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                                                                     EXHIBIT 4.4


                                    EXHIBIT D

                               SECURITY AGREEMENT



         THIS SECURITY AGREEMENT (this "Agreement"), dated as of October 25,
2001, is made and given by SHELDAHL, INC., a corporation organized under the
laws of the State of Minnesota ("Sheldahl"), and the wholly-owned subsidiaries
of Sheldahl listed on Schedule I attached hereto (collectively and together with
Sheldahl, the "Grantors" and each such subsidiary and Sheldahl, a "Grantor"), to
MORGENTHALER PARTNERS VII, L.P., a limited liability company organized under the
laws of the State of Delaware (the "Secured Party"), as agent for the purchasers
(the "Purchasers") under the Purchase Agreement defined below.

                                    RECITALS

         A. The Grantors, the Secured Party and the Purchasers have entered into
a Subordinated Notes and Warrant Purchase Agreement dated concurrently herewith
(as the same may hereafter be amended, supplemented, extended, restated, or
otherwise modified from time to time, the "Purchase Agreement") pursuant to
which the Purchasers have agreed to extend to Sheldahl certain credit
accommodations.

         B. It is a condition precedent to the obligation of the Purchasers to
extend credit accommodations pursuant to the terms of the Purchase Agreement
that this Agreement be executed and delivered by the Grantors.

         C. The Grantors finds it advantageous, desirable and in their best
interests to comply with the requirement that they execute and deliver this
Agreement to the Secured Party for the benefit of the Secured Party and the
Purchasers.

         NOW, THEREFORE, in consideration of the premises and in order to induce
the Secured Party and the Purchasers to enter into the Purchase Agreement and to
extend credit accommodations to Sheldahl thereunder, the Grantors hereby agree
with the Secured Party for the benefit of the Secured Party and the Purchasers
as follows:

Section 1. Defined Terms.

                  1.(a) As used in this Agreement, the following terms shall
have the meanings indicated:

                  "Account" means a right to payment of a monetary obligation,
         whether or not earned by performance, (i) for property that has been or
         is to be sold, leased, licensed, assigned, or otherwise disposed of,
         (ii) for services rendered or to be rendered, (iii) for a policy of
         insurance issued or to be issued, (iv) for a secondary obligation
         incurred or to be incurred, (v) for energy provided or to be provided,
         (vi) for the use or hire of a vessel under a charter or other contract,
         (vii) arising out of the use of a credit or charge card or information
         contained on or for use with the card, or (viii) as winnings in a
         lottery or other game of chance operated, sponsored, licensed or
         authorized by a State or



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         governmental unit of a State, or person licensed or authorized to
         operate the game by a State or governmental unit of a State. The term
         includes health-care insurance receivables, but excludes foreign
         accounts receivables of Grantors.

                  "Account Debtor" shall mean a Person who is obligated on or
         under any Account, Chattel Paper, Instrument or General Intangible.

                  "Chattel Paper" shall mean a record or records that evidence
         both a monetary obligation and a security interest in specific goods, a
         security interest in specific goods and software used in the goods, a
         security interest in specific goods and license of software used in the
         goods, a lease of specific goods, or a lease of specific goods and
         license of software used in the goods.

                  "Collateral" shall mean all property and rights in property
         now owned or hereafter at any time acquired by any Grantor in or upon
         which a Security Interest is granted to the Secured Party by the
         Grantors under this Agreement.

                  "Deposit Account" shall mean any demand, time, savings,
         passbook or similar account maintained with a bank.

                  "Document" shall mean a document of title or a warehouse
         receipt.

                  "Equipment" shall mean all machinery, equipment, motor
         vehicles, furniture, furnishings and Manufacturing Fixtures, including
         all accessions, accessories and attachments thereto, and any
         guaranties, warranties, indemnities and other agreements of
         manufacturers, vendors and others with respect to such Equipment.

                  "Event of Default" shall have the meaning given to such term
         in Section 18 hereof.

                  "Financing Statement" shall have the meaning given to such
         term in Section 4 hereof.

                  "General Intangibles" shall mean any personal property (other
         than goods, Accounts, Chattel Paper, Deposit Accounts, Documents,
         Instruments, Investment Property, Letter of Credit Rights and money)
         including things in action, contract rights, payment intangibles,
         software, corporate and other business records, inventions, designs,
         patents, patent applications, service marks, trademarks, tradenames,
         trade secrets, internet domain names, engineering drawings, good will,
         registrations, copyrights, licenses, franchises, customer lists, tax
         refund claims, royalties, licensing and product rights, rights to the
         retrieval from third parties of electronically processed and recorded
         data and all rights to payment resulting from an order of any court.

                  "Instrument" shall mean a negotiable instrument or any other
         writing which evidences a right to the payment of a monetary obligation
         and is not itself a security agreement or lease and is of a type which
         is transferred in the ordinary course of business by delivery with any
         necessary endorsement or assignment.




