Document:

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                                                                   EXHIBIT 10.3

                                 LOAN AGREEMENT

         This Loan Agreement (the "Agreement") is entered into June 7, 2002 to
be effective as of June 3, 2002 (References to the date of this Loan Agreement
contained herein shall be deemed to mean June 3, 2002.) by and between Fin.part
International S.A., a Luxembourg societe anonyme ("Lender"), and the Borrower
described below:

         In consideration of the Loan described below and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby,
Lender and Borrower agree as follows:

         1.       DEFINITIONS AND REFERENCE TERMS. In addition to any other
terms defined herein, the following terms shall have the meaning set forth with
respect thereto:

         A.       AFFILIATE. As to any Person, each of the Persons that
directly or indirectly, through one or more intermediaries, owns or controls,
or is controlled by or under common control with, such Person or any individual
related to such Person. For the purpose of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of management and policies, whether through the ownership of voting
securities, by contract or otherwise.

         B.       BORROWER. Frisby Technologies, Inc., a Delaware corporation.

         C.       BORROWER'S ADDRESS: 3195 Centre Park Boulevard,
Winston-Salem, NC 27107.

         D.       COLLATERAL. The property and interests in property securing

payment and performance of the Loan, as set forth in Section 3 hereof.

         E.       NOTE. The promissory note described in Section 2 hereof.

         F.       HAZARDOUS MATERIALS. All materials defined as hazardous
wastes or substances under any local, state or federal environmental laws,
rules or regulations, and petroleum, petroleum products, oil and asbestos.

         G.       LOANS. Collectively, the loans made by Lender to Borrower
under this Agreement and any other subsequent loan or extension of credit by
Lender to the Borrower that is subject to this Agreement.

         H.       LOAN DOCUMENTS. Loan Documents means this Loan Agreement, the
Note executed by Borrower in favor of Lender and all other documents,
instruments, guaranties, certificates and agreements executed and/or delivered
by Borrower, any guarantor or third party in connection with this Loan
Agreement.

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         I.       MATERIAL ADVERSE EFFECT. Any material adverse effect on (i)
the business, assets, operations or financial condition of Borrower and its
subsidiaries, taken as a whole, (ii) the Borrower's ability to pay the
Obligations in accordance with the terms thereof, or (iii) the Collateral or
Lender's security interest in the Collateral or the priority of such security
interest.

         J.       OBLIGATIONS. The Loans and all other loans, advances,
indebtedness, liabilities, obligations, covenants and duties (including
post-petition interest on the foregoing, to the extent lawful) owing, arising,
due or payable from the Borrower to the Lender of any kind or nature, present
or future, arising under this Agreement or any of the other Loan Documents,
whether direct or indirect (including those acquired by assignment), absolute
or contingent, primary or secondary, due or to become due, now existing or
hereafter arising. The term includes, without limitation, all interest,
charges, expenses, fees, attorneys' fees and any other sums chargeable to the
Borrower by the Lender under this Agreement or any of the other Loan Documents.

         K.       PERMITTED LIENS. Collectively, (i) all liens or security
interests securing indebtedness owed to Lender, (ii) pledges or deposits made
in the ordinary course of business in connection with or to secure workers'
compensation, unemployment insurance, pensions or other employee benefits
accruing under provisions of law or under agreements now in force and disclosed
to Lender, (iii) liens imposed by law, such as carriers', warehousemen's,
materialmen's and vendors' liens and other similar liens, incurred in good
faith in the ordinary course of business and securing obligations that are not
overdue, or which are being contested in good faith and against which, if
requested by the Lender, the Borrower will establish reserves satisfactory to
the Lender, (iv) zoning restrictions, easements, licenses, reservations,
covenants, conditions, and restrictions on the use of property which do not, in
the aggregate, materially detract from the value of Borrower's property or
assets or materially impair the use thereof in the operation of its business;
(v) liens for taxes not due or which are being contested in good faith and
against which, if requested by the Lender, the Borrower will establish reserves
satisfactory to the Lender; (vi) purchase money security interests granted by
the Borrower in the ordinary course of its business; and (vii) liens and
security interests described on Schedule 1K attached hereto.

         L.       PERSON. A corporation, an association, a joint venture, a
limited liability company, a partnership, an organization, a business, an
individual, a trust or a government or political subdivision thereof or any
government agency or any other legal entity.

         M.       PRIME RATE. Prime Rate shall have the same meaning set forth
in the Note.

         N.       TANGIBLE NET WORTH. The amount by which the Borrower's total
assets exceed total liabilities, in accordance with GAAP, minus: (i) goodwill,
net of accumulated amortization; (ii) contract rights, net of accumulated
amortization; (iii) leasehold improvements, net of accumulated depreciation;
(iv) assets representing claims on (A) shareholders, directors or officers or
(B) Affiliates and (v) other assets net

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of accumulated depreciation and/or amortization constituting intangible assets
including, without limitation, any capitalized patents, trademarks, tradenames,
copyrights or similar intellectual property.

