SECURITY AGREEMENT


         THIS SECURITY  AGREEMENT (the  "Agreement") is made and entered into as
of the 24th day of  October,  1996,  by  THREE-FIVE  SYSTEMS,  INC.,  a Delaware
corporation  (hereinafter  called  "Debtor"),  whose chief  executive  office is
located at 1600 North Desert Drive, Tempe, Arizona 85281-1212, in favor of WELLS
FARGO BANK, NATIONAL  ASSOCIATION,  and its successors and assigns  (hereinafter
called  "Secured  Party"),  whose  address is Post  Office  Box 29742,  Phoenix,
Arizona 85038-9742.

1.       SECURITY INTEREST

         Debtor hereby grants to Secured Party a security interest  (hereinafter
called the "Security  Interest") in all of Debtor's right, title and interest in
and to the personal property (the "Collateral") described on Schedule A attached
hereto and by this reference incorporated herein.

2.       OBLIGATION SECURED

         The  Security  Interest  shall  secure,  in such order of  priority  as
Secured Party may elect:

                  (a) Payment of the sum of $5,000,000.00 with interest thereon,
         extension  and  other  fees,  late  charges,  prepayment  premiums  and
         attorneys'  fees,  according to the terms of that Promissory Note dated
         of even date herewith,  made by Debtor, payable to the order of Secured
         Party,  and all  extensions,  modifications,  renewals or  replacements
         thereof (hereinafter called the "Note");

                  (b)  Payment,  performance  and  observance  by Debtor of each
         covenant,  condition,  provision and agreement  contained herein and of
         all monies  expended or advanced by Secured Party pursuant to the terms
         hereof,  or to preserve  any right of Secured  Party  hereunder,  or to
         protect or preserve the Collateral or any part thereof; and

                  (c)  Payment,  performance  and  observance  by Debtor of each
         covenant,  condition,  provision and  agreement  contained in that Loan
         Agreement  dated July 11, 1994, by and between Debtor and Secured Party
         as  successor-in-interest to First Interstate Bank of Arizona, N.A. (as
         amended from time to time, hereinafter called the "Loan Agreement") and
         in any  other  document  or  instrument  related  to  the  indebtedness
         described in subparagraph (a) above (the "Term Loan") and of all monies
         expended  or advanced by Secured  Party  pursuant to the terms  thereof
         with respect to the Term Loan only, and not with respect to the RLC (as
         defined in the Loan  Agreement),  or to  preserve  any right of Secured
         Party thereunder.

All  of  the  indebtedness  and  obligations   secured  by  this  Agreement  are
hereinafter collectively called the "Obligation."

3.       USE; LOCATION; MANILA EQUIPMENT

         3.1  The  Collateral  is or will be  used  or  produced  primarily  for
business purposes.
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         3.2 The  Collateral  will be kept at Debtor's  address set forth at the
beginning of this Agreement;  provided that,  notwithstanding anything herein to
the contrary,  Collateral ("Manila  Equipment") may be removed from the State of
Arizona  without  the  consent  of the  Secured  Party  only to the extent it is
designated  by Debtor in the ordinary  course of business to be sent to Debtor's
facility in Manila,  P.I.  ("Manila  Facility").  Upon the  shipment of any such
Manila  Equipment  to the Manila  Facility and its  departure  from the State of
Arizona,  the  Security  Interest  of the Secured  Party shall be  automatically
released from such Manila Equipment.

         3.3 Debtor's records concerning the Collateral will be kept at Debtor's
address set forth at the beginning of this Agreement.