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                  "Inventory" shall mean goods, other than farm products, that
         are leased by a person as lessor, are held by a person for sale or
         lease or to be furnished under a contract of service, are furnished by
         a person under a contract of service, or consist of raw materials, work
         in process, or materials used or consumed in a business or incorporated
         or consumed in the production of any of the foregoing and supplies, in
         each case wherever the same shall be located, whether in transit, on
         consignment, in retail outlets, warehouses, terminals or otherwise, and
         all property the sale, lease or other disposition of which has given
         rise to an Account and which has been returned to a Grantor or
         repossessed by a Grantor or stopped in transit.

                  "Investment Property" shall mean a security, whether
         certificated or uncertificated, a security entitlement, a securities
         account and all financial assets therein, a commodity contract or a
         commodity account.

                  "Letter of Credit Right" shall mean a right to payment or
         performance under a letter of credit, whether or not the beneficiary
         has demanded or is at the time entitled to demand payment or
         performance.

                  "Lien" shall mean any security interest, mortgage, pledge,
         lien, charge, encumbrance, title retention agreement or analogous
         instrument or device (including the interest of the lessors under
         capitalized leases), in, of or on any assets or properties of the
         Person referred to.

                  "Manufacturing Fixtures" shall mean any equipment used in the
         manufacturing operations of the Grantors which is deemed to be a
         fixture under applicable law.

                  "Obligations" shall mean (a) all indebtedness, liabilities and
         obligations of the Grantors to the Secured Party and the Purchasers of
         every kind, nature or description under the Purchase Agreement,
         including the Grantors' obligation on any promissory note or notes
         under the Purchase Agreement and any note or notes hereafter issued in
         substitution or replacement thereof, (b) all liabilities of the
         Grantors under this Agreement, (c) any and all other liabilities and
         obligations of the Grantors to the Secured Party and the Purchasers of
         every kind, nature and description, whether direct or indirect or
         hereafter acquired by the Secured Party and the Purchasers from any
         Person, absolute or contingent, regardless of how such liabilities
         arise or by what agreement or instrument they may be evidenced, and (d)
         in all of the foregoing cases whether due or to become due, and whether
         now existing or hereafter arising or incurred.

                  "Person" shall mean any individual, corporation, partnership,
         limited partnership, limited liability company, joint venture, firm,
         association, trust, unincorporated organization, government or
         governmental agency or political subdivision or any other entity,
         whether acting in an individual, fiduciary or other capacity.

                  "Security Interest" shall have the meaning given such term in
         Section 2 hereof.

                  1.(b) All other terms used in this Agreement that are not
specifically defined herein shall have the meaning assigned to such terms in
Revised Article 9 of the Uniform Commercial Code as adopted in the State of
Minnesota (the "UCC").



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                  1.(c) Unless the context of this Agreement otherwise clearly
requires, references to the plural include the singular, the singular, the
plural and "or" has the inclusive meaning represented by the phrase "and/or."
The words "include," "includes" and "including" shall be deemed to be followed
by the phrase "without limitation." The words "hereof," "herein," "hereunder"
and similar terms in this Agreement refer to this Agreement as a whole and not
to any particular provision of this Agreement. References to Sections are
references to Sections in this Agreement unless otherwise provided.

         Section 2. Grant of Security Interest. As security for the payment and
performance of all of the Obligations, the Grantors hereby grant to the Secured
Party for the benefit of the Secured Party and the Purchasers a security
interest (the "Security Interest") in all of the Grantors' right, title, and
interest in and to the following, whether now or hereafter owned, existing,
arising or acquired and wherever located:

                  2.(a)    All Accounts.

                  2.(b)    All Chattel Paper.

                  2.(c)    All Deposit Accounts.

                  2.(d)    All Documents.

                  2.(e)    All Equipment.

                  2.(f)    All General Intangibles.

                  2.(g)    All Instruments.

                  2.(h)    All Inventory.

                  2.(i)    All Investment Property.

                  2.(j)    All Letter of Credit Rights.

                  2.(k) To the extent not otherwise included in the foregoing,
all other rights to the payment of money, including rents and other sums payable
to any Grantor under leases, rental agreements and other Chattel Paper; all
books, correspondence, credit files, records, invoices, bills of lading, and
other documents relating to any of the foregoing, including, without limitation,
all tapes, cards, disks, computer software, computer runs, and other papers and
documents in the possession or control of a Grantor or any computer bureau from
time to time acting for a Grantor; all rights in, to and under all policies
insuring the life of any officer, director, stockholder or employee of a
Grantor, the proceeds of which are payable to any Grantor; all accessions and
additions to, parts and appurtenances of, substitutions for and replacements of
any of the foregoing; and all proceeds (including insurance proceeds) and
products thereof.

