 4. In the event this Option does not  continue
in full force and effect after the consummation of the transactions described in
this Section 3, then the  Company's  securities  and property  (including  cash,
where  applicable)  receivable  by the Holder will be delivered to the Holder or
the Trustee as contemplated by Section 3.2.

      4.  Extraordinary  Events  Regarding  Common Stock.  In the event that the
Company shall (a) issue  additional  shares of the Common Stock as a dividend or
other  distribution on outstanding Common Stock or any preferred stock issued by
the Company,  (b)  subdivide  its  outstanding  shares of Common  Stock,  or (c)
combine  its  outstanding  shares of the Common  Stock into a smaller  number of
shares of the Common  Stock (each of the  preceding  clauses  (a)  through  (c),
inclusive, an "Event"), then, in each such event, the number of shares of Common
Stock that the Holder shall  thereafter,  on the exercise  hereof as provided in
Section 1, be entitled to receive  shall be adjusted to a number  determined  by
multiplying the number of shares of Common Stock that would immediately prior to
such Event be issuable  upon the  exercise of this Option by a fraction of which
(a) the numerator is the number of issued and outstanding shares of Common Stock
immediately after such Event and (b) the denominator is the number of issued and
outstanding shares of Common Stock immediately prior to such Event. The Exercise
price, as so adjusted, shall be readjusted in the same manner upon the happening
of any successive event or events described herein in this Section 4. The number
of shares of Common  Stock that the Holder  shall  thereafter,  on the  exercise
hereof as provided in Section 1, be entitled to receive shall be adjusted to the
number determined by multiplying the number of shares of Common Stock that would
otherwise  (but  for the  provisions  of this  Section  4) be  issuable  on such
exercise by a fraction of which (a) the  numerator  is the  Exercise  Price that
would otherwise (but for the provisions of this Section 4) be in effect, and (b)
the  denominator  is the Exercise  Price in effect on the date of such  exercise
(taking into account the provisions of this Section 4).

      5.  Certificate  as to  Adjustments.  In each  case of any  adjustment  or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of this  Option,  the Company at its expense  will  promptly  cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or  readjustment  in  accordance  with the terms of this  Option  and  prepare a
certificate  setting forth such adjustment or readjustment and showing in detail
the facts upon which such  adjustment  or  readjustment  is based,  including  a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold,  (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding,  and (c) the Exercise Price
and the number of shares of Common  Stock to be received  upon  exercise of this
Option,  in effect  immediately  prior to such adjustment or readjustment and as
adjusted or  readjusted as provided in this Option.  The Company will  forthwith
mail a copy of each such  certificate  to the Holder and any Option agent of the
Company (appointed pursuant to Section 11 hereof).


                                       5
<PAGE>

      6. Reservation of Stock, Etc., Issuable on Exercise of Option. The Company
will at all times reserve and keep  available,  solely for issuance and delivery
on the  exercise of this Option,  shares of Common  Stock (or Other  Securities)
from time to time issuable on the exercise of this Option.

      7. Assignment;  Exchange of Option.  Subject to compliance with applicable
securities  laws,  this  Option,   and  the  rights  evidenced  hereby,  may  be
transferred  by any  registered  holder hereof (a  "Transferor")  in whole or in
part.  On the  surrender  for  exchange of this  Option,  with the  Transferor's
endorsement  in  the  form  of  Exhibit  B  attached  hereto  (the   "Transferor
Endorsement  Form") and together with evidence  reasonably  satisfactory  to the
Company  demonstrating  compliance with applicable  securities laws, which shall
include,  without  limitation,  the  provision  of  a  legal  opinion  from  the
Transferor's  counsel (at the  Company's  expense)  that such transfer is exempt
from the registration requirements of applicable securities laws, the Company at
its expense  (but with  payment by the  Transferor  of any  applicable  transfer
taxes) will issue and deliver to or on the order of the Transferor thereof a new
Option of like tenor,  in the name of the  Transferor  and/or the  transferee(s)
specified in such Transferor Endorsement Form (each a "Transferee"),  calling in
the  aggregate  on the face or faces  thereof for the number of shares of Common
Stock  called  for on the face or  faces of the  Option  so  surrendered  by the
Transferor.

