<PAGE>

                                         This Security Agreement is entered into
                                         January 23, 2002 to be effective as of
                                         January 10, 2002 (References to the
                                         date of this Security Agreement
                                         contained herein shall be deemed to
                                         mean January 10, 2002.)

                               SECURITY AGREEMENT

================================================================================
LENDER/SECURED PARTY:                DEBTOR(S)/PLEDGOR(S):

DAMAD HOLDING AG                        FRISBY TECHNOLOGIES, INC.

    LINDENSTRASSE 14                    3195 CENTRE PARK BOULEVARD
    CH - 6340 BAAR                      WINSTON-SALEM, FORSYTH COUNTY, NC  27107
    SWITZERLAND
    ATTN: DANIEL GUGGENHEIM

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Debtor/Pledgor is:  [ ] Individual  [X] Corporation  [ ] Partnership
[ ] Other
          -------------------------------------------------
Address is Debtor's/Pledgor's:  [ ] Residence   [X] Place of Business
[ ] Chief Executive Office if more than one place of business
Collateral (hereinafter defined) is located at:  [X] Debtor's/Pledgor's address
shown above   [ ] the following address:

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

Reference is made to that certain Loan Agreement entered into January 23, 2002
to be effective as of January 10, 2002 (the "Loan Agreement") between Lender and
Debtor. Capitalized terms used herein and not otherwise defined herein shall
have the meaning ascribed to them in the Loan Agreement.

1.       SECURITY INTEREST. For good and valuable consideration, the receipt and
         adequacy of which are hereby acknowledged, Debtor/Pledgor (hereinafter
         referred to as "Debtor") assigns and grants to Lender (also known as
         "Secured Party"), a security interest and lien in the Collateral
         (hereinafter defined) to secure the payment and the performance of the
         Obligation (hereinafter defined).

2.       COLLATERAL. A security interest is granted in the following collateral
         described in this Item 2 (the "Collateral"):

         A.       TYPES OF COLLATERAL (check as applicable)

[X]      ACCOUNTS: Any and all accounts and other rights of Debtor to the
payment for goods sold or leased or for services rendered whether or not earned
by performance, contract rights, book debts, checks, notes, drafts, instruments,
chattel, paper acceptances, and any and all amounts due to Debtor from a factor
or other forms of obligations and receivables now existing or hereafter arising
out of the business of Debtor.

[X]      INVENTORY: Any and all of Debtor's goods held as inventory

whether now owned or hereafter acquired, including without limitation, any and
all such goods held for sale or lease or being processed for sale or lease in
Debtor's business, as now or hereafter conducted including all materials goods
and work in process, finished goods and other tangible property held for sale or
lease or furnished or to be furnished under contracts of service or used or
consumed in Debtor's business, along with all documents (including documents of
title) covering such inventory.

[X]      EQUIPMENT: Any and all of Debtor's goods held as equipment

including, without limitation, all machinery, tools, dies, furnishings, or
fixtures wherever located whether now owned or hereafter acquired, together with
all increases, parts, fittings, accessories, equipment, and special tools now or
hereafter affixed to any part thereof or used in connection therewith.

[X]      FIXTURES:

[X]      Specific Fixtures: Limited to any and all of Debtor's goods held as
fixtures which are specifically described in the space below to the extent that
granting a security interest shall not constitute a violation of law or default
under any agreement or contract applicable to Debtor.

whether now existing or hereafter acquired. These goods are or will become
fixtures on the following described real estate in Forsyth County, North
Carolina, owned by: Debtor more particularly described as follows: as described
in Exhibit A attached hereto.


                                      -1-

<PAGE>

[X]      GENERAL INTANGIBLES:

         Any and all of Debtor's general intangible property, including, without
limitation, all patents, trademarks, service marks and exclusive licenses
(whether issued or pending), and all processes and systems related thereto.