         Notwithstanding anything herein to the contrary, in no event shall the
Collateral include, and no Grantor shall be deemed to have granted a security
interest in any of such Grantor's rights



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or interests in any lease, license, contract, permit or agreement (including,
without limitation, any such agreement which shall grant a security interest in
the assets of any Grantor) to which any Grantor is a party or any of its rights
or interests thereunder to the extent, but only to the extent, that such a grant
would, under the terms of the lease, license, contract, permit or agreement or
otherwise, result in a breach of the terms of, or constitute a default under, or
cause a termination of, such lease, license, contract, permit or agreement to
which such Grantor is a party (other than to the extent that the other party to
such lease, license, contract, permit or agreement has consented to such grant
or to the extent that any such term would be rendered ineffective pursuant to
the UCC, or any other applicable law (including the U.S. Bankruptcy Code) or
principles of equity), provided that (x) the foregoing grant of security
interest shall extend to, and the Collateral shall include, any and all proceeds
of any such lease, license, contract, permit or agreement to the extent that the
assignment or encumbering of such proceeds is not so restricted and is permitted
by applicable law and (y) immediately upon the effectiveness, lapse, waiver or
termination of any such provision or restriction, the Collateral shall include,
and the Grantors shall be deemed to have granted a security interest in, all
such rights and interests as if such provisions or restrictions had never been
in effect.

         Section 3. Grantors Remain Liable. Anything herein to the contrary
notwithstanding, (a) the Grantors shall remain liable under the Accounts,
Chattel Paper, General Intangibles and other items included in the Collateral to
the extent set forth therein to perform all of their respective duties and
obligations thereunder to the same extent as if this Agreement had not been
executed, (b) the exercise by the Secured Party of any of the rights hereunder
shall not release the Grantors from any of their duties or obligations under the
Accounts and any items included in the Collateral, and (c) the Secured Party
shall have no obligation or liability under Accounts, Chattel Paper, General
Intangibles and other items included in the Collateral by reason of this
Agreement, nor shall the Secured Party be obligated to perform any of the
obligations or duties of the Grantors thereunder or to take any action to
collect or enforce any claim for payment assigned hereunder.

         Section 4. Title to Collateral. The Grantors have (or will have at the
time they acquire rights in Collateral hereafter acquired or arising) and will
maintain so long as the Security Interest may remain outstanding, title to each
item of Collateral (including the proceeds and products thereof), free and clear
of all Liens except the Security Interest and except Liens permitted by the
Purchase Agreement. Other than in the ordinary course of business or upon
approval by the Board of Directors of Sheldahl, the Grantors will not license
any Collateral unless such license is by its terms subordinated to the Security
Interest in a manner approved in advance in writing by the Secured Party. The
Grantors will defend the Collateral against all claims or demands of all Persons
(other than the Secured Party) claiming the Collateral or any interest therein,
except Liens permitted by the Purchase Agreement. As of the date of execution of
this Agreement, no effective financing statement or other similar document used
to perfect and preserve a security interest under the laws of any jurisdiction
(a "Financing Statement") covering all or any part of the Collateral is on file
in any recording office, except such as may have been filed (a) in favor of the
Secured Party relating to this Agreement, or (b) to perfect Liens permitted by
the Purchase Agreement.



                                      -5-
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         Section 5. Disposition of Collateral. The Grantors will not sell, lease
or otherwise dispose of, or discount or factor with or without recourse, any
Collateral, except sales of items of Inventory in the ordinary course of
business or except as permitted by the Purchase Agreement.

         Section 6. Names, Offices, Locations, Jurisdiction of Organization.
Each Grantors legal name (as set forth in its constituent documents filed with
the appropriate governmental official or agency) is as set forth in the opening
paragraph hereof or on Schedule I. The jurisdiction of organization of Sheldahl
is the State of Minnesota. The jurisdiction of organization of each other
Grantor is as set forth on Schedule I. The Grantors will from time to time at
the request of the Secured Party provide the Secured Party with current good
standing certificates and/or state-certified constituent documents from the
appropriate governmental officials. The chief place of business and chief
executive office of the Grantors are located at the addresses set forth on the
signature page hereof. The Grantors will not locate or relocate any item of
Collateral into any jurisdiction in which an additional Financing Statement
would be required to be filed to maintain the Secured Party's perfection in such
Collateral. No Grantor will change its name, the location of its chief place of
business and chief executive office or its corporate structure (including
without limitation, its jurisdiction of organization) unless the Secured Party
has been given at least 30 days' prior written notice thereof and that Grantor
has executed and delivered to the Secured Party such Financing Statements and
other instruments required or appropriate to continue the perfection of the
Security Interest.