      8. Replacement of Option. On receipt of evidence  reasonably  satisfactory
to the Company of the loss, theft, destruction or mutilation of this Option and,
in the case of any such loss,  theft or destruction of this Option,  on delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the  Company  or,  in the  case of any  such  mutilation,  on  surrender  and
cancellation  of this  Option,  the  Company at its  expense  will  execute  and
deliver, in lieu thereof, a new Option of like tenor.

      9. Registration  Rights. The Holder has been granted certain  registration
rights by the Company. These registration rights are set forth in a Registration
Rights  Agreement  entered  into by the Company and Holder  dated as of the date
hereof,  as the same may be amended,  modified and/or  supplemented from time to
time.

      10. Maximum  Exercise.  Notwithstanding  anything  contained herein to the
contrary, the Holder shall not be entitled to exercise this Option in connection
with that number of shares of Common  Stock which  would  exceed the  difference
between (i) 4.99% of the issued and outstanding  shares of Common Stock and (ii)
the number of shares of Common  Stock  beneficially  owned by the Holder For the
purposes of the immediately  preceding sentence,  beneficial  ownership shall be
determined in accordance with Section 13(d) of the Exchange Act, as amended, and
Regulation 13d-3 thereunder. The conversion limitation described in this Section
10 shall automatically become null and void following notice to the Company upon
the  occurrence  and during the  continuance of an Event of Default under and as
defined in the Security Agreement, or upon 75 days prior notice to the Company.


                                       6
<PAGE>

      11. Option Agent. The Company may, by written notice to the each Holder of
the Option,  appoint an agent for the purpose of issuing  Common Stock (or Other
Securities)  on the  exercise of this Option  pursuant to Section 1,  exchanging
this Option pursuant to Section 7, and replacing this Option pursuant to Section
8, or any of the  foregoing,  and  thereafter  any such  issuance,  exchange  or
replacement, as the case may be, shall be made at such office by such agent.

      12. Transfer on the Company's  Books.  Until this Option is transferred on
the books of the Company,  the Company may treat the registered Holder hereof as
the absolute  owner hereof for all purposes,  notwithstanding  any notice to the
contrary.

      13. Notices, Etc. All notices and other communications from the Company to
the Holder shall be mailed by first class registered or certified mail,  postage
prepaid, at such address as may have been furnished to the Company in writing by
such Holder or, until any such Holder furnishes to the Company an address,  then
to, and at the address of, the last  Holder who has so  furnished  an address to
the Company.

      14. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged  or terminated  only by an instrument in writing  signed by the party
against which  enforcement of such change,  waiver,  discharge or termination is
sought.  THIS OPTION SHALL BE GOVERNED BY AND CONSTRUED IN  ACCORDANCE  WITH THE
LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
ANY ACTION BROUGHT CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS OPTION SHALL
BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED
IN THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT THE HOLDER MAY CHOOSE TO WAIVE
THIS  PROVISION  AND  BRING  AN  ACTION  OUTSIDE  THE  STATE  OF NEW  YORK.  The
individuals  executing  this Option on behalf of the Company  agree to submit to
the  jurisdiction  of such courts and waive trial by jury. The prevailing  party
shall be entitled to recover from the other party its reasonable attorneys' fees
and  costs.  In the  event  that any  provision  of this  Option is  invalid  or
unenforceable  under any applicable  statute or rule of law, then such provision
shall be deemed  inoperative  to the extent that it may conflict  therewith  and
shall be deemed  modified to conform  with such statute or rule of law. Any such
provision  which  may prove  invalid  or  unenforceable  under any law shall not
affect the validity or enforceability of any other provision of this Option. The
headings in this Option are for purposes of reference  only, and shall not limit
or otherwise affect any of the terms hereof. The invalidity or  unenforceability
of any provision hereof shall in no way affect the validity or enforceability of
any  other  provision  hereof.  The  Company  acknowledges  that  legal  counsel
participated in the preparation of this Option and,  therefore,  stipulates that
the  rule of  construction  that  ambiguities  are to be  resolved  against  the
drafting  party  shall not be applied in the  interpretation  of this  Option to
favor any party against the other party.


