SECURED REVOLVING NOTE

 

THIS NOTE AND THE COMMON SHARES   ISSUABLE UPON   CONVERSION OF THIS NOTE HAVE NOT

BEEN   REGISTERED   UNDER THE   SECURITIES   ACT OF 1933,   AS AMENDED,   OR ANY STATE

SECURITIES   LAWS.   THIS NOTE AND THE COMMON SHARES   ISSUABLE UPON   CONVERSION OF

THIS NOTE MAY NOT BE SOLD,   OFFERED   FOR SALE,   PLEDGED OR   HYPOTHECATED   IN THE

ABSENCE OF AN   EFFECTIVE   REGISTRATION   STATEMENT AS TO THIS NOTE 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.

 

                             SECURED REVOLVING NOTE

 

      FOR VALUE RECEIVED,   each of AMERICAN   TECHNOLOGIES   GROUP, INC., a Nevada

corporation (the "Parent"), and the other companies listed on EXHIBIT A attached

hereto (such other   companies   together   with the Parent,   each a "COMPANY"   and

collectively, the "COMPANIES"), jointly and severally, promises to pay to LAURUS

MASTER FUND, LTD., c/o M&C Corporate   Services Limited,   P.O. Box 309 GT, Ugland

House,   South Church Street,   George Town,   Grand Cayman,   Cayman Islands,   Fax:

345-949-8080 (the "HOLDER") or its registered assigns or successors in interest,

the sum of   Seven   Million   Dollars   ($7,000,000),   without   duplication   of any

amounts owing by the Companies to the Holder under the Minimum   Borrowing   Notes

(as defined in the Security Agreement referred to below), or, if different,   the

aggregate   principal   amount of all Loans (as defined in the Security   Agreement

referred to below),   together with any accrued and unpaid   interest   hereon,   on

September 6, 2008 (the "MATURITY Date") if not sooner indefeasibly paid in full.

 

      This Secured   Revolving   Note (this "NOTE") is intended to be a registered

obligation within the meaning of Treasury   Regulation Section   1.871-14(c)(1)(i)

and each Company (or its agent) shall register this Note (and   thereafter   shall

maintain   such   registration)   as to both   principal   and any   stated   interest.

Notwithstanding   any document,   instrument or agreement relating to this Note to

the   contrary,   transfer of this Note (or the right to any payments of principal

or stated   interest   thereunder)   may only be effected by (i)   surrender of this

Note and either the   reissuance by the Company of this Note to the new holder or

the   issuance by the   Company of a new   instrument   to the new   holder,   or (ii)

transfer   through a book entry system   maintained by the Company (or its agent),

within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

 

      Capitalized   terms used herein without   definition shall have the meanings

ascribed to such terms in that certain   Security   Agreement dated as of the date

hereof by and among the   Companies and the Holder (as amended,   modified   and/or

supplemented from time to time, the "SECURITY AGREEMENT").

 

      The following terms shall apply to this Note:

 

 

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                                    ARTICLE I

                    CONTRACT RATE AND MINIMUM BORROWING NOTE

 

      1.1 CONTRACT RATE.   Subject to Sections 3.2 and 4.10,   interest payable on

the outstanding   principal   amount of this Note (the   "PRINCIPAL   AMOUNT") shall

accrue at a rate per   annum   equal to the   "prime   rate"   published   in THE WALL

STREET JOURNAL from time to time (the "PRIME RATE"),   plus two percent (2%) (the

"CONTRACT RATE").   The Contract Rate shall be increased or decreased as the case

may be for each   increase or   decrease   in the Prime Rate in an amount   equal to

such   increase or decrease in the Prime Rate;   each change to be effective as of

the day of the change in the Prime Rate.   Subject to Section   1.2,   the Contract

Rate shall not at any time be less than   eight and   one-quarter   of one   percent

(8.25%).   Interest   shall be (i)   calculated on the basis of a 360 day year, and

(ii) payable   monthly,   in arrears,   commencing   on October 1, 2005 on the first

business day of each consecutive calendar month thereafter through and including

the   Maturity   Date,   and on the   Maturity   Date,   whether   by   acceleration   or

otherwise.

 

      1.2 CONTRACT RATE   ADJUSTMENTS   AND   PAYMENTS.   The Contract Rate shall be

calculated on the last business day of each calendar month hereafter (other than

for   increases   or   decreases   in the Prime Rate which shall be   calculated   and

become effective in accordance with the terms of Section 1.1) until the Maturity

Date (each a   "DETERMINATION   DATE") and shall be subject to   adjustment   as set

forth herein.   If (i) the Parent shall have   registered the shares of its Common

Stock underlying the conversion of each Minimum Borrowing Note, each Warrant and

each Option on a registration statement declared effective by the Securities and

Exchange   Commission (the "SEC"), and (ii) the market price (the "MARKET PRICE")

of the Common Stock as reported by Bloomberg,   L.P. on the Principal   Market for

the five (5) trading days immediately preceding a Determination Date exceeds the

then applicable Fixed Conversion   Price by at least   twenty-five   percent (25%),

the Contract   Rate for the   succeeding   calendar   month shall   automatically   be

reduced by 200 basis   points   (200 b.p.) (2%) for each   incremental   twenty-five

percent   (25%)   increase in the Market   Price of the Common Stock above the then

applicable Fixed Conversion Price.   Notwithstanding   the foregoing (and anything

to the contrary   contained   herein),   in no event shall the Contract Rate at any

time be less than zero percent (0%).