         B.       SUBSTITUTIONS, PROCEEDS AND RELATED ITEMS. Any and all
                  substitutes and replacements for, accessions, attachments and
                  other additions to, tools, parts and equipment now or
                  hereafter added to or used in connection with, and all cash or
                  non-cash proceeds and products of, the Collateral (including,
                  without limitation all income benefits and property
                  receivable, received or distributed which results from any of
                  the Collateral, such as dividends payable or distributable in
                  cash property or stock; insurance distributions of any kind
                  related to the Collateral, including, without limitation,
                  returned premiums interest premium and principal payments;
                  redemption proceeds and subscription rights; and shares or
                  other proceeds of conversions or splits of any securities in
                  the Collateral) any and all choses in action and causes of
                  action of Debtor, whether now existing or hereafter arising,
                  relating directly or indirectly to the Collateral (whether
                  arising in contract, tort or otherwise and whether or not
                  currently in litigation); all certificates of title,
                  manufacturer's statements of origin, other documents, accounts
                  and chattel paper, whether now existing or hereafter arising
                  directly or indirectly from or related to the Collateral; all
                  warranties, wrapping, packaging, advertising and shipping
                  materials used or to be used in connection with or related to
                  the Collateral; all of Debtors books, records, data, plans,
                  manuals, computer software, computer tapes, computer systems,
                  computer disks, computer programs, source codes and object
                  codes containing any information, pertaining directly or
                  indirectly to the Collateral and all rights of Debtor to
                  retrieve data and other information pertaining directly or
                  indirectly to the Collateral from third parties, whether now
                  existing or hereafter arising; and all returned refused,
                  stopped in transit, or repossessed Collateral, any of which,
                  received by Debtor, upon request shall be delivered
                  immediately to Lender.

3.       DESCRIPTION OF OBLIGATION(S). The following obligations ("Obligation"
         or "Obligations") are secured by this Agreement: (a) All debts,
         obligations liabilities and agreements of Debtor to Lender, now or
         hereafter existing, arising under the Loan Agreement, and all renewals,
         extensions or rearrangement of any of the above; (b) All costs incurred
         by Lender to obtain, preserve, perfect and enforce this Agreement and
         maintain, preserve, collect and realize upon the Collateral; (c) All
         other reasonable costs and reasonable attorney's fees incurred by
         Lender for which Debtor is obligated to reimburse Lender in accordance
         with the terms of the Loan Documents, together with interest at the
         maximum rate allowed by law or if none, Prime Rate plus 3.75% per
         annum. If Debtor is not the obligor of the Obligation, and in the event
         any amount paid to Lender on any Obligation is subsequently recovered
         from Lender in or as a result of any bankruptcy, insolvency or
         fraudulent conveyance proceeding, Debtor shall be liable to Lender for
         the amounts so recovered up to the fair market value of the Collateral
         whether or not the Collateral has been released or the security
         interest terminated. In the event the Collateral has been released or
         the security interest terminated the fair market value of the
         Collateral shall be determined, at Lender's option, as of the date the
         Collateral was released, the security interest terminated, or said
         amounts were recovered.

4.       DEBTOR'S WARRANTIES. Debtor hereby represents and warrants to Lender as
         follows:

         A.       FINANCING STATEMENTS. Except as may be noted by schedule
                  attached hereto and incorporated herein by reference, no
                  financing statement covering the Collateral is or will be on
                  file in any public office, except the financing statements
                  relating to this security interest, and no security interest,
                  other than the one herein created, has attached or been
                  perfected in the Collateral or any part thereof.

         B.       OWNERSHIP. Debtor owns, or will use the proceeds of any loans
                  by Lender to become the owner of, the Collateral free from any
                  setoff, claim, restriction, lien, security interest or
                  encumbrance, except Permitted Liens and the security interest
                  hereunder.

         C.       FIXTURES AND ACCESSIONS. No material part of the Collateral is
                  affixed to real estate or is an accession to any goods, or
                  will become a fixture or accession, except as expressly set
                  out herein.

         D.       CLAIMS OF DEBTORS ON THE COLLATERAL. As of the date of this
                  Agreement, all account debtors and other obligors whose debts
                  or obligations are part of the Collateral have no right to
                  setoffs, counterclaims or adjustments, and no defenses in
                  connection therewith, except defenses, adjustments, setoffs
                  and counterclaims that arise in the ordinary course of
                  business.

         E.       ENVIRONMENTAL COMPLIANCE. To the best of Debtor's knowledge,
                  the conduct of Debtor's business operations and the condition
                  of Debtor's property does not and will not violate any federal
                  laws, rules or ordinances for environmental protection,
                  regulations of the Environmental Protection Agency and any
                  applicable local or state law rule, regulation or rule of
                  common law and any judicial interpretation thereof relating
                  primarily to the environment or any materials defined as
                  hazardous materials or substances under any local, state or
                  federal environmental laws, rules or regulations, and
                  petroleum, petroleum products, oil and asbestos ("Hazardous
                  Materials"), except violations which are not likely to have a
                  Material Adverse Effect.


                                      -2-

<PAGE>

         F.       POWER AND AUTHORITY. Debtor has full power and authority to
                  make this Agreement, and all necessary consents and approvals
                  of any persons, entities, governmental or regulatory
                  authorities and securities exchanges have been obtained to
                  effectuate the validity of this Agreement.