4.       REPRESENTATIONS AND WARRANTIES OF DEBTOR

         Debtor hereby represents and warrants that:

         4.1 Debtor (i) is duly organized, validly existing and in good standing
under the laws of the state in which it is  organized;  (ii) is  qualified to do
business  and is in good  standing  under  the laws of the  state  in which  the
Collateral is located and in each state in which it is doing business; (iii) has
full power and  authority to own its  properties  and assets and to carry on its
businesses  as now  conducted;  and (iv) is fully  authorized  and  permitted to
execute and deliver this Agreement and to enter into any transactions  evidenced
by any portion of the  Collateral.  The execution,  delivery and  performance by
Debtor of this Agreement and all other documents and instruments relating to the
Obligation  will not  result  in any  breach  of the  terms  and  conditions  or
constitute a default under any  agreement or instrument  under which Debtor is a
party or is obligated. Debtor is not in default in the performance or observance
of any covenants, conditions or provisions of any such agreement or instrument.

         4.2 Subject to Section 7.2 of the Loan  Agreement,  Debtor is the owner
of the Collateral free of all security  interests or other  encumbrances  except
the Security  Interest and no financing  statement  covering the  Collateral  is
filed or recorded in any public office.

         4.3 The  Collateral  is,  and is  intended  to be,  used,  produced  or
acquired  by Debtor for use  primarily  for  business  purposes.  The address of
Debtor  set forth at the  beginning  of this  Agreement  is the chief  executive
office of Debtor. If a portion of the Collateral is or will become a fixture, it
will be affixed to the real property as described above.

5.       COVENANTS OF DEBTOR

         5.1 Except as  permitted  in  Paragraph  3.2 hereof with respect to the
Manila Equipment,  Debtor shall not sell, transfer,  assign or otherwise dispose
of any Collateral or any interest  therein (except as permitted  herein) without
obtaining the prior written consent of Secured Party and, subject to Section 7.2
of the Loan Agreement,  shall keep the Collateral free of all security interests
or other encumbrances except the Security Interest; provided however that Debtor
may sell,  transfer,  assign or otherwise  dispose of any Collateral  ("Disposed
Collateral") or any interest thereon without obtaining the prior written consent
of  Secured  Party so long as (i) Debtor is doing so in the  ordinary  course of
business,  (ii) the book value of any such Disposed  Collateral  does not exceed
$5,000.00,  and (iii) the aggregate  book value of all such Disposed  Collateral
does not exceed $100,000.00 in any fiscal year.  Although proceeds of Collateral
are covered by this Agreement,  this shall not be construed to mean that Secured
Party consents to any sale of the Collateral.
                                       2
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         5.2 Debtor shall keep and maintain the Collateral in good condition and
repair and shall not use the  Collateral  in violation of any  provision of this
Agreement or any  applicable  statute,  ordinance or regulation or any policy of
insurance insuring the Collateral.

         5.3 Debtor shall provide and maintain insurance insuring the Collateral
against  risks,  with  coverage and in form and amount  satisfactory  to Secured
Party.  At Secured  Party's  request,  Debtor shall deliver to Secured Party the
original policies of insurance containing endorsements naming Secured Party as a
loss payee.

         5.4 Subject to Section 7.2 of the Loan Agreement, Debtor shall pay when
due all taxes,  assessments  and other  charges  which may be levied or assessed
against the Collateral.

         5.5 Debtor shall  prevent any portion of the  Collateral  that is not a
fixture  from being or becoming a fixture  and shall  prevent any portion of the
Collateral  from being or becoming an accession to other goods that are not part
of the Collateral.

         5.6 Debtor shall give Secured  Party  immediate  written  notice of any
change in the location of: (i) Debtor's chief executive  office;  (ii) except as
permitted in  Paragraph  3.2 hereof with  respect to the Manila  Equipment,  the
Collateral  or any  part  thereof;  or (iii)  Debtor's  records  concerning  the
Collateral.

         5.7 After reasonable  notice by Secured Party to Debtor,  Secured Party
or its agents may inspect the Collateral at reasonable  times and may enter into
any  premises  where the  Collateral  is or may be  located.  Debtor  shall keep
records   concerning  the  Collateral  in  accordance  with  generally  accepted
accounting  principles and, if requested in writing by Secured Party, shall mark
its records and the Collateral to indicate the Security Interest.  Secured Party
shall have free and complete access to Debtor's records and shall have the right
to make extracts therefrom or copies thereof. Upon request of Secured Party from
time to time, Debtor shall submit  up-to-date  schedules of the items comprising
the Collateral in such detail as Secured Party may require.