         Section 7. Rights to Payment. Except as the Grantors may otherwise
advise the Secured Party in writing, each Account, Chattel Paper, Document,
General Intangible and Instrument constituting or evidencing Collateral is (or,
in the case of all future Collateral, will be when arising or issued) the valid,
genuine and legally enforceable obligation of the Account Debtor or other
obligor named therein or in the Grantors' records pertaining thereto as being
obligated to pay or perform such obligation. The Grantors will perform and
comply in all material respects with all their respective obligations under any
items included in the Collateral and exercise promptly and diligently their
respective rights thereunder.

         Section 8. Further Assurances; Attorney-in-Fact.

                  8.(a) The Grantors agree that from time to time, at their
expense, they will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or that the
Secured Party may reasonably request, in order to perfect and protect the
Security Interest granted or purported to be granted hereby or to enable the
Secured Party to exercise and enforce its rights and remedies hereunder with
respect to any Collateral (but any failure to request or assure that the
Grantors execute and deliver such instrument or documents or to take such action
shall not affect or impair the validity, sufficiency or enforceability of this
Agreement and the Security Interest, regardless of whether any such item was or
was not executed and delivered or action taken in a similar context or on a
prior occasion). Without limiting the generality of the foregoing, the Grantors
will, promptly and from time to time at the request of the Secured Party: (i)
execute and file such Financing Statements or continuation statements in respect
thereof, or amendments thereto, and such other instruments or notices (including
fixture filings with any necessary legal descriptions as to any Manufacturing
Fixtures included in the Collateral that the Secured Party determines might be
deemed to be fixtures, and instruments and notices with respect to vehicle
titles), as may be necessary or



                                      -6-
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desirable, or as the Secured Party may request, in order to perfect, preserve,
and enhance the Security Interest granted or purported to be granted hereby;
(ii) obtain from any bailee holding any item of Collateral an acknowledgment, in
form satisfactory to the Secured Party that such bailee holds such collateral
for the benefit of the Secured Party; (iii) obtain from any securities
intermediary, or other party holding any item of Collateral, control agreements
in form satisfactory to the Secured Party; (iv) and deliver and pledge to the
Secured Party, all Instruments and Documents, duly indorsed or accompanied by
duly executed instruments of transfer or assignment, with full recourse to the
Grantors, all in form and substance satisfactory to the Secured Party; and (v)
obtain waivers, in form reasonably satisfactory to the Secured Party, of any
claim to any Collateral from any landlords or mortgagees of any property where
any Inventory or Equipment is located.

                  8.(b) The Grantors hereby authorize the Secured Party to file
one or more Financing Statements or continuation statements in respect thereof,
and amendments thereto, relating to all or any part of the Collateral without
the signature of any Grantor where permitted by law. A photocopy or other
reproduction of this Agreement or any Financing Statement covering the
Collateral or any part thereof shall be sufficient as a Financing Statement
where permitted by law.

                  8.(c) The Grantors will furnish to the Secured Party from time
to time statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as the
Secured Party may reasonably request, all in reasonable detail and in form and
substance reasonably satisfactory to the Secured Party.

                  8.(d) In furtherance, and not in limitation, of the other
rights, powers and remedies granted to the Secured Party in this Agreement, each
Grantor hereby appoints the Secured Party that Grantor's attorney-in-fact, with
full authority in the place and stead of that Grantor and in the name of that
Grantor or otherwise, from time to time in the Secured Party's good faith
discretion upon and during the continuation of any Event of Default, to take any
action (including the right to collect on any Collateral) and to execute any
instrument that the Secured Party reasonably believes is necessary or advisable
to accomplish the purposes of this Agreement, in a manner consistent with the
terms hereof.

         Section 9. Taxes and Claims. The Grantors will promptly pay all taxes
and other governmental charges levied or assessed upon or against any Collateral
or upon or against the creation, perfection or continuance of the Security
Interest, as well as all other claims of any kind (including claims for labor,
material and supplies) against or with respect to the Collateral, except to the
extent (a) such taxes, charges or claims are being contested in good faith by
appropriate proceedings, (b) such proceedings do not involve any material danger
of the sale, forfeiture or loss of any of the Collateral or any interest therein
and (c) such taxes, charges or claims are adequately reserved against on the
Grantors' books in accordance with generally accepted accounting principles.

         Section 10. Books and Records. The Grantors will keep and maintain at
their own cost and expense satisfactory and complete records of the Collateral,
including a record of all payments received and credits granted with respect to
all Accounts, Chattel Paper and other items included in the Collateral.



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         Section 11. Inspection, Reports, Verifications. The Grantors will at
all reasonable times permit the Secured Party or its representatives to examine
or inspect any Collateral, any evidence of Collateral and the Grantors' books
and records concerning the Collateral, wherever located. The Grantors will from
time to time when requested by the Secured Party furnish to the Secured Party a
report on their Accounts, Chattel Paper, General Intangibles and Instruments,
naming the Account Debtors or other obligors thereon, the amount due and the
aging thereof. The Secured Party or its designee is authorized to contact
Account Debtors and other Persons obligated on any such Collateral from time to
time to verify the existence, amount and/or terms of such Collateral.