5.       DEBTOR'S COVENANTS. Until full payment and performance of all of the
         Obligations and termination or expiration of any obligation or
         commitment of Lender to make advances or loans to Debtor, unless Lender
         otherwise consents in writing:

         A.       OBLIGATION AND THIS AGREEMENT. Debtor shall perform all of its
                  agreements herein and in any other material agreements between
                  it and Lender.

         B.       OWNERSHIP AND MAINTENANCE OF THE COLLATERAL. Debtor shall keep
                  all tangible Collateral (except Collateral that is obsolete or
                  no longer used in the ordinary course of business) in good
                  condition. Debtor shall defend the Collateral against all
                  claims and demands of all persons at any time claiming any
                  interest therein adverse to Lender. Debtor shall keep the
                  Collateral free from all liens and security interests except
                  Permitted Liens and the security interest hereby created.

         C.       INSURANCE. Debtor shall insure the Collateral with companies
                  reasonably acceptable to Lender. Such insurance shall be in an
                  amount not less than the fair market value of the Collateral
                  and shall be against such casualties with such deductible
                  amounts as Lender shall approve. All insurance policies shall
                  be written for the benefit of Debtor and Lender as their
                  interests may appear, payable to Lender as loss payee, or in
                  other form satisfactory to Lender, and such policies or
                  certificates evidencing the same shall be furnished to Lender.
                  All policies of insurance shall provide for written notice to
                  Lender at least thirty (30) days prior to cancellation. Risk
                  of loss or damage is Debtor's to the extent of any deficiency
                  in any effective insurance coverage.

         D.       LENDER'S COSTS. Debtor shall pay all reasonable costs
                  necessary to obtain, preserve, perfect, defend and enforce the
                  security interest created by this Agreement, collect the
                  Obligation, and preserve, defend, enforce and collect the
                  Collateral, including but not limited to taxes, assessments,
                  insurance premiums, repairs, rent, storage costs and expenses
                  of sales legal expenses, reasonable attorney's fees and other
                  fees or expenses for which Debtor is obligated to reimburse
                  Lender in accordance with the terms of the Loan Documents.
                  Whether the Collateral is or is not in Lender's possession,
                  and without any obligation to do so and without waiving
                  Debtor's default for failure to make any such payment, Lender
                  at its option may pay any such costs and expenses, discharge
                  encumbrances on the Collateral, and pay for insurance of the
                  Collateral, and such payments shall be a part of the
                  Obligation and bear interest at the rate set out in the
                  Obligation. Debtor agrees to reimburse Lender on demand for
                  any costs so incurred.

         E.       INFORMATION AND INSPECTION. Debtor shall (i) promptly furnish
                  Lender any information with respect to the Collateral
                  reasonably requested by Lender; (ii) allow Lender or its
                  representatives to inspect the Collateral, during business
                  hours and wherever located, and to inspect and copy, or
                  furnish Lender or its representatives with copies of, all
                  records relating to the Collateral and the Obligation; (iii)
                  promptly furnish Lender or its representatives such
                  information as Lender may request to identify the Collateral,
                  at the time and in the form requested by Lender; and (iv)
                  deliver upon request to Lender shipping and delivery receipts
                  evidencing the shipment of goods and invoices evidencing the
                  receipt of, and the payment for, the Collateral.

         F.       ADDITIONAL DOCUMENTS. Debtor shall sign and deliver any papers
                  deemed reasonably necessary or desirable in the judgment of
                  Lender to obtain, maintain, and perfect the security interest
                  hereunder and to enable Lender to comply with any federal or
                  state law in order to obtain or perfect Lender's interest in
                  the Collateral or to obtain proceeds of the Collateral.

         G.       PARTIES LIABLE ON THE COLLATERAL. Debtor shall preserve the
                  liability of all obligors on any Collateral, shall preserve
                  the priority of all security therefor. Lender shall have no
                  duty to preserve such liability or security, but may do so at
                  the expense of Debtor, without waiving Debtor's default.

         H.       RECORDS OF THE COLLATERAL. Debtor at all times shall maintain
                  accurate books and records covering the Collateral. Debtor
                  immediately will mark all books and records with an entry
                  showing the absolute assignment of all Collateral to Lender,
                  and Lender is hereby given the right to audit the books and
                  records of Debtor relating to the Collateral at any time and
                  from time to time. The amounts shown as owed to Debtor on
                  Debtor's books and on any assignment schedule will be the
                  undisputed amounts owing and unpaid.

         I.       DISPOSITION OF THE COLLATERAL. If disposition of any
                  Collateral gives rise to an account, chattel paper or
                  instrument, Debtor immediately shall notify Lender, and upon
                  request of Lender shall assign or indorse the same to Lender.
                  No Collateral may be sold, leased, manufactured, processed or
                  otherwise disposed of by Debtor in any manner without the
                  prior written consent of Lender, except: (1) the Collateral
                  sold, leased, manufactured, processed or consumed in the
                  ordinary course of business, and (2) dispositions of
                  Collateral that is obsolete or no longer used in Debtor's
                  business.