         ACCOUNTING TERMS. All accounting terms not specifically defined or
specified herein shall have the meanings generally attributed to such terms
under generally accepted accounting principles ("GAAP"), as in effect from time
to time, consistently applied. All financial computations made under this
Agreement for the purpose of determining compliance with the financial
requirements of this Agreement shall be made, and all financial information
required under this Agreement shall be prepared, in accordance with GAAP, as in
effect on the date hereof.

         2.       LOAN.

         A.       Subject to the terms of this Agreement, Lender hereby agrees
to extend a loan to Borrower (the "Loan"), in the principal amount of up to
Three Hundred Thousand Dollars ($300,000.00), for the exclusive purpose of
funding payroll, related taxes and benefits of the employees of the Borrower
(excluding the compensation of Gregory S. Frisby). Lender agrees, on the terms
and conditions set forth herein and promptly upon Borrower's request, to make
advances to the Borrower from time to time before the Maturity Date in
accordance with the attached Schedule 8; provided that, immediately after each
such advance is made the aggregate outstanding principal amount of advances by
the Lender shall not exceed $300,000.00. Within the foregoing limits, the
Borrower may borrow, repay, prepay and reborrow under this Loan Agreement at
any time before the Maturity Date.

         B.       To evidence the Loan, Borrower shall execute and deliver to
Lender a convertible promissory note (the "Note") in the principal amount of up
to $300,000.00, which Note shall bear interest and be payable in accordance
with the terms set forth herein below. The Loan shall mature and become payable
in full on June 3, 2004 which date shall be the "Maturity Date."

         C.       Interest and Principal. Interest on the principal amount
outstanding under the Loan from time to time shall accrue at a variable rate of
the Prime Rate, plus seventy-five basis points (0.75%) per annum, which accrued
interest shall be payable quarterly in arrears. The principal of the Note shall
be repaid in full on the Maturity Date, together with all accrued but unpaid
interest.

         D.       Collateral Security. Repayment in full of all Obligations of
the Borrower shall be secured by the Collateral, such security interest to be
junior and subordinate to the security interests of DAMAD Holding AG and Bluwat
AG.

         3.       COLLATERAL SECURITY. Payment and performance of the
Obligations shall be secured by the following Collateral, and the Borrower
hereby grants, conveys, transfers and assigns to the Lender a security interest
in and lien upon all of the property described below:

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         A.       A third assignment of, security interest in and lien upon all
of the Borrower's interests in and to all patents for products, goods and items
produced or manufactured by the Borrower, and all processes employed in the
production or manufacture thereof, to the extent the granting of such security
interests shall not constitute a violation of law or a default under any
existing agreement between the Borrower and any Person with regard to any such
patents;

         B.       A continuing security interest in and lien upon all of the
Borrower's accounts, inventory, and general intangibles, and a third priority
security interest in and lien upon all of the Borrower's furniture, machinery
and equipment, whether now owned or hereafter acquired, and wherever located,
together with all proceeds thereof.

         Lender's security interest in and lien on the Collateral shall be
junior and subordinate to the security interest and lien of DAMAD Holding AG
and Bluwat AG to such Collateral. Borrower agrees and undertakes to execute and
deliver to the Lender such deeds of trust, security agreements, pledge
agreements, assignments, financing statements, subordinations, certificates,
waivers, estoppel agreements, and other documentation, in form acceptable to
the Lender, as may be reasonably requested by the Lender in connection with the
Collateral. Borrower further agrees that all of the Collateral shall secure all
of the Obligations of the Borrower to the Lender. It is specifically agreed and
acknowledged by the parties hereto that the personal and real property owned by
Schoeller Frisby Technologies GmbH, a joint venture between Borrower and
Schoeller Textil AG, shall not be deemed to be Collateral, as herein defined.
Lender agrees that it will release its security interest in the Borrower's
accounts receivable upon the establishment by Borrower of a program of
factoring such accounts receivable.

         4.       CONDITIONS PRECEDENT. The Lender's agreement to extend the
Loan to the Borrower is subject to the fulfillment, to the Lender's
satisfaction, of all of the following conditions:

         A.       Lender shall have received, on or before the date hereof (i)
a copy of the resolutions of the Board of Directors of the Borrower, certified
on such date by an officer of the Borrower, authorizing the execution and
delivery of this Agreement, the borrowings hereunder and the execution and
delivery of the Note and the other Loan Documents and the Collateral, and (ii)
such additional documents and requirements as the Lender or counsel for the
Lender may reasonably request.

         B.       The Borrower shall have executed and delivered all
documentation for the Loan reasonably requested by the Lender, which shall be
in form and content reasonably acceptable to the Lender and its counsel.

         C.       The Borrower shall have provided to the Lender, in form
satisfactory to the Lender, all financial and other information concerning its
business and affairs, as reasonably requested by the Lender.

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         D.       To the best knowledge of the Borrower, no event has occurred
or failed to occur that would have a Material Adverse Effect on the financial
condition of the Borrower, as set forth in its March 31, 2002 quarterly
financial statements.