                                       7
<PAGE>

                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
                             SIGNATURE PAGE FOLLOWS]


                                       8
<PAGE>

      IN WITNESS  WHEREOF,  the Company has executed  this Option as of the date
first written above.

                                        AMERICAN TECHNOLOGIES GROUP, INC.

WITNESS:
                                        By:
                                               ---------------------------------
                                        Name:
                                               ---------------------------------
                                        Title:
------------------------------------           ---------------------------------


                                       9
<PAGE>

                                    Exhibit A

                              FORM OF SUBSCRIPTION
                    (To Be Signed Only On Exercise Of Option)

TO:   American Technologies Group, Inc.

      -------------------------------

      -------------------------------

      Attention:   Chief Financial Officer

      The  undersigned,  pursuant to the  provisions  set forth in the  attached
Option (No.____), hereby irrevocably elects to purchase (check applicable box):

            ________ ________ shares of the Common Stock covered by such Option;
      or

            ________  the maximum  number of shares of Common  Stock  covered by
      such  Option  pursuant to the  cashless  exercise  procedure  set forth in
      Section 2.

      The undersigned herewith makes payment of the full Exercise Price for such
shares  at  the  price  per  share  provided  for  in  such  Option,   which  is
$___________. Such payment takes the form of (check applicable box or boxes):

            ________ $__________ in lawful money of the United States; and/or

            ________ the  cancellation of such portion of the attached Option as
      is exercisable for a total of _______ shares of Common Stock (using a Fair
      Market  Value of $_______  per share for  purposes  of this  calculation);
      and/or

            ________ the  cancellation  of such number of shares of Common Stock
      as is necessary,  in accordance with the formula set forth in Section 2.2,
      to exercise  this Option with  respect to the maximum  number of shares of
      Common Stock purchasable  pursuant to the cashless exercise  procedure set
      forth in Section 2.

      The undersigned  requests that the  certificates for such shares be issued
in the name of, and delivered to  ______________________________________________
whose address is _______________________________________________________________

      The  undersigned  represents  and Options that all offers and sales by the
undersigned of the securities  issuable upon exercise of the within Option shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933,  as amended  (the  "Securities  Act") or  pursuant  to an  exemption  from
registration under the Securities Act.

Dated:
      ------------------------          ----------------------------------------
                                        (Signature   must  conform  to  name  of
                                        holder as  specified  on the face of the
                                        Option)
                                        Address:
                                                 -------------------------------

                                                 -------------------------------


                                       10
<PAGE>

                                    Exhibit B

                         FORM OF TRANSFEROR ENDORSEMENT
                    (To Be Signed Only On Transfer Of Option)

      For value received,  the undersigned hereby sells,  assigns, and transfers
unto the  person(s)  named  below  under  the  heading  "Transferees"  the right
represented by the within Option to purchase the percentage and number of shares
of Common  Stock of American  Technologies  Group,  Inc.,  into which the within
Option relates specified under the headings "Percentage Transferred" and "Number
Transferred," respectively,  opposite the name(s) of such person(s) and appoints
each such  person  Attorney  to transfer  its  respective  right on the books of
American  Technologies  Group,  Inc.,  with full  power of  substitution  in the
premises.

                                                Percentage            Number
Transferees        Address                      Transferred         Transferred
-----------        -------                      -----------         -----------









Dated:
      ------------------------          ----------------------------------------
                                        (Signature   must  conform  to  name  of
                                        holder as  specified  on the face of the
                                        Option)
                                        Address:
                                                 -------------------------------

                                                 -------------------------------

                                        SIGNED IN THE PRESENCE OF:

                                        ----------------------------------------
                                                          (Name)

ACCEPTED AND AGREED:
[TRANSFEREE]


------------------------------------
              (Name)