         J.       ACCOUNTS. Each account held as Collateral will represent the
                  valid and legally enforceable obligation of third parties and
                  shall not be evidenced by any instrument or chattel paper.


                                      -3-

<PAGE>

         K.       NOTICE/LOCATION OF THE COLLATERAL. Debtor shall give Lender
                  written notice of each office of Debtor in which records of
                  Debtor pertaining to accounts held as Collateral are kept and
                  each location at which the Collateral is or will be kept, and
                  of any change of any such location. If no such notice is
                  given, all records of Debtor pertaining to the Collateral and
                  all Collateral of Debtor are and shall be kept at the address
                  marked by Debtor above.

         L.       CHANGE OF NAME/STATUS AND NOTICE OF CHANGES. Without the
                  written consent of Lender, Debtor shall not change its name,
                  change its corporate status, use any trade name or engage in
                  any business not reasonably related to its business as
                  presently conducted. Debtor shall notify Lender immediately of
                  (i) any material change in the Collateral, (ii) a change in
                  Debtor's residence or location, (iii) a change in any matter
                  warranted or represented by Debtor in this Agreement, or in
                  any of the Loan Documents or furnished to Lender pursuant to
                  this Agreement, and (iv) the occurrence of an Event of Default
                  (hereinafter defined).

         M.       USE AND REMOVAL OF THE COLLATERAL. Debtor shall not use the
                  Collateral illegally. Debtor shall not, unless previously
                  indicated as a fixture, permit the Collateral to be affixed to
                  real or personal property without the prior written consent of
                  Lender. Debtor shall not permit any of the Collateral to be
                  removed from the locations specified herein without the prior
                  written consent of Lender, except for the sale of inventory in
                  the ordinary course of business.

         N.       POSSESSION OF THE COLLATERAL. Debtor shall deliver all
                  investment securities and other instruments, documents and
                  chattel paper which are part of the Collateral and in Debtor's
                  possession to Lender immediately upon request, or if hereafter
                  acquired, immediately following acquisition and such request,
                  appropriately endorsed to Lender s order, or with appropriate,
                  duly executed powers. Debtor waives presentment, notice of
                  acceleration, demand, notice of dishonor, protest, and all
                  other notices with respect thereto.

         O.       CONSUMER CREDIT. If any Collateral or proceeds includes
                  obligations of third parties to Debtor, the transactions
                  giving rise to the Collateral shall conform in all material
                  respects to the applicable state or federal law including but
                  not limited to consumer credit law. Debtor shall hold harmless
                  and indemnify Lender against any cost, loss or expense arising
                  from Debtor's breach of this covenant.

         P.       POWER OF ATTORNEY. Debtor appoints Lender and any officer
                  thereof effective upon the occurrence and during the
                  continuance of an Event of Default as Debtor's
                  attorney-in-fact with full power in Debtor's name and behalf
                  to do every act which Debtor is obligated to do or may be
                  required to do hereunder; however, nothing in this paragraph
                  shall be construed to obligate Lender to take any action
                  hereunder nor shall Lender be liable to Debtor for failure to
                  take any act on hereunder. This appointment shall be deemed a
                  power coupled with an interest and shall not be terminable as
                  long as the Obligation is outstanding and shall not terminate
                  on the disability or incompetence of Debtor.

         Q.       WAIVERS BY DEBTOR. Debtor waives notice of the creation,
                  advance, increase, existence, extension or renewal of and of
                  any indulgence with respect to, the Obligation; waives
                  presentment, demand, notice of dishonor, and protest; waives
                  notice of the amount of the Obligation outstanding at any
                  time, notice of any change in financial condition of any
                  person liable for the Obligation or any part thereof, and all
                  other notices respecting the Obligation except for notices to
                  be provided under the Loan Agreement. Debtor waives any right
                  to require that any action be brought against any other person
                  or to require that resort be had to any other security or to
                  any balance of any deposit account. Debtor further waives any
                  right of subrogation or to enforce any right of action against
                  any other Debtor until the Obligation is paid in full.