         E.       The Borrower shall have certified that the execution of the
Loan Documents shall not cause any default which would have a Material Adverse
Effect on Borrower under any other contract or agreement to which the Borrower
is subject.

         F.       Subject to the limitations set forth in Section 11, the
Borrower shall have paid or agreed to make payment of all reasonable expenses
actually incurred in connection with the closing of the Loan, including,
without limitation, insurance premiums, audit charges and attorneys' fees.

         5.       REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants to Lender as follows:

         A.       GOOD STANDING. Borrower is a corporation, duly organized,
validly existing and in good standing under the laws of the State of Delaware
(except as to franchise taxes which are being contested in good faith) and has
the power and authority to own its property and to carry on its business.

         B.       AUTHORITY AND COMPLIANCE. Borrower has full power and
authority to execute and deliver the Loan Documents and to incur and perform
the obligations provided for therein, all of which have been duly authorized by
all proper and necessary action of the appropriate governing body of Borrower.
No consent or approval of any public authority or other third party is required
as a condition to the validity of any Loan Document, and Borrower is in
compliance with all material laws and regulatory requirements to which it is
subject, the failure to comply with would result in a Material Adverse Effect
on the Borrower.

         C.       BINDING AGREEMENT. This Agreement and the other Loan
Documents executed by Borrower constitute valid and legally binding obligations
of Borrower, enforceable in accordance with their terms, subject to bankruptcy,
insolvency, reorganization and similar laws and other laws generally affecting
the enforceability of creditors' rights and to general principles of equity.

         D.       LITIGATION. There is no material proceeding involving
Borrower pending or, to the knowledge of Borrower, threatened before any court
or governmental authority, agency or arbitration authority which is likely to
result in a Material Adverse Effect on the Borrower, except as disclosed in
Schedule 5D attached hereto.

         E.       NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock
provision or other document pertaining to the organization, power or authority
of Borrower and no provision of any existing agreement, mortgage, indenture or
contract binding on Borrower or affecting its property, which would conflict
with or in any way prevent the execution, delivery or carrying out of the terms
of this Agreement and the other Loan Documents, and violation of which would
have a Material Adverse Effect on the Borrower.

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         F.       OWNERSHIP OF ASSETS. Borrower has good title to, or a valid
leasehold interest in, its assets, and its assets are free and clear of liens,
except those granted to Lender, except as disclosed in Schedule 1K attached
hereto.

         G.       TAXES. Except as set forth on Schedule 5G attached hereto,
all material taxes and assessments due and payable by Borrower have been paid
or are being contested in good faith by appropriate proceedings and Borrower
has filed all material tax returns which it is required to file, or has been
granted extensions of time to file such tax returns.

         H.       FINANCIAL STATEMENTS. The audited financial statements of
Borrower heretofore delivered to Lender have been prepared in accordance with
GAAP applied on a consistent basis throughout the period involved, with respect
to Borrower, and fairly present Borrower's financial condition as of the date
or dates thereof, and there has been no material adverse change in Borrower's
or such companies' financial condition or operations since March 31, 2002. To
the best of its knowledge, all factual information furnished by Borrower to
Lender in connection with this Agreement and the other Loan Documents is and
will be accurate and complete on the date as of which such information is
delivered to Lender and is not and will not be incomplete by the omission of
any material fact necessary to make such information not misleading.

         I.       PLACE OF BUSINESS. Borrower's chief executive office is
located at: 3195 Centre Park Blvd, Winston-Salem, North Carolina 27107.

         J.       ENVIRONMENTAL MATTERS. To the best of Borrower's knowledge
after diligent investigation, the conduct of Borrower's business operations
does not and will not violate any material federal laws, rules or ordinances
for environmental protection, regulations of the Environmental Protection
Agency, any applicable local or state law, rule, regulation or rule of common
law or any judicial interpretation thereof relating primarily to the
environment or Hazardous Materials, and Borrower will not use or permit any
other party to use any Hazardous Materials at Borrower's places of business
except such materials as are incidental to Borrower's normal course of
business, maintenance and repairs and which are handled in material compliance
with all applicable environmental laws. Borrower agrees to permit Lender, its
agents, contractors and employees to enter and inspect any of Borrower's places
of business or any other property of Borrower 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 Borrower is complying with this covenant.

         K.       NO MATERIAL ADVERSE EFFECT. To the best knowledge of Borrower
neither this Agreement nor any of the other Loan Documents, nor any written
statements when furnished to the Lender by or on behalf of the Borrower in
connection with the Loans or the Loan Documents, contain any untrue statement
of a material fact or omit a material fact necessary to make the statements
contained therein or herein not misleading. To the best knowledge of the
Borrower, there is no material fact that the Borrower has not

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disclosed to the Lender in writing that would reasonably be deemed to have a
Material Adverse Effect on the Borrower.