         5.8 Debtor,  at its  reasonable  cost and  expense,  shall  protect and
defend this  Agreement,  all of the rights of Secured Party  hereunder,  and the
Collateral against all claims and demands of other parties. Debtor shall pay all
claims and charges that in the opinion of Secured Party might prejudice, imperil
or  otherwise  affect the  Collateral  or the  Security  Interest.  Debtor shall
promptly  notify Secured Party of any levy,  distraint or other seizure by legal
process or  otherwise of any part of the  Collateral  and of any  threatened  or
filed claims or proceedings  that might in any way affect or impair the terms of
this Agreement.

         5.9  Subject  to  Section  7.2  of the  Loan  Agreement,  the  Security
Interest,  at all  times,  shall be  perfected  and  shall be prior to any other
interests in the Collateral. Debtor shall act and perform as necessary and shall
execute and file all security  agreements,  financing  statements,  continuation
statements and other documents requested by Secured Party to establish, maintain
and continue the perfected Security Interest.  Debtor, on demand, shall promptly
pay all  reasonable  costs and expenses of filing and  recording,  including the
costs of any searches, deemed reasonably necessary by Secured Party from time to
time to establish and determine the validity and the continuing  priority of the
Security Interest.
                                       3
<PAGE>
         5.10  If  Debtor  shall  fail,  subject  to  Section  7.2 of  the  Loan
Agreement,  to pay any taxes,  assessments,  expenses or charges, to keep all of
the Collateral free from other security  interests,  encumbrances or claims,  to
keep the  Collateral  in good  condition  and repair,  to procure  and  maintain
insurance thereon, or to perform otherwise as required herein, Secured Party may
advance the monies  necessary to pay the same,  to accomplish  such repairs,  to
procure and maintain such insurance or to so perform; after reasonable notice by
Secured Party to Debtor,  Secured  Party is hereby  authorized to enter upon any
property in the possession or control of Debtor for such purposes.

         5.11 All rights,  powers and remedies granted Secured Party herein,  or
otherwise available to Secured Party, are for the sole benefit and protection of
Secured Party, and Secured Party may exercise any such right, power or remedy at
its option and in its sole and absolute  discretion without any obligation to do
so. In addition,  if under the terms hereof,  Secured Party is given two or more
alternative  courses  of  action,  Secured  Party may elect any  alternative  or
combination  of  alternatives  at  its  option  and  in its  sole  and  absolute
discretion.  All monies advanced by Secured Party under the terms hereof and all
amounts paid,  suffered or incurred by Secured Party in exercising any authority
granted herein,  including  reasonable  attorneys'  fees,  shall be added to the
Obligation,  shall be secured by the Security  Interest,  shall bear interest at
the highest rate payable on any of the  Obligation  until paid, and shall be due
and payable by Debtor to Secured Party immediately without demand.

6.       COLLATERAL IN THE POSSESSION OF SECURED PARTY

         6.1  Secured  Party  shall  use  such   reasonable  care  in  handling,
preserving  and  protecting  the  Collateral  in its  possession  as it  uses in
handling similar  property for its own account.  Secured Party,  however,  shall
have no liability for the loss,  destruction or  disappearance of any Collateral
unless there is  affirmative  proof of a lack of due care;  the lack of due care
shall not be implied solely by virtue of any loss, destruction or disappearance.