         R.       OTHER PARTIES AND OTHER COLLATERAL. No renewal or extension of
                  or any other indulgence with respect to the Obligation or any
                  part thereof, no release of any security, no release of any
                  person (including any maker, indorser, guarantor or surety)
                  liable on the Obligation, no delay in enforcement of payment,
                  and no delay or omission or lack of diligence or care in
                  exercising any right or power with respect to the Obligation
                  or any security therefor or guaranty thereof or under this
                  Agreement shall in any manner impair or affect the rights of
                  Lender under the law, hereunder, or under any other agreement
                  pertaining to the Collateral. Lender need not file suit or
                  assert a claim for personal judgment against any person for
                  any part of the Obligation or seek to realize upon any other
                  security for the Obligation, before foreclosing or otherwise
                  realizing upon the Collateral Debtor waives any, right to the
                  benefit of or to require or control application of any other
                  security or proceeds thereof, and agrees that Lender shall
                  have no duty or obligation to Debtor to apply to the
                  Obligation any such other security or proceeds thereof.

         S.       COLLECTION AND SEGREGATION OF ACCOUNTS AND RIGHT TO NOTIFY.
                  Lender hereby authorizes Debtor to collect the Collateral,
                  subject to the direction and control of Lender, but following
                  the occurrence and during the continuance of an Event of
                  Default, Lender may without cause or notice, curtail or
                  terminate said authority at any time. Upon notice by Lender,
                  whether oral or in writing to Debtor, Debtor shall forthwith
                  upon receipt of all checks, drafts, cash, and other
                  remittances in payment of or on account following the
                  occurrence and during the continuance of an Event of Default
                  of the Collateral, deposit the same in one or more special
                  accounts maintained with Lender over which Lender alone shall
                  have power of withdrawal. The remittance of the proceeds of
                  such Collateral shall not, however, constitute payment or
                  liquidation of such Collateral until Lender shall receive good
                  funds for such proceeds. Funds placed in such special accounts
                  shall be held by Lender as security for all Obligations
                  secured hereunder. These


                                      -4-

<PAGE>

                  proceeds shall be deposited in precisely the form received
                  except for the endorsement of Debtor where necessary to permit
                  collection of items, which indorsement Debtor agrees to make
                  and which indorsement Lender is also hereby authorized, as
                  attorney-in-fact, to make on behalf of Debtor. In the event
                  Lender has notified Debtor to make deposits to a special
                  account, pending such deposit, Debtor agrees that it will not
                  commingle any such checks, drafts, cash or other remittances
                  with any funds or other property of Debtor, but will hold them
                  separate and apart therefrom, and upon an express trust for
                  Lender until deposit thereof is made in the special account.
                  Lender will, from time to time, apply the whole or any part of
                  the Collateral funds on deposit in this special account
                  against such Obligations as are secured hereby as Lender may
                  in its sole discretion elect. At the sole election of Lender,
                  any portion of said funds on deposit in the special account
                  which Lender shall elect not to apply to the Obligations, may
                  be paid over by Lender to Debtor. At any time, following the
                  occurrence and during the continuance of an Event of Default,
                  Lender may notify persons obligated on any Collateral to make
                  payments directly to Lender and Lender may take control of all
                  proceeds of any Collateral. Until Lender elects to exercise
                  such rights, Debtor as agent of Lender, shall collect and
                  enforce all payments owed on the Collateral.

         T.       COMPLIANCE WITH STATE AND FEDERAL LAWS. Debtor will maintain
                  its existence, good standing and qualification to do business,
                  where the failure to do so would result in a Material Adverse
                  Effect, and comply in all material respects with all laws,
                  regulations and governmental requirements, including without
                  limitation, environmental laws applicable to it or any of its
                  property, business operations and transactions.

         U.       ENVIRONMENTAL COVENANTS. Debtor shall immediately advise
                  Lender in writing of (i) any and all material enforcement,
                  cleanup, remedial, removal, or other governmental or
                  regulatory actions instituted, completed or threatened
                  pursuant to any applicable federal, state, or local laws,
                  ordinances or regulations relating to any Hazardous Materials
                  affecting Debtor's business operations; and (ii) all material
                  claims made or threatened by any third party against Debtor
                  relating to damages, contribution, cost recovery,
                  compensation, loss or injury resulting from any Hazardous
                  Materials. Debtor shall immediately notify Lender of any
                  material remedial action taken by Debtor with respect to
                  Debtor's business operations. Debtor will not use or permit
                  any other party to use any Hazardous Materials at any of
                  Debtor's places of business or at any other property owned by
                  Debtor except such materials as are incidental to Debtor's
                  normal course of business, maintenance and repairs and which
                  are handled in material compliance with all applicable
                  environmental laws. Debtor agrees to permit Lender, its
                  agents, contractors and employees to enter and inspect any of
                  Debtor's places of business or any other property of Debtor at
                  any reasonable times upon three (3) days prior notice for the
                  purposes of conducting, at Lender's expense, an environmental
                  investigation and audit (including taking physical samples) to
                  insure that Debtor is complying with this covenant.