         6.       AFFIRMATIVE COVENANTS. Until full payment and performance of
all Obligations of Borrower under the Loan Documents, Borrower will, unless
Lender consents otherwise in writing (and without limiting any requirement of
any other Loan Document):

         A.       FINANCIAL CONDITION. Maintain Borrower's financial condition,
determined in accordance with GAAP applied on a consistent basis throughout the
period involved, as follows:

                  (i)      Maintain a Tangible Net Worth of not less than
$1,250,000 as of the end of each fiscal quarter hereafter; provided that Lender
hereby waives compliance with this covenant for the quarter ended June 30,
2002.

         B.       FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system
of accounting satisfactory to Lender and in accordance with GAAP applied on a
consistent basis throughout the period involved, permit Lender's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Lender may desire. If an
Event of Default has occurred and continues, Borrower agrees to reimburse the
Lender on demand for the reasonable costs of one such inspection conducted
during such Event of Default. Unless written notice of another location is
given to Lender, Borrower's books and records will be located at Borrower's
chief executive office set forth above. All financial statements called for
below shall be prepared in form and content acceptable to Lender and by
independent certified public accountants acceptable to Lender.

         In addition, Borrower will:

                  (i)      Furnish to Lender audited consolidated financial
statements of Borrower for each fiscal year of Borrower, within 90 days after
the close of each such fiscal year.

                  (ii)     Furnish to Lender monthly consolidated financial
statements (including a balance sheet and profit and loss statement) of
Borrower, which shall be prepared by Borrower, for each month of each fiscal
year of Borrower, within 45 days after the end of each month.

                  (iii)    Furnish to Lender for each fiscal quarter a
compliance certificate for (and executed by an authorized representative of)
Borrower concurrently with and dated as of the date of delivery of each of the
financial statements for such fiscal quarter as required in paragraphs (i) and
(ii) above, containing (a) a certification that the financial statements of
each date are true and correct and that the Borrower is not in default under
the terms of this Agreement, and (b) computations and conclusions, in such
detail as Lender may request, with respect to compliance with Section of this
Agreement which compliance certificate shall be substantially in the form of
Exhibit A attached hereto.

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                  (iv)     Furnish to Lender promptly such additional
information, reports and statements respecting the business operations and
financial condition of Borrower from time to time, as Lender may reasonably
request. Without limiting the scope of the preceding sentence, Borrower shall
furnish Lender a copy of its quarterly report on Form 10-QSB promptly upon the
filing thereof with the Securities and Exchange Commission.

         C.       RESERVATION OF SHARES. The Company will at all times reserve
and keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued common stock for the purpose of enabling it to satisfy
any obligation to issue common stock upon conversion of the Note.

         D.       INSURANCE. Maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity,
specifically to include fire and extended coverage insurance covering all
assets, business interruption insurance, workers compensation insurance and
liability insurance, all to be with such companies and in such amounts as are
satisfactory to Lender and with respect to insurance on the Collateral, to
contain a mortgagee clause naming Lender as a loss payee or an additional
insured (as applicable) as its interest may appear and providing for at least
30 days prior notice to Lender of any cancellation thereof. Satisfactory
evidence of such insurance will be supplied to Lender prior to funding under
the Loan and 30 days prior to each policy renewal.

         E.       EXISTENCE AND COMPLIANCE. Maintain its existence, good
standing and qualification to do business, where required and the failure to be
so qualified will have a Material Adverse Effect on Borrower and comply with
all laws, regulations and governmental requirements including, without
limitation, environmental laws applicable to it or to any of its property,
business operations and transactions, where the failure to comply will have a
Material Adverse Effect on Borrower.

         F.       ADVERSE CONDITIONS OR EVENTS. Promptly advise Lender in
writing of (i) any condition, event or act which comes to its attention that
Borrower reasonably believes is likely to have a Material Adverse Effect, (ii)
any litigation filed by or against Borrower, an adverse outcome of which could
reasonably be expected to have a Material Adverse Effect on Borrower, (iii) any
event that has occurred that would constitute an event of default under any
Loan Documents and (iv) any uninsured loss of Collateral through fire, theft,
liability or property damage in excess of an aggregate of $500,000.00.

         G.       TAXES AND OTHER OBLIGATIONS. Pay all of its taxes,
assessments and other obligations where the failure to make such payments will
have a Material Adverse Effect on Borrower, including, but not limited to
taxes, costs or other expenses arising out of this transaction, as the same
become due and payable, except to the extent the same are being contested in
good faith by appropriate proceedings in a diligent manner.

         H.       MAINTENANCE. Maintain all of its tangible property in good
condition and repair, excepting ordinary wear and tear, and make all necessary
replacements thereof (provided that Borrower shall not be required to maintain
any obsolete or immaterial

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property), and preserve and maintain all material licenses, trademarks,
privileges, permits, franchises, certificates and the like necessary for the
operation of its business.

         I.       NOTIFICATION OF ENVIRONMENTAL CLAIMS. Borrower shall
immediately advise Lender in writing of (i) any and all 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
Borrower's business operations which is likely to result in a Material Adverse
Effect; and (ii) all claims made or threatened by any third party against
Borrower relating to damages, contribution, cost recovery, compensation, loss
or injury resulting from any Hazardous Materials which is likely to result in a
Material Adverse Effect. Borrower shall immediately notify Lender of any
material remedial action taken by Borrower with respect to Borrower's business
operations.