         Section 12. Notice of Loss. The Grantors will promptly notify the
Secured Party of any loss of or material damage to any material item of
Collateral or of any substantial adverse change, known to any Grantor, in any
material item of Collateral or the prospect of payment or performance thereof.

         Section 13. Insurance. The Grantors will keep the Inventory and
Equipment insured against "all risks" for the full replacement cost thereof
subject to a deductible and with an insurance company or companies satisfactory
to the Secured Party, the policies to protect the Secured Party as its interests
may appear, with such policies or certificates with respect thereto to be
delivered to the Secured Party at its request. Each such policy or the
certificate with respect thereto shall provide that such policy shall not be
canceled or allowed to lapse unless at least 30 days prior written notice is
given to the Secured Party.

         Section 14. Lawful Use; Fair Labor Standards Act. The Grantors will use
and keep the Collateral, and will require that others use and keep the
Collateral, only for lawful purposes, without violation of any federal, state or
local law, statute or ordinance. All Inventory of the Grantors as of the date of
this Agreement that was produced by any Grantor or with respect to which any
Grantor performed any manufacturing or assembly process was produced by that
Grantor (or such manufacturing or assembly process was conducted) in compliance
in all material respects with all requirements of the Fair Labor Standards Act,
and all Inventory produced, manufactured or assembled by any Grantor after the
date of this Agreement will be so produced, manufactured or assembled, as the
case may be.

         Section 15. Action by the Secured Party. If any Grantor at any time
fails to perform or observe any of the foregoing agreements beyond any
applicable cure period, the Secured Party shall have (and the Grantors hereby
grant to the Secured Party) the right, power and authority (but not the duty) to
perform or observe such agreement on behalf and in the name, place and stead of
such Grantor (or, at the Secured Party's option, in the Secured Party's name)
and to take any and all other actions that the Secured Party may reasonably deem
necessary to cure or correct such failure (including, without limitation, the
payment of taxes, the satisfaction of Liens, the procurement and maintenance of
insurance, the execution of assignments, security agreements and Financing
Statements, and the indorsement of instruments); and the Grantors shall
thereupon pay to the Secured Party on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys' fees and legal
expenses) incurred by the Secured Party in connection with or as a result of the
performance or observance of such agreements or the taking of such action by the
Secured Party, together with interest thereon from the date expended or incurred
at the highest lawful rate then applicable to any of the Obligations,



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and all such monies expended, costs and expenses and interest thereon shall be
part of the Obligations secured by the Security Interest.

         Section 16. Insurance Claims. As additional security for the payment
and performance of the Obligations, the Grantors hereby assign to the Secured
Party for the benefit of the Secured Party and the Purchasers any and all monies
(including proceeds of insurance and refunds of unearned premiums) due or to
become due under, and all other rights of the Grantors with respect to, any and
all policies of insurance now or at any time hereafter covering the Collateral
or any evidence thereof or any business records or valuable papers pertaining
thereto. At any time, whether before or after the occurrence of any Event of
Default, the Secured Party may (but need not), in the Secured Party's name or in
a Grantor's name, execute and deliver proofs of claim, receive all such monies,
indorse checks and other instruments representing payment of such monies, and
adjust, litigate, compromise or release any claim against the issuer of any such
policy. Notwithstanding any of the foregoing, so long as no Event of Default
exists the Grantors shall be entitled to all insurance proceeds with respect to
Equipment or Inventory provided that such proceeds are applied to the cost of
replacement Equipment or Inventory.

         Section 17. The Secured Party's Duties. The powers conferred on the
Secured Party hereunder are solely to protect its interest and the Purchaser's
interest in the Collateral and shall not impose any duty upon it to exercise any
such powers. The Secured Party shall be deemed to have exercised reasonable care
in the safekeeping of any Collateral in its possession if such Collateral is
accorded treatment substantially equal to the safekeeping which the Secured
Party accords its own property of like kind. Except for the safekeeping of any
Collateral in its possession and the accounting for monies and for other
properties actually received by it hereunder, the Secured Party shall have no
duty, as to any Collateral, as to ascertaining or taking action with respect to
calls, conversions, exchanges, maturities, tenders or other matters relative to
any Collateral, whether or not the Secured Party has or is deemed to have
knowledge of such matters, or as to the taking of any necessary steps to
preserve rights against any Persons or any other rights pertaining to any
Collateral. The Secured Party will take action in the nature of exchanges,
conversions, redemptions, tenders and the like requested in writing by the
Grantors with respect to the Collateral in the Secured Party's possession if the
Secured Party in its reasonable judgment determines that such action will not
impair the Security Interest or the value of the Collateral, but a failure of
the Secured Party to comply with any such request shall not of itself be deemed
a failure to exercise reasonable care with respect to the taking of any
necessary steps to preserve rights against any Persons or any other rights
pertaining to any Collateral.