6.       RIGHTS AND POWERS OF LENDER.

         A.       GENERAL. Lender, following the occurrence and during the
                  continuance of an Event of Default may obtain from any person
                  information regarding Debtor or Debtor's business, which
                  information any such person also may furnish without liability
                  to Debtor; require Debtor to give possession or control of any
                  Collateral to Lender; indorse as Debtor's agent any
                  instruments, documents or chattel paper in the Collateral or
                  representing proceeds of the Collateral; contact account
                  debtors directly to verify information furnished by Debtor;
                  take control of proceeds, Including stock received as
                  dividends or by reason of stock splits; release the Collateral
                  in its possession to any Debtor, temporarily or otherwise;
                  require additional Collateral; reject as unsatisfactory any
                  property hereafter offered by Debtor as Collateral; set
                  standards from time to time to govern what may be used as
                  after acquired Collateral; designate, from time to time, a
                  certain percent of the Collateral as the loan value and
                  require Debtor to maintain the Obligation at or below such
                  figure; take control of funds generated by the Collateral,
                  such as cash dividends, interest and proceeds or refunds from
                  insurance, and use same to reduce any part of the Obligation
                  and exercise all other rights which an owner of such
                  Collateral may exercise, except the right to vote or dispose
                  of the Collateral before an Event of Default; at any time
                  transfer any of the Collateral or evidence thereof into its
                  own name or that of its nominee; and demand, collect, convert,
                  redeem receipt for, settle, compromise, adjust, sue for,
                  foreclose or realize upon the Collateral, in its own name or
                  in the name of Debtor, as Lender may determine. Lender shall
                  not be liable for failure to collect any account or
                  instruments, or for any act or omission on the part of Lender,
                  its officers, agents or employees, except for its or their own
                  willful misconduct or gross negligence. The foregoing rights
                  and powers of Lender will be in addition to, and not a
                  limitation upon, any rights and powers of Lender given by law,
                  elsewhere in this Agreement, or otherwise. If Debtor fails to
                  maintain any required insurance to the extent permitted by
                  applicable law Lender may (but is not obligated to) following
                  10 days prior written notice to Debtor purchase single
                  interest insurance coverage for the Collateral which insurance
                  may at Lender's option (i) protect only Lender and not provide
                  any remuneration or protection for Debtor directly and (ii)
                  provide coverage only after the Obligation has been declared
                  due as herein provided. The premiums for any such insurance
                  purchased by Lender shall be a part of the Obligation and
                  shall bear interest as provided in 3(c) hereof.


                                      -5-

<PAGE>

7.       DEFAULT.

         A.       EVENT OF DEFAULT. An event of default ("Event of Default")
                  shall occur if: (i) there is a loss, theft, damage or
                  destruction of any material portion of the Collateral for
                  which there is no insurance coverage or for which, in the
                  opinion of Lender, there is insufficient insurance coverage;
                  or (ii) the occurrence of a "Default" under the Loan
                  Agreement.

         B.       RIGHTS AND REMEDIES. If any Event of Default shall occur then
                  in each and every such case, Lender may without presentment,
                  demand, or protest; notice of default, dishonor, demand,
                  non-payment, or protest; notice of intent to accelerate all or
                  any part of the Obligation; notice of acceleration of all or
                  any part of the Obligation; or notice of any other kind, all
                  of which Debtor hereby expressly waives, (except for any
                  notice required under this Agreement, any other Loan Document
                  or applicable law); at any time thereafter exercise and/or
                  enforce any of the following rights and remedies of Lender's
                  option:

                  i.       ACCELERATION. The Obligation shall at Lender's
                           option, become immediately due and payable, and the
                           obligation, If any, of Lender to permit further
                           borrowings under the Obligation shall at Lender's
                           option immediately cease and terminate.