         7.       NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without
the prior written consent of Lender (and without limiting any requirement of
any other Loan Documents):

         A.       OWNERSHIP AND MANAGEMENT. Make or permit to be made any
significant change in Gregory S. Frisby's involvement in the management of the
Borrower.

         B.       TRANSFER OF ASSETS. Sell, lease, sell and leaseback, assign
or otherwise dispose of or transfer all or substantially all of its assets,
except in the normal course of its business.

         C.       LIENS. Grant, suffer or permit any contractual or
non-contractual lien on or security interest in the Collateral, other than
Permitted Liens. It is expressly provided, however, that leases for office
equipment and vehicles entered into in the normal course of Borrower's business
shall not be subject to this covenant.

         D.       EXTENSIONS OF CREDIT. Make any loan or advance to any
individual, partnership, corporation or other entity, except: (1) advances to
employees of the Borrower for expenses incurred in the ordinary course of
business; (2) loans made to Schoeller Frisby Technologies GmbH in accordance
with the terms of the Joint Venture Agreement between Borrower and Schoeller
Textil AG or as approved from time to time by the board of directors of the
Borrower; (3) loans outstanding on the date of this Agreement and listed on
Schedule 7D attached hereto.

         E.       BORROWINGS. Create, incur, assume or become liable in any
manner for any indebtedness (for borrowed money, lease payments under capital
leases, as surety or guarantor for the debt for another, or otherwise), other
than to Lender, except for (1) normal trade debts incurred in the ordinary
course of Borrower's business; (2) existing indebtedness disclosed to Lender on
Schedule 7E(2) attached hereto; (3) indebtedness arising pursuant to purchase
money contracts for assets acquired after the date hereof, provided that (i)
any lien in respect of such indebtedness attaches only to the assets

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purchased, and (ii) the indebtedness is within the ranges set forth on Schedule
7E(3); (4) any indebtedness with respect to a program of factoring accounts
receivable of the Borrower which, by its terms, is secured solely by the
Borrower's accounts receivable; (5) other indebtedness which, by its terms is
expressly subordinated in repayment to the Loan, and the covenants, events of
default and mandatory prepayment provisions of such indebtedness may not be
more restrictive than the corresponding provisions contained in the Loan
Documents and any conversion rights may not be any more favorable than the
conversion rights in the Note; and (6) short-term unsecured indebtedness up to
an aggregate amount outstanding of $250,000 at any one time.

         F.       DIVIDENDS AND DISTRIBUTIONS. Pay any dividend (other than
dividends payable in capital stock of Borrower) or make any distribution on any
shares of any class of its capital stock, other than in the normal course of
Borrower's business, or apply any of its property or assets to the purchase,
redemption or other retirement of any shares of any class of capital stock of
Borrower, or in any way amend its capital structure.

         G.       CHARACTER OF BUSINESS. Change in any material respect the
general character of business as conducted at the date hereof.

         8.       DEFAULT. Borrower shall be in default under this Agreement
and under each of the other Loan Documents if it shall default in the payment
of any amounts due and owing under the Loan and such default continues for 5
days after written notice thereof. Borrower shall also be in default if it
should fail to timely and properly observe, keep or perform any term, covenant,
agreement or condition in any Loan Document or in any other loan agreement,
promissory note, security agreement, deed of trust, assignment, pledge or other
contract securing or evidencing payment of any indebtedness of Borrower to
Lender, and such default shall continue uncured for a period of thirty (30)
days following written notice by Lender to Borrower; provided, further, that if
the Borrower has undertaken to cure any such default and is diligently
prosecuting such cure, to the reasonable satisfaction of Lender, it shall not
constitute a default under this Agreement if the subject default remains
uncured beyond thirty (30) days following written notice by Lender to Borrower.
Borrower shall also be in default and all unpaid principal and accrued interest
under the Loan shall become immediately due and payable: (i) if Borrower
commences voluntary proceeding under any provision of Title 11 of the United
States Code, as now or hereafter amended, or commences any other proceeding,
under any law, now or hereafter in force, relating to its own bankruptcy,
insolvency, reorganization, liquidation, or otherwise to the relief of its own
debtors or the readjustment of its own indebtedness; (ii) if Borrower makes any
assignment for the benefit of its own creditors or similar arrangement with its
own such creditors; (iii) if Borrower appoints a receiver, trustee or similar
judicial officer or agent to take charge of or liquidate any of its own
property or assets; (iv) upon the commencement against Borrower of any
involuntary proceeding of the kind described in subsections (i), (ii) and (iii)
herein; (v) any other liquidation, dissolution or winding up of Borrower; (vi)
any consolidation, merger, recapitalization, sale of equity securities or other
transaction pursuant to which the holders of the Borrower's outstanding capital
stock immediately preceding such event own less than 50% of the outstanding
capital stock (on a fully

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diluted basis) of the surviving corporation; or (viii) a sale, lease or other
disposition of all or substantially all of the assets of the Borrower.