         Section 18. Default. Each of the following occurrences shall constitute
an Event of Default under this Agreement: (a) any Grantor shall fail to observe
or perform any covenant or agreement applicable to that Grantor under this
Agreement and such failure shall continue for 20 calendar days (five calendar
days for any failure to perform under Section 13) after the earlier of (i) the
date any officer of a Grantor becomes aware of such failure or (ii) the date on
which the Secured Party gives notice of such failure to any Grantor; or (b) any
representation or warranty made by any Grantor in this Agreement or the Purchase
Agreement or any schedule, exhibit, supplement or attachment hereto or in any
financial statements, or certificates required to be delivered hereunder or
under the Purchase Agreement by or on behalf of any Grantor to the Secured Party
shall prove to have been false or misleading in a material respect when made; or
(c) any Event of Default shall occur under the Purchase Agreement.



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         Section 19. Remedies on Default. Upon the occurrence and during the
continuance of an Event of Default:

                  19.(a) The Secured Party may exercise and enforce any and all
rights and remedies available upon default to a secured party under Revised
Article 9 of the Uniform Commercial Code as adopted in the State of Minnesota.

                  19.(b) The Secured Party shall have the right to enter upon
and into and take possession of all or such part or parts of the properties of
each Grantor, including lands, plants, buildings, Equipment, Inventory and other
property as may be necessary or appropriate in the judgment of the Secured Party
to permit or enable the Secured Party to manufacture, produce, process, store or
sell or complete the manufacture, production, processing, storing or sale of all
or any part of the Collateral, as the Secured Party may elect, and to use and
operate said properties for said purposes and for such length of time as the
Secured Party may deem necessary or appropriate for said purposes without the
payment of any compensation to any Grantor therefor. The Secured Party may
require each Grantor to, and each Grantor hereby agrees that it will, at its
expense and upon request of the Secured Party forthwith, assemble all or part of
the Collateral as directed by the Secured Party and make it available to the
Secured Party at a place or places to be designated by the Secured Party.

                  19.(c) Any disposal of Collateral may be in one or more
parcels at public or private sale, at any of the Secured Party's offices or
elsewhere, for cash, on credit, or for future delivery, and upon such other
terms as the Secured Party reasonably believes are commercially reasonable. The
Secured Party shall not be obligated to dispose of Collateral regardless of
notice of sale having been given, and the Secured Party may adjourn any public
or private sale from time to time by announcement made at the time and place
fixed therefor, and such disposal may, without further notice, be made at the
time and place to which it was so adjourned.

                  19.(d) The Secured Party is hereby granted a license or other
right to use, without charge, all of the Grantors' property, including, without
limitation, all of the Grantors' labels, trademarks, copyrights, patents and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale and selling any
Collateral, and all of the Grantors' rights under all licenses and all franchise
agreements shall inure to the Secured Party's benefit until the Obligations are
paid in full.

                  19.(e) If notice to any Grantor of any intended disposition of
Collateral or any other intended action is required by law in a particular
instance, such notice shall be deemed commercially reasonable if given in the
manner specified for the giving of notice in Section 24 hereof at least ten
calendar days prior to the date of intended disposition or other action, and the
Secured Party may exercise or enforce any and all other rights or remedies
available by law or agreement against the Collateral, against the Grantor, or
against any other Person or property. The Secured Party (i) may dispose of the
Collateral in its then present condition or following such preparation and
processing as the Secured Party deems commercially reasonable, (ii) shall have
no duty to prepare or process the Collateral prior to sale, (iii) may disclaim
warranties of title, possession, quiet enjoyment and the like, and (iv) may
comply with any applicable state or federal law requirements in connection with
a disposition of the Collateral and none of the



                                      -10-
<PAGE>



foregoing actions shall be deemed to adversely affect the commercial
reasonableness of the disposition of the Collateral.

         Section 20. Remedies as to Certain Rights to Payment. Upon the
occurrence and during the continuance of an Event of Default, the Secured Party
may notify any Account Debtor or other Person obligated on any Accounts or other
Collateral that the same have been assigned or transferred to the Secured Party
and that the same should be performed as requested by, or paid directly to, the
Secured Party, as the case may be. The Grantors shall join in giving such
notice, if the Secured Party so requests. The Secured Party may, in the Secured
Party's name or in any Grantor's name, demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such Collateral or grant any extension to, make any compromise or settlement
with or otherwise agree to waive, modify, amend or change the obligation of any
such Account Debtor or other Person. If any payments on any such Collateral are
received by the Grantors after an Event of Default has occurred, such payments
shall be held in trust by the Grantors as the property of the Secured Party and
shall not be commingled with any funds or property of the Grantors and shall be
forthwith remitted to the Secured Party for application on the Obligations.