                  ii.      POSSESSION AND COLLECTION OF THE COLLATERAL. At its
                           option: (a) take possession or control of, store,
                           lease, operate, manage, sell, or instruct any Agent
                           or Broker to sell or otherwise dispose of, all or any
                           part of the Collateral; (b) notify all parties under
                           any account or contract right forming all or any part
                           of the Collateral to make any payments otherwise due
                           to Debtor directly to Lender; (c) in Lender's own
                           name, or in the name of Debtor, demand, collect,
                           receive, sue for, and give receipts and releases for,
                           any and all amounts due under such accounts and
                           contract rights; (d) indorse as the agent of Debtor
                           any check, note, chattel paper, documents or
                           instruments forming all or any part of the
                           Collateral; (e) make formal application for transfer
                           to Lender (or to any assignee of Lender or to any
                           purchaser of any of the Collateral) of all of
                           Debtor's permits, licenses, approvals, agreements and
                           the like relating to the Collateral or to Debtor's
                           business; (f) take any other action which Lender
                           deems necessary or desirable to protect and realize
                           upon its security interest in the Collateral; and (g)
                           in addition to the foregoing, and not in substitution
                           therefor, exercise any one or more of the rights and
                           remedies exercisable by Lender under any other
                           provision of this Agreement, under any of the other
                           Loan Documents, or as provided by applicable law
                           (including, without limitation, the Uniform
                           Commercial Code as in effect in NORTH CAROLINA
                           (hereinafter referred to as the "UCC")). In taking
                           possession of the Collateral Lender may enter
                           Debtor's premises and otherwise proceed without legal
                           process, if this can be done without breach of the
                           peace. Debtor shall, upon Lender's demand, promptly
                           make the Collateral or other security available to
                           Lender at a place designated by Lender, which place
                           shall be reasonably convenient to both parties.

Lender shall not be liable for nor be prejudiced by, any loss, depreciation or
other damages to the Collateral, unless caused by Lender's willful and malicious
act. Lender shall have no duty to take any action to preserve or collect the
Collateral.

                  iii.     RECEIVER. Obtain the appointment of a receiver for
                           all or any of the Collateral, Debtor hereby
                           consenting to the appointment of such a receiver and
                           agreeing not to oppose any such appointment.

                  iv.      RIGHT OF SET OFF. Without notice or demand to Debtor,
                           set off and apply against any and all of the
                           Obligation any and all deposits (general or special,
                           time or demand provisional or final) and any other
                           indebtedness, at any time held or owing by Lender or
                           any of Lender's agents or affiliates to or for the
                           credit of the account of Debtor or any guarantor or
                           indorser of Debtor's Obligation.

Lender shall be entitled to immediate possession of all books and records
evidencing any Collateral or pertaining to chattel paper covered by this
Agreement and it or its representatives shall have the authority to enter upon
any premises upon which any of the same, or any Collateral, may be situated and
remove the same therefrom without liability. Lender may surrender any insurance
policies in the Collateral and receive the unearned premium thereon. Debtor
shall be entitled to any surplus and shall be liable to Lender for any
deficiency. The proceeds of any disposition after default available to satisfy
the Obligation shall be applied to the Obligation in such order and in such
manner as Lender in its discretion shall decide.

Debtor specifically understands and agrees that any sale by Lender of all or
part of the Collateral pursuant to the terms of this Agreement may be effected
by the Lender at times and in manners which could result in the proceeds of such
sale as being significantly and materially less than might have been received if
such sale had occurred at different times or in different manners, and Debtor
hereby releases Lender and its officers and representatives from and against any
and all obligations and liabilities arising out of or related to the timing or
manner of any such date; provided that any such sale is in accordance with
applicable law and conducted in a commercially reasonable manner.

8.       GENERAL.

         A.       PARTIES BOUND. Lender's rights hereunder shall inure to the
                  benefit of its successors and assigns. In the event of any
                  assignment or transfer by Lender of any of the Obligation or
                  the Collateral, Lender thereafter shall be fully


                                      -6-
<PAGE>

                  discharged from any responsibility with respect to the
                  Collateral so assigned or transferred, but Lender shall retain
                  all rights and powers hereby given with respect to any of the
                  Obligation or the Collateral not so assigned or transferred.
                  All representations, warranties and agreements of Debtor if
                  more than one are joint and several and all shall be binding
                  upon the personal representatives, heirs, successors and
                  assigns of Debtor.

         B.       WAIVER. No delay of Lender in exercising any power or right
                  shall operate as a waiver thereof; nor shall any single or
                  partial exercise of any power or right preclude other or
                  further exercise thereof or the exercise of any other power or
                  right. No waiver by Lender of any right hereunder or of any
                  default by Debtor shall be binding upon Lender unless in
                  writing, and no failure by Lender to exercise any power or
                  right hereunder or waiver of any default by Debtor shall
                  operate as a waiver of any other or further exercise of such
                  right or power or of any further default. Each right, power
                  and remedy of Lender as provided for herein or in any of the
                  Loan Documents, or which shall now or thereafter exist at law
                  or in equity or by statue or otherwise, shall be cumulative
                  and concurrent and shall be in addition to every other such
                  right, power or remedy. The exercise or beginning of the
                  exercise by Lender of any one or more of such rights, powers
                  or remedies shall not preclude the simultaneous or later
                  exercise by Lender or any or all other such rights, powers or
                  remedies.