         9.       REMEDIES UPON DEFAULT. If an event of default shall occur,
Lender shall have all rights, powers and remedies available under each of the
Loan Documents as well as all rights and remedies available at law or in
equity.

         10.      NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:

         Borrower:         Frisby Technologies, Inc.
                           3195 Centre Park Blvd
                           Winston-Salem, NC 27107
                           Attn:    John L. Ruggiero
                                    Chief Financial Officer

         With a copy to:
                           Womble, Carlyle, Sandridge & Rice, PLLC
                           200 West Second Street
                           Winston-Salem, NC  27101
                           Attn:  Christopher E. Leon, Esq.

                           Lender:
                           Fin.part International S.A.
                           25A Boulevard Royal - Le Forum Royal
                           L - 2449 Luxembourg

         With a copy to:
                           Jones, Day, Reavis & Pogue
                           120 Rue du Faubourg Saint-Honore
                           75008 Paris, France
                           Attn:    Peter R. Sternberg, Esq.

or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:

         A.       If sent by hand delivery, upon delivery;

         B.       If sent by a nationally-recognized overnight courier, on the
business day following the date sent; or

         C.       If sent by mail, upon the earlier of the date of receipt or
five (5) days after deposit in the U.S. Mail, first class postage prepaid.

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<PAGE>

         11.      COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Lender immediately upon demand the full amount of all costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of Lender's in-house counsel), incurred by Lender in connection
with negotiation and preparation of this Agreement and each of the Loan
Documents; provided, however, Borrower's obligation to pay such costs and
expenses shall be limited to 2% of the total amount of the Loan. Whenever in
the Loan Documents reference is made to "attorneys' fees" or "counsel fees",
each such reference shall mean and refer to the reasonable fees (and expenses)
actually incurred by the party retaining such attorneys or counsel.

         12.      MISCELLANEOUS. Borrower and Lender further covenant and agree
as follows, without limiting any requirement of any other Loan Document:

         A.       CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted
to Lender under any Loan Document, or allowed it by law or equity shall be
cumulative of each other and may be exercised in addition to any and all other
rights of Lender, and no delay in exercising any right shall operate as a
waiver thereof, nor shall any single or partial exercise by Lender of any right
preclude any other or future exercise thereof or the exercise of any other
right. Borrower expressly waives any presentment, demand, protest or other
notice of any kind, including but not limited to notice of intent to accelerate
and notice of acceleration. No notice to or demand on Borrower in any case
shall, of itself, entitle Borrower to any other or future notice or demand in
similar or other circumstances.

         B.       APPLICABLE LAW. This Loan Agreement and the rights and
obligations of the parties hereunder shall be governed by and interpreted in
accordance with the laws of the State of North Carolina and applicable federal
law.

         C.       AMENDMENT. No modification, consent, amendment or waiver of
any provision of this Loan Agreement, nor consent to any departure by Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
an officer of Lender, and then shall be effective only in the specified
instance and for the purpose for which given. This Loan Agreement is binding
upon Borrower, its successors and assigns, and inures to the benefit of Lender,
its successors and assigns; however, no assignment or other transfer of
Borrower's rights or obligations hereunder shall be made or be effective
without Lender's prior written consent, nor shall it relieve Borrower of any
obligations hereunder. There is no third party beneficiary of this Loan
Agreement.

         D.       DOCUMENTS. All documents, certificates and other items
required under this Loan Agreement to be executed and/or delivered to Lender
shall be in form and content satisfactory to Lender and its counsel.

         E.       PARTIAL INVALIDITY. The unenforceability or invalidity of any
provision of this Loan Agreement shall not affect the enforceability or
validity of any other provision herein and the invalidity or unenforceability
of any provision of any Loan Document to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to
other persons or circumstances. Upon any such

                                      12
<PAGE>

determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto will negotiate in good faith to modify
this Loan Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated by this Loan Agreement are consummated to the extent possible.

         F.       INDEMNIFICATION. Borrower shall indemnify, defend and hold
Lender and its successors and assigns in Lender's capacity as a lender under
this Agreement harmless from and against any and all claims, demands, suits,
losses, damages, assessments, fines, penalties, costs or other expenses
(including reasonable attorneys' fees and court costs) arising from or in any
way related to any of the transactions contemplated hereby, including but not
limited to actual or threatened damage to the environment, agency costs of
investigation, personal injury or death, or property damage, due to a release
or alleged release of Hazardous Materials, arising from Borrower's business
operations, any other property owned by Borrower or in the surface or ground
water arising from Borrower's business operations, or gaseous emissions arising
from Borrower's business operations or any other condition existing or arising
from Borrower's business operations resulting from the use or existence of
Hazardous Materials, whether such claim proves to be true or false. Borrower
further agrees that its indemnity obligations shall include, but are not
limited to, liability for damages resulting from the personal injury or death
of an employee of the Borrower, regardless of whether the Borrower has paid the
employee under the worker's compensation laws of any state or other similar
federal or state legislation for the protection of employees. The term
"property damage" as used in this paragraph includes, but is not limited to,
damage to any real or personal property of the Borrower, the Lender, and of any
third parties. The Borrower's obligations under this paragraph shall survive
the repayment of the Loans and foreclosure of the Deed of Trust securing the
Loans.