         Section 21. Application of Proceeds. All cash proceeds received by the
Secured Party in respect of any sale of, collection from, or other realization
upon all or any part of the Collateral may, in the discretion of the Secured
Party, be held by the Secured Party as collateral for, or then or at any time
thereafter be applied in whole or in part by the Secured Party against, all or
any part of the Obligations (including, without limitation, any expenses of the
Secured Party payable pursuant to Section 22 hereof).

         Section 22. Costs and Expenses; Indemnity. The Grantors will pay or
reimburse the Secured Party on demand for all out-of-pocket expenses (including
in each case all filing and recording fees and taxes and all reasonable fees and
expenses of counsel and of any experts and agents) incurred by the Secured Party
in connection with the creation, perfection, protection, satisfaction,
foreclosure or enforcement of the Security Interest and the preparation,
administration, continuance, amendment or enforcement of this Agreement, and all
such costs and expenses shall be part of the Obligations secured by the Security
Interest. The Grantors shall indemnify and hold the Secured Party harmless from
and against any and all claims, losses and liabilities (including reasonable
attorneys' fees) growing out of or resulting from this Agreement and the
Security Interest hereby created (including enforcement of this Agreement) or
the Secured Party's actions pursuant hereto, except claims, losses or
liabilities resulting from the Secured Party's gross negligence or willful
misconduct as determined by a final judgment of a court of competent
jurisdiction. Any liability of the Grantors to indemnify and hold the Secured
Party harmless pursuant to the preceding sentence shall be part of the
Obligations secured by the Security Interest. The obligations of the Grantors
under this Section shall survive any termination of this Agreement.

         Section 23. Waivers; Remedies; Marshalling. This Agreement can be
waived, modified, amended, terminated or discharged, and the Security Interest
can be released, only explicitly in a writing signed by the Secured Party. A
waiver so signed shall be effective only in the specific instance and for the
specific purpose given. Mere delay or failure to act shall not preclude the
exercise or enforcement of any rights and remedies available to the Secured
Party.



                                      -11-
<PAGE>



All rights and remedies of the Secured Party shall be cumulative and may be
exercised singly in any order or sequence, or concurrently, at the Secured
Party's option, and the exercise or enforcement of any such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other. The Grantors hereby waive all requirements of law, if any, relating to
the marshalling of assets that would be applicable in connection with the
enforcement by the Secured Party of its remedies hereunder, absent this waiver.

         Section 24. Notices. Any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telegram, telex, facsimile transmission, overnight courier or United
States mail (postage prepaid) addressed to such party at the address specified
on the signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telegram, telex or facsimile transmission, from
the first business day after the date of sending if sent by overnight courier,
or from four days after the date of mailing if mailed.

         Section 25. Joint and Several Liability. Each of the Grantors is
accepting joint and several liability hereunder in consideration of the
financial accommodation to be provided by the Purchasers under the Purchase
Agreement, for the mutual benefit, directly and indirectly, of each of the
Grantors and in consideration of the undertakings of each of the Grantors to
accept joint and several liability for the obligations of each of them. Each of
the Grantors jointly and severally hereby irrevocably and unconditionally
accepts, not merely as a surety but also as a co-debtor, joint and several
liability with the other Grantors with respect to the payment and performance of
all of the Obligations arising under this Agreement and the Purchase Agreement,
it being the intention of the parties hereto that all the Obligations shall be
the joint and several obligations of each of the Grantors without preferences or
distinction among them.

         Section 26. Continuing Security Interest; Assignments under Purchase
Agreement. This Agreement shall (a) create a continuing security interest in the
Collateral and shall remain in full force and effect until payment in full of
the Obligations and the expiration of the obligations, if any, of the Purchasers
to extend credit accommodations to Sheldahl, (b) be binding upon the Grantors,
their successors and assigns, and (c) inure to the benefit of, and be
enforceable by, the Secured Party and its successors, transferees, and assigns.
Without limiting the generality of the foregoing clause (c), the Secured Party
may assign or otherwise transfer all or any portion of its rights and
obligations under the Purchase Agreement to any other Persons to the extent and
in the manner provided in the Purchase Agreement and may similarly transfer all
or any portion of its rights under this Agreement to such Persons.