         C.       AGREEMENT CONTINUING. This Agreement shall constitute a
                  continuing agreement, applying to all future as well as
                  existing transactions, whether or not of the character
                  contemplated at the date of this Agreement, and if all
                  transactions between Lender and Debtor shall be closed at any
                  time, shall be equally applicable to any new transactions
                  thereafter. Provisions of this Agreement, unless by their
                  terms exclusive, shall be in addition to other agreements
                  between the parties. Time is of the essence of this Agreement.

         D.       DEFINITIONS. Unless the context indicates otherwise,
                  definitions in the UCC apply to words and phrases in this
                  Agreement; if UCC definitions conflict, Article 9 definitions
                  apply.

         E.       NOTICES. Notice shall be deemed reasonable if mailed postage
                  prepaid at least five (5) days before the related action (or
                  if the UCC elsewhere specifies a longer period, such longer
                  period) to the address of Debtor given above, or to such other
                  address as any party may designate by written notice to the
                  other party. Each notice request and demand shall be deemed
                  given or made, if sent by mail, upon the earlier of the date
                  of receipt of five (5) days after deposit in the U.S. Mail,
                  first class postage prepaid, or if sent by any other means,
                  upon delivery.

         F.       MODIFICATIONS. No provision hereof shall be modified or
                  limited except by written agreement expressly referring hereto
                  and to the provisions so modified or limited and signed by
                  Debtor and Lender. The provisions of this Agreement shall not
                  be modified or limited by course of conduct or usage of trade.

         G.       APPLICABLE LAW AND PARTIAL INVALIDITY. This Agreement has been
                  delivered in the State of NORTH CAROLINA and shall be
                  construed in accordance with the laws of that State. Wherever
                  possible each provision of this Agreement shall be interpreted
                  in such manner as to be effective and valid under applicable
                  law, but if any provision of this Agreement shall be
                  prohibited by or invalid under applicable law, such provision
                  shall be ineffective to the extent of such prohibition or
                  invalidity, without invalidating the remainder of such
                  provisions or the remaining provisions of this Agreement. The
                  invalidity or unenforceability of any provision of any Loan
                  Document to any person or circumstances shall not affect the
                  enforceability or validity of such provision as it may apply
                  to other persons or circumstances.

         H.       FINANCING STATEMENT. To the extent permitted by applicable
                  law, a carbon, photographic or other reproduction of this
                  Agreement or any financing statement covering the Collateral
                  shall be sufficient as a financing statement.

         I.       ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE
                  PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT
                  OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR
                  ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING
                  ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE
                  DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE
                  FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE
                  STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE
                  ARBITRATION OF COMMERCIAL DISPUTES OF AMERICAN ARBITRATION
                  ASSOCIATION OR ANY SUCCESSOR THEREOF ("A.A.A."), AND THE
                  "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY
                  INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
                  ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING
                  JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR
                  DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
                  PROCEEDING, TO COMPEL ARBITRATION OF ANY INCONSISTENCY OR
                  CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING
                  JURISDICTION OVER SUCH ACTION.

         i.       SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN FORSYTH
COUNTY, NORTH CAROLINA AND ADMINISTERED BY A.A.A. WHO WILL APPOINT AN
ARBITRATOR. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE
DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF
CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN
ADDITIONAL 60 DAYS.


                                      -7-

<PAGE>

         ii.      RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT,
AGREEMENT OR DOCUMENT; OR (II) LIMIT THE RIGHT OF LENDER HERETO (A) TO EXERCISE
SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE
AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT
PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE
RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. LENDER MAY EXERCISE
SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL
OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION
PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER
THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN
ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH
REMEDIES.

         J.       CONTROLLING DOCUMENT. To the extent that this Security
                  Agreement conflicts with or is in any way incompatible with
                  any other Loan Document concerning the Obligation, any
                  promissory note shall control over any other document, and if
                  such note does not address an issue, then each other document
                  shall control to the extent that it deals most specifically
                  with an issue.

         K.       EXECUTION UNDER SEAL. This Agreement is being executed under
                  seal by Debtor(s).

         L.       NOTICE OF FINAL AGREEMENT. THIS WRITTEN SECURITY AGREEMENT AND
                  THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
                  THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
                  CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
                  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.


DAMAD HOLDING AG                       FRISBY TECHNOLOGIES, INC.



By:    /s/ Daniel Guggenheim           By:    /s/ Gregory S. Frisby
   -----------------------------          --------------------------------------

Name:  Daniel Guggenheim               Name:  Gregory S. Frisby
     ---------------------------            ------------------------------------

Title: Vice Chairman                   Title: Chairman and CEO
      --------------------------             -----------------------------------


                                       Attest (If Applicable)


                                       /s/ Douglas J. McCrosson


                                       [Corporate Seal]


                                      -8-