         G.       SURVIVABILITY. All covenants, agreements, representations and
warranties made herein or in the other Loan Documents shall survive the making
of the Loans and shall continue in full force and effect so long as the Loans
are outstanding or the obligation of the Lender to make any advances under the
Line of Credit shall not have expired.

         H.       UPDATED APPRAISALS AND MAINTENANCE OF COLLATERAL VALUE.
Lender may at its option, at Lender's own expense, obtain an appraisal of any
Collateral securing payment of the Loan, which appraisal shall be prepared by a
third-party appraiser engaged directly by Lender.

         13.      ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE
PARTIES HERETO, INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, 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

                                      13
<PAGE>

DISPUTES OF THE 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
AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO
COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES
IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.

         A.       SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN FORSYTH
COUNTY, NORTH CAROLINA AND ADMINISTERED BY A.A.A., WHICH 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.

         B.       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 AGREEMENT;
OR (II) LIMIT THE RIGHT OF THE 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. THE 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 AGREEMENT. NEITHER THE 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.

         14.      NO ORAL AGREEMENT. THIS WRITTEN LOAN 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.

              The remainder of this page intentionally left blank

                                      14
<PAGE>

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

                                        BORROWER:

WITNESS:                                FRISBY TECHNOLOGIES, INC.

                                        By: /s/ Gregory S. Frisby
                                           -------------------------------------
                                        Name: Gregory S. Frisby
                                             -----------------------------------
/s/ John L. Ruggiero                    Title: Chairman and CEO
---------------------------                   ----------------------------------
[Corporate Seal]

                                        LENDER:

                                        FIN.PART INTERNATIONAL S.A.

                                        By: /s/ Gianluigi Facchini
                                           -------------------------------------
                                        Name: Gianluigi Facchini
                                             -----------------------------------
                                        Title:
                                              ----------------------------------

                                      15
<PAGE>

                                  SCHEDULE 1K
                               (PERMITTED LIENS)

         (1) (a)  any lien existing on any specific fixed asset of any
corporation at the time such corporation becomes a subsidiary and not created
in contemplation of such event;

         (b)      any lien on any specific fixed asset securing debt incurred
or assumed for the purpose of financing all or any part of the cost of
acquiring or constructing such asset, provided that such lien attaches to such
asset concurrently with or within 18 months after the acquisition or completion
of construction thereof;

         (c)      any lien on any specific fixed asset of any corporation
existing at the time such corporation is merged or consolidated with or into
the Borrower or a subsidiary and not created in contemplation of such event;

         (d)      any lien existing on any specific fixed asset prior to the
acquisition thereof by the Borrower or a subsidiary and not created in
contemplation of such acquisition;

         (e)      any lien arising out of the refinancing, extension, renewal
or refunding of any debt secured by any lien permitted by any of the foregoing
paragraphs provided that (i) such debt is not secured by any additional assets,
and (ii) the amount of such debt secured by any such lien is not increased; and

         (f)      liens incidental to the conduct of the Borrower's business or
the ownership of assets which (i) do not secure debt and (ii) do not in the
aggregate materially detract from the value of the Borrower's assets or
materially impair the use thereof in the operation of the Borrower's business.

<PAGE>

                             SCHEDULE 1K, CONTINUED
                               (PERMITTED LIENS)

         (2)      Liens perfected by the following UCC financing statements:

                           FRISBY TECHNOLOGIES, INC.

<TABLE>
<CAPTION>
File #                Jurisdiction        Secured Party
-------------------------------------------------------------------------------
<S>                   <C>                 <C>
1327822               NC                  Perkin Elmer Leasing Company
                                          550 Cochituate Rd
                                          P.O. Box 9104
216915                Forsyth Co.         Framingham, MA 01701
-------------------------------------------------------------------------------
                              NC          DAMAD Holding AG &
                                          Bluwat AG.

                      Forsyth Co.
-------------------------------------------------------------------------------
19980058492           NC                  First Corp.
                                          7145 SW Vams St.
                                          Portland, OR 97223-8057
227844                Forsyth Co.
-------------------------------------------------------------------------------
</TABLE>

                             EXTREME COMFORT, INC.

<TABLE>
<CAPTION>
       File #            Jurisdiction               Secured Party
-------------------------------------------------------------------------------
       <S>               <C>              <C>
                              NC          DAMAD Holding AG & Bluwat AG.

                         Forsyth Co.
-------------------------------------------------------------------------------
</TABLE>

<PAGE>

                                  SCHEDULE 5D
                              (PENDING LITIGATION)

         (1)      An action filed by Outlast Technologies, Inc. against
                  Borrower in U.S. District Court, District of Colorado,
                  alleging patent infringement.