         Section 27. Termination of Security Interest. Upon payment in full of
the Obligations and the expiration of any obligation of the Purchasers to extend
credit accommodations to Sheldahl, the Security Interest granted hereby shall
terminate. Upon any such termination, the Secured Party will return to the
Grantors such of the Collateral then in the possession of the Secured Party as
shall not have been sold or otherwise applied pursuant to the terms hereof free
and clear of all Liens of the Secured Party and will execute and deliver to the
Grantors such documents as the Grantors shall reasonably request to evidence
such termination. Any reversion or return of Collateral upon termination of this
Agreement and any instruments of transfer or termination shall be at the expense
of the Grantors and shall be without warranty by (except as



                                      -12-
<PAGE>



noted in the previous sentence), or recourse on, the Secured Party. As used in
this Section, "Grantors" includes any assigns of the Grantors, any Person
holding a subordinate security interest in any of the Collateral or whoever else
may be lawfully entitled to any part of the Collateral.

         Section 28. GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION
AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF,
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE
MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
MINNESOTA. Whenever possible, each provision of this Agreement and any other
statement, instrument or transaction contemplated hereby or relating hereto
shall be interpreted in such manner as to be effective and valid under such
applicable law, but, if any provision of this Agreement or any other statement,
instrument or transaction contemplated hereby or relating hereto shall be held
to be prohibited or invalid under such applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement or any other statement, instrument or transaction contemplated hereby
or relating hereto.

         Section 29. CONSENT TO JURISDICTION. AT THE OPTION OF THE SECURED
PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN HENNEPIN COUNTY; AND THE GRANTORS CONSENT TO THE JURISDICTION
AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS
NOT CONVENIENT. IN THE EVENT ANY GRANTOR COMMENCES ANY ACTION IN ANOTHER
JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR
INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT
ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE
JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.

         Section 30. WAIVER OF NOTICE AND HEARING. EACH GRANTOR HEREBY WAIVES
ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE
SECURED PARTY OF ITS RIGHTS TO POSSESSION OF THE COLLATERAL WITHOUT JUDICIAL
PROCESS OR OF ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL WITHOUT
PRIOR NOTICE OR HEARING. EACH GRANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY
COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND THIS AGREEMENT.

         Section 31. WAIVER OF JURY TRIAL. EACH GRANTOR AND THE SECURED PARTY,
BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES



                                      -13-
<PAGE>



ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

         Section 32. Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.

         Section 33. General. All representations and warranties contained in
this Agreement or in any other agreement between any Grantor and the Secured
Party shall survive the execution, delivery and performance of this Agreement
and the creation and payment of the Obligations. The Grantors waive notice of
the acceptance of this Agreement by the Secured Party. Captions in this
Agreement are for reference and convenience only and shall not affect the
interpretation or meaning of any provision of this Agreement.

         Section 34. Subordination. Secured Party's rights and Grantor's
obligations under this Agreement are subject to the terms and conditions of the
Subordination Agreement (as defined in the Purchase Agreement). To the extent
that any provisions in this Agreement conflict with the provisions of such
Subordination Agreement, the provisions of the Subordination Agreement shall
govern.

               [Remainder of this page intentionally left blank.]



                                      -14-
<PAGE>



         IN WITNESS WHEREOF, each Grantor has caused this Agreement to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.

<Table>
<S>                                                                        <C>
SHELDAHL, INC.                                                             Address of Grantor:
                                                                           ------------------
                                                                           1150 Sheldahl Road
By:  /s/ Benoit Pouliquen                                                  Northfield, MN 55057-9444
   ---------------------------------------                                 Attn:    Benoit Pouliquen
     Benoit Pouliquen,                                                     Fax:     (507) 663-8326 or
     President and Chief Executive Officer                                 (507) 663-8435
                                                                           Tax ID # 41-0758073


INTERNATIONAL FLEX TECHNOLOGIES, INC.                                      Address of Grantor:
                                                                           -------------------
                                                                           1093 Clark Street
By:  /s/ Benoit Pouliquen                                                  Endicott, NY  13760
   ---------------------------------------                                 Attn:    Benoit Pouliquen
     Benoit Pouliquen,                                                     Fax:     (607) 658-5001
     President and Chief Executive Officer                                 Tax ID # 06-1533465


INTERNATIONAL FLEX HOLDINGS, INC.                                          Address of Grantor:
                                                                           -------------------
                                                                           1093 Clark Street
By:  /s/ Benoit Pouliquen                                                  Endicott, NY  13760
   ---------------------------------------                                 Attn:    Benoit Pouliquen
     Benoit Pouliquen,                                                     Fax:     (607) 658-5001
     President and Chief Executive Officer                                 Tax ID # 52-2227973

                                                                           Address for the Secured Party:
                                                                           -----------------------------
                                                                           Morgenthaler Partners VII, L.P.
                                                                           Terminal Tower
                                                                           50 Public Square
                                                                           Suite 2700
                                                                           Cleveland, OH 44113
</Table>



                                      -15-
<PAGE>



                                   SCHEDULE I


Legal Name of Subsidiary                           Jurisdiction of Organization
------------------------                           ----------------------------

International Flex Holdings, Inc.                  Delaware

International Flex Technologies, Inc.              Delaware






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