7.       EVENTS OF DEFAULT; REMEDIES

         7.1 The occurrence of any of the following  events or conditions  shall
constitute and is hereby defined to be an "Event of Default":

                  (a) Any  failure or  neglect to perform or observe  any of the
         terms, provisions,  or covenants of this Agreement, and such failure or
         neglect  either (i) cannot be  remedied,  (ii) can be  remedied  within
         fifteen  (15) days by prompt  and  diligent  action,  but it  continues
         unremedied  for a period of fifteen (15) days after  notice  thereof to
         Debtor, or (iii) can be remedied, although not within fifteen (15) days
         even by prompt and diligent  action,  but such remedy is not  commenced
         within  fifteen  (15) days  after  notice  thereof  to Debtor or is not
         diligently  prosecuted to completion  within a total of forty-five (45)
         days from the date of such notice.

                  (b) Any  warranty,  representation  or statement  contained in
         this  Agreement  that  shall be or shall  prove to have been false when
         made or furnished.

                  (c) Any levy or execution  upon,  or judicial  seizure of, any
         portion of the  Collateral or any other  collateral or security for the
         Obligation.
                                       4
<PAGE>
                  (d) Any  attachment  or  garnishment  of, or the  existence or
         filing  of  any  lien  or  encumbrance  against,  any  portion  of  the
         Collateral or any other  collateral or security for the Obligation that
         is not  removed  and  released  within  fifteen  (15)  days  after  its
         creation.

                  (e) The  institution  of any legal  action or  proceedings  to
         enforce any lien or  encumbrance  upon any portion of the Collateral or
         any  other  collateral  or  security  for the  Obligation,  that is not
         dismissed within sixty (60) days after its institution.

                  (f)  The  abandonment  by  Debtor  of all or any  part  of the
         Collateral.

                  (g) The loss,  theft or  destruction  of,  or any  substantial
         damage to, any portion of the  Collateral  or any other  collateral  or
         security  for  the  Obligation,  that  is  not  adequately  covered  by
         insurance.

                  (h) The  occurrence  of any  event of  default  under the Loan
         Agreement.

         7.2 Upon the  occurrence  of any Event of Default and at any time while
such Event of Default is  continuing,  Secured  Party  shall have the  following
rights and remedies and may do one or more of the following:

                  (a)  Declare  all  or  any  part  of  the   Obligation  to  be
         immediately due and payable,  and the same,  with all reasonable  costs
         and charges, shall be collectible thereupon by action at law.

                  (b)  Without  further  notice  or  demand  and  without  legal
         process, take possession of the Collateral wherever found and, for this
         purpose,  enter  upon any  property  occupied  by or in the  control of
         Debtor.  Debtor,  upon  demand by Secured  Party,  shall  assemble  the
         Collateral and deliver it to Secured Party or to a place  designated by
         Secured Party that is reasonably convenient to both parties.

                  (c) Pursue any legal or equitable  remedy available to collect
         the Obligation,  to enforce its title in and right to possession of the
         Collateral  and to  enforce  any  and  all  other  rights  or  remedies
         available to it.

                  (d) Upon  obtaining  possession of the  Collateral or any part
         thereof,  after notice to Debtor as provided in  Paragraph  7.4 herein,
         sell such  Collateral  at public or private sale either with or without
         having such Collateral at the place of sale. The proceeds of such sale,
         after deducting  therefrom all reasonable  expenses of Secured Party in
         taking,  storing,  repairing  and  selling  the  Collateral  (including
         reasonable  attorneys'  fees)  shall be applied  to the  payment of the
         Obligation,  and any  surplus  thereafter  remaining  shall  be paid to
         Debtor or any other person that may be legally entitled thereto. In the
         event of a deficiency  between  such net proceeds  from the sale of the
         Collateral and the total amount of the Obligation, Debtor, upon demand,
         shall promptly pay the amount of such deficiency to Secured Party.
                                       5
<PAGE>
         7.3 Secured  Party,  so far as may be lawful,  may  purchase all or any
part of the  Collateral  offered  at any  public  or  private  sale  made in the
enforcement of Secured Party's rights and remedies hereunder.

         7.4 Any demand or notice of sale,  disposition or other intended action
hereunder or in connection herewith,  whether required by the Uniform Commercial
Code or otherwise,  shall be deemed to be commercially  reasonable and effective
if such demand or notice is given to Debtor at least ten (10) days prior to such
sale,  disposition or other intended  action,  in the manner provided herein for
the giving of notices.