 

      1.3   ALLOCATION OF PRINCIPAL TO MINIMUM   BORROWING   NOTE.   Notwithstanding

anything   herein   to the   contrary,   whenever   during   the Term the   outstanding

balance on the Minimum   Borrowing Note shall be less than the Minimum   Borrowing

Amount (such amount being   referred to herein as the   "TRANSFERABLE   AMOUNT") to

the extent that the   outstanding   balance on the Revolving   Note should equal or

exceed   $3,000,000,   that   portion   of the   balance of the   Revolving   Note that

exceeds   $3,000,000,   but does not   exceed   the   Transferable   Amount,   shall be

segregated from the   outstanding   balance under the Revolving Note and allocated

to and aggregated with the then existing balance of the next unissued serialized

Minimum Borrowing Note (the "NEXT UNISSUED SERIALIZED NOTE"); provided that such

segregated   balance   shall remain   subject to the terms and   conditions   of such

Revolving   Note until a new serialized   Minimum   Borrowing Note is issued as set

forth below.   The Next Unissued   Serialized Note shall remain in book entry form

until the balance   thereunder shall equal the Minimum Borrowing Amount, at which

time a new   serialized   Minimum   Borrowing   Note in the face amount equal to the

Minimum   Borrowing   Amount   will be issued   and   registered   as set forth in the

Registration   Rights Agreement (and the outstanding   balance under the Revolving

Note shall at such time be   correspondingly   reduced in the amount   equal to the

Minimum   Borrowing   Amount as a result of the   issuance   of such new   serialized

Minimum Borrowing Note).

 

 

                                       2

<PAGE>

 

                                    ARTICLE II

                  CONVERSION RIGHTS AND FIXED CONVERSION PRICE

 

      2.1   OPTIONAL   CONVERSION.   Subject to the terms of this   Article   II, the

Holder   shall   have the   right,   but not the   obligation,   at any time until the

Maturity   Date, or during an Event of Default (as defined in Article III),   and,

subject to the   limitations   set forth in Section 2.2 hereof,   to convert all or

any portion of the outstanding Principal Amount and/or accrued interest and fees

due and   payable   into fully   paid and   nonassessable   restricted   shares of the

Common Stock at the Fixed Conversion Price (defined below). For purposes hereof,

subject to Section   2.6 hereof,   the   initial   "FIXED   CONVERSION   PRICE"   means

$0.0033. The shares of Common Stock to be issued upon such conversion are herein

referred to as the "CONVERSION SHARES."

 

      2.2 CONVERSION   LIMITATION.   Notwithstanding   anything contained herein to

the contrary,   the Holder shall not be entitled to convert pursuant to the terms

of this Note an amount that would be convertible   into that number of Conversion

Shares   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 and issuable to the Holder upon exercise of the

Warrants and the Options.   For purposes of the immediately   preceding   sentence,

beneficial ownership shall be determined in accordance with Section 13(d) of the

Exchange Act and Regulation 13d-3   thereunder.   The Conversion Shares limitation

described in this Section 2.2 shall automatically become null and void following

notice to any Company upon the occurrence and during the continuance of an Event

of Default, or upon 75 days prior notice to the Parent. Notwithstanding anything

contained   herein   to the   contrary,   the   provisions   of this   Section   2.2 are

irrevocable and may not be waived by the Holder or any Company.

 

      2.3 MECHANICS OF HOLDER'S CONVERSION.   In the event that the Holder elects

to convert   this Note into Common   Stock,   the Holder   shall give notice of such

election by   delivering   an   executed   and   completed   notice of   conversion   in

substantially the form of Exhibit B hereto (appropriately completed) ("NOTICE OF

CONVERSION")   to the   Parent   and such   Notice   of   Conversion   shall   provide a

breakdown in reasonable   detail of the Principal   Amount,   accrued   interest and

fees that are being converted.   On each Conversion Date (as hereinafter defined)

and in   accordance   with its Notice of   Conversion,   the   Holder   shall make the

appropriate   reduction to the   Principal   Amount,   accrued   interest and fees as

entered in its records and shall provide   written   notice   thereof to the Parent

within two (2) Business   Days after the   Conversion   Date.   Each date on which a

Notice of Conversion is delivered or telecopied to the Parent in accordance with

the   provisions   hereof   shall be   deemed a   Conversion   Date   (the   "CONVERSION

DATE")..   Pursuant   to the terms of the Notice of   Conversion,   the Parent   will

issue   instructions   to the transfer agent   accompanied by an opinion of counsel

within one (1)   Business   Day of the date of the   delivery   to the Parent of the

Notice   of   Conversion   and shall   cause   the   transfer   agent to   transmit   the

certificates   representing the Conversion   Shares to the Holder by crediting the

account of the Holder's   designated broker with the Depository Trust Corporation

("DTC") through its Deposit   Withdrawal Agent Commission   ("DWAC") system within

three (3) Business   Days after receipt by the Parent of the Notice of Conversion

(the "DELIVERY   Date"). In the case of the exercise of the conversion rights set

forth herein the conversion privilege shall be deemed to have been exercised and

the Conversion Shares issuable upon such conversion shall be