         (2)      An action filed by Baychar, Inc. against Borrower in a court
                  in Maine alleging patent infringement.

         (3)      An action filed by Triangle Research and Development
                  Corporation of Raleigh, North Carolina ("TRDC") and certain
                  of its employees and owners alleging breach of contract
                  violation of federal and state securities laws and unfair and
                  deceptive trade practices.

         (4)      An action filed by Ruskin, Moscou, Evans & Faltischek, P.C.,
                  Uniondale, New York, former counsel to Borrower, to recover
                  alleged unpaid legal fees.

<PAGE>

                                  SCHEDULE 5-G
                                 (TAX MATTERS)

         The Borrower has not filed federal income tax returns or certain state
income tax returns provided that to the best of the Borrower's knowledge, no
income taxes are due and payable in connection with such returns.

<PAGE>

                                  SCHEDULE 7D
                             (EXTENSIONS OF CREDIT)

                                      None

<PAGE>

                                 SCHEDULE 7E(2)
                            (EXISTING INDEBTEDNESS)

(1) The Borrower has existing secured revolving credit facilities payable to
DAMAD Holding AG and Bluwat AG in the amounts of $750,000 and $500,000,
respectively, each bearing interest at the rate of prime plus 0.75% per annum;
due date is January 10, 2005.

<PAGE>

                                 SCHEDULE 7E(3)
                             (PURCHASE MONEY DEBT)

(1) The Borrower contemplates the purchase of computer and other office
equipment in an aggregate amount not to exceed $50,000; (2) the Borrower
contemplates the need to finance machinery, fixtures, equipment and other
assets in connection with the acquisition and construction of a microcapsule
manufacturing facility in an aggregate amount which will be approved by the
Board of Directors.

<PAGE>

                                   SCHEDULE 8
                               (FUNDING SCHEDULE)

                  FRISBY TECHNOLOGIES, INC.
                  ESTIMATED FUNDING REQUIREMENTS COVERING
                  ESTIMATED PAYROLL, RELATED TAXES & BENEFITS
                  JUNE - NOVEMBER, 2002

                       June                              56,550
                       July                              54,875
                       August                            78,638
                       September                         53,650
                       October                           48,050
                       November                           8,237
                                                       --------

                       Total                           $300,000
                                                       ========<PAGE>
                                                                   EXHIBIT 10.4

                                        This Security Agreement is entered into
                                        June 7, 2002 to be effective as of June
                                        3, 2002 (References to the date of this
                                        Security Agreement contained herein
                                        shall be deemed to mean June 3, 2002.)

                              SECURITY AGREEMENT

<TABLE>
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>
LENDER/SECURED PARTY:                                               DEBTOR(S)/PLEDGOR(S):

   FINPART INTERNATIONAL S.A.                                          FRISBY TECHNOLOGIES, INC.
   25A BOULEVARD ROYAL - LE FORUM ROYAL
   L - 2449 LUXEMBOURG                                                 3195 CENTRE PARK BOULEVARD
                                                                       WINSTON-SALEM, FORSYTH COUNTY, NC  27107
-----------------------------------------------------------------------------------------------------------------------------------
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:

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

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

   --------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Reference is made to that certain Loan Agreement entered into June ___, 2002 to
be effective as of June 3, 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); provided that Lender expressly acknowledges and agrees
               that (i) its security interest and lien in the Collateral
               (hereinafter defined) is junior and subordinate to the security
               interests and liens of DAMAD Holding AG and Bluwat AG to such
               Collateral granted in January 2002 (the "Prior Secured Rights")
               and (ii) to the extent any covenant of Borrower hereunder, or any
               right and remedy of Lender hereunder, is inconsistent with, or
               impracticable in light of, a covenant, right or remedy set forth
               in documents executed in connection with the Prior Secured
               Rights, such covenant, right or remedy hereunder shall be deemed
               stricken herefrom in its entirety.

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.

                                      -1-
<PAGE>

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.

[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 and
                  except as noted in the Loan Agreement or a schedule thereto,
                  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.

                                      -3-
<PAGE>

         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.

         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,

                                      -4-
<PAGE>

                  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
                  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.

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

                                      -5-
<PAGE>

                  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.

                                      -6-
<PAGE>

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 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

                                      -7-
<PAGE>

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.

         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.

<TABLE>
<S>                                                                <C>
FIN.PART INTERNATIONAL S.A.                                        FRISBY TECHNOLOGIES, INC.

By: /s/ Gianluigi Facchini                                         By: /s/ Gregory S. Frisby________________
   ----------------------------------------------                     ------------------------------------------------------

Name: Gianluigi Facchini                                           Name: Gregory S. Frisby____________________
     --------------------------------------------                       ----------------------------------------------------

Title:                                                             Title: Chairman and CEO__________________
     --------------------------------------------                        ---------------------------------------------------

                                                                   Attest (If Applicable)

                                                                   /s/ John L. Ruggiero
                                                                   [Corporate Seal]
</TABLE>

                                      -8-

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