         7.5  Debtor  shall  pay  all  costs  and  expenses,  including  without
limitation costs of Uniform Commercial Code searches, court costs and reasonable
attorneys' fees,  incurred by Secured Party in enforcing payment and performance
of the  Obligation  or in  exercising  the rights and remedies of Secured  Party
hereunder. All such costs and expenses shall be secured by this Agreement and by
all  deeds  of  trust  and  other  lien  and  security  documents  securing  the
Obligation.  In the event of any court  proceedings,  court costs and attorneys'
fees  shall be set by the  court and not by jury and  shall be  included  in any
judgment obtained by Secured Party.

         7.6 In  addition  to any  remedies  provided  herein  for an  Event  of
Default, Secured Party shall have all the rights and remedies afforded a secured
party  under  the  Uniform  Commercial  Code and all other  legal and  equitable
remedies  allowed under  applicable law. No failure on the part of Secured Party
to exercise any of its rights hereunder  arising upon any Event of Default shall
be  construed  to  prejudice  its  rights  upon the  occurrence  of any other or
subsequent Event of Default. No delay on the part of Secured Party in exercising
any such rights shall be  construed to preclude it from the exercise  thereof at
any time while that Event of Default is  continuing.  Secured  Party may enforce
any one or more rights or remedies  hereunder  successively or concurrently.  By
accepting  payment or performance  of any of the Obligation  after its due date,
Secured Party shall not thereby waive the agreement  contained  herein that time
is of the  essence,  nor shall  Secured  Party waive either its right to require
prompt payment or performance when due of the remainder of the Obligation or its
right to consider the failure to so pay or perform an Event of Default.

8.       MISCELLANEOUS PROVISIONS

         8.1 The  acceptance  of this  Agreement  by Secured  Party shall not be
considered a waiver of or in any way to affect or impair any other security that
Secured Party may have, acquire  simultaneously  herewith,  or hereafter acquire
for the  payment  or  performance  of the  Obligation,  nor shall the  taking by
Secured  Party at any time of any such  additional  security be  construed  as a
waiver of or in any way to affect or impair the Security Interest; Secured Party
may resort,  for the payment or  performance of the  Obligation,  to its several
securities therefor in such order and manner as it may determine.

         8.2 Without  notice or demand,  without  affecting the  obligations  of
Debtor  hereunder  or the  personal  liability  of any  person  for  payment  or
performance of the Obligation,  and without  affecting the Security  Interest or
the priority thereof, Secured Party, from time to time, may: (i) extend the time
for  payment  of all or any  part  of the  Obligation,  accept  a  renewal  note
therefor,  reduce the payments thereon, release any person liable for all or any
part  thereof,  or  otherwise  change  the  terms  of  all or  any  part  of the
Obligation;  (ii) take and hold other security for the payment or performance of
the Obligation and enforce, exchange, substitute,  subordinate, waive or release
any such security;  (iii) join in any extension or subordination  agreement;  or
(iv) release any part of the Collateral from the Security Interest.
                                       6
<PAGE>
         8.3 Debtor  waives  and agrees not to assert:  (i) any right to require
Secured Party to proceed  against any guarantor,  to proceed  against or exhaust
any other security for the Obligation,  to pursue any other remedy  available to
Secured Party, or to pursue any remedy in any particular  order or manner;  (ii)
the  benefits of any legal or equitable  doctrine or  principle of  marshalling;
(iii) the  benefits  of any statute of  limitations  affecting  the  enforcement
hereof; (iv) demand, diligence, presentment for payment, protest and demand, and
notice of extension,  dishonor, protest, demand and nonpayment,  relating to the
Obligation;  and (v) any benefit of, and any right to participate  in, any other
security now or hereafter held by Secured Party.

         8.4 The terms herein shall have the meanings in and be construed  under
the Uniform  Commercial  Code. This Agreement shall be governed by and construed
according to the laws of the State of Arizona.  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 is held to be void or
invalid, the same shall not affect the remainder hereof which shall be effective
as though the void or invalid provision had not been contained herein.

         8.5 No modification,  rescission,  waiver,  release or amendment of any
provision of this Agreement shall be made except by a written agreement executed
by Debtor and a duly authorized officer of Secured Party.

         8.6 This is a continuing Agreement which shall remain in full force and
effect until actual receipt by Secured Party of written notice of its revocation
as to future  transactions and shall remain in full force and effect  thereafter
until all of the  Obligation  with respect to the Term Loan incurred  before the
receipt of such notice,  and all of the  Obligation  incurred  thereafter  under
commitments  extended  by Secured  Party  before the receipt of such notice with
respect to the Term Loan,  shall have been paid and performed in full.  Once the
Term Loan has been fully paid,  Secured Party agrees to terminate  this Security
Agreement and release its Security Interest with respect to the Collateral.

         8.7 No setoff or claim that  Debtor  now has or may in the future  have
against  Secured  Party  shall  relieve  Debtor from  paying or  performing  the
Obligation.

         8.8 Time is of the essence  hereof.  All liability  hereunder  shall be
joint and several.  This Agreement shall be binding upon, and shall inure to the
benefit  of, the  parties  hereto  and their  heirs,  personal  representatives,
successors  and assigns.  The term  "Secured  Party" shall  include not only the
original Secured Party hereunder but also any future owner and holder, including
pledgees,  of note or notes  evidencing the  Obligation.  The provisions  hereof
shall apply to the parties  according to the context  thereof and without regard
to the number or gender of words or expressions used.

         8.9 All notices required or permitted to be given hereunder shall be in
writing and may be given in person or by United States mail, by delivery service
or by electronic transmission.  Any notice directed to a party to this Agreement
shall become effective upon the earliest of the following: (i) actual receipt by
that party; (ii) delivery to the designated address of that party,  addressed to
that party;  or (iii) if given by certified or  registered  United  States mail,
twenty-four  (24) hours after  deposit with the United  States  Postal  Service,
postage  prepaid,  addressed  to  that  party  at its  designated  address.  The
designated  address of a party  shall be the  address of that party shown at the
beginning of this  Agreement or such other  address as that party,  from time to
time, may specify by notice to the other parties.
                                       7
<PAGE>
         8.10 A carbon,  photographic or other reproduced copy of this Agreement
and/or any financing  statement  relating  hereto shall be sufficient for filing
and/or recording as a financing statement.

         IN  WITNESS  WHEREOF,  these  presents  are  executed  as of  the  date
indicated above.

                                        THREE-FIVE SYSTEMS, INC., a Delaware
                                        corporation



                                        By:____________________________________
                                        Name:__________________________________
                                        Its:___________________________________

                                                                         DEBTOR
                                       -9-
<PAGE>
                                  SCHEDULE "A"

                                   COLLATERAL
                                   ----------


         (a) All  equipment  now  owned or  hereafter  acquired,  including  all
furniture,  fixtures,  furnishings,  vehicles  (whether  titled or  non-titled),
machinery,  materials  and supplies,  wherever  located in the State of Arizona,
together  with  all  parts,  accessories,   attachments,  additions  thereto  or
replacements therefor;

         (b)  Together  with  (i) all  policies  or  certificates  of  insurance
covering any of the foregoing property, and all awards, loss payments,  proceeds
and premium  refunds that may become payable with respect to such policies;  and
(ii) all proceeds of any of the foregoing property, whether due or to become due
from any sale, exchange or other disposition  thereof,  whether cash or non-cash
in nature, and whether represented by checks, drafts, notes or other instruments
for the payment of money, including,  without limitation,  all property, whether
cash or non-cash  in nature,  derived  from tort,  contractual  or other  claims
arising in connection with any of the foregoing property.