Document:

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                                                                     EXHIBIT 4.2

                              MUSI INVESTMENTS S.A.

                           CONVERTIBLE PROMISSORY NOTE

         Date  May 14, 2001              Maturity Date: January 2, 2002

         Lender:                                   Borrower:

MUSI Investments S.A.                    Frisby Technologies, Inc.
231 Val des Bons Malades                 3195 Centre Park Blvd.
L-2121 Luxembourg-Kirchberg              Winston-Salem, NC County: Forsyth 27107

         FOR VALUE RECEIVED, the undersigned Borrower unconditionally promises
to pay to the order of Lender, its successors and assigns, without setoff, at
its offices indicated at the beginning of this Convertible Note, or at such
other place as may be designated by Lender, the principal amount of One Million
Five Hundred Thousand and 00/100 Dollars ($1,500,000.00), or so much thereof as
may be advanced from time to time in immediately available funds, together with
interest computed daily on the outstanding principal balance hereunder, at an
annual interest rate, and in accordance with the payment schedule, indicated
below.

1. RATE. The Rate shall be the Prime Rate plus 0.75%.

The "Prime Rate" is the so-called composite "Prime Rate" which is published from
time to time during the relevant period in the Southeast Edition of The Wall
Street Journal listing of "Money Rates" and shall be the arithmetic average of
such published rates if more than one is quoted.

Notwithstanding any provision of this Convertible Note, Lender does not intend
to charge and Borrower shall not be required to pay any amount of interest or
other charges in excess of the maximum permitted by the applicable law of the
State of New York; if any higher rate ceiling is lawful, then that higher rate
ceiling shall apply. Any payment in excess of such maximum shall be refunded to
Borrower or credited against principal, at the option of Lender.

2. ACCRUAL METHOD. Unless otherwise indicated, interest at the Rate set forth
above will be calculated by the 365/360 day method (a daily amount of interest
is computed for a hypothetical year of 360 days; that amount is multiplied by
the actual number of days for which any principal is outstanding hereunder).

3. RATE CHANGE DATE. Any Rate based on a fluctuating index or base rate will
change, unless otherwise provided, each time and as of the date that the index
or base rate changes. In the event The Wall Street Journal ceases to publish the
Prime Rate, Lender shall substitute an index determined by Lender to be
comparable, in its sole discretion.

4. PAYMENT SCHEDULE. All payments received hereunder shall be applied first to
the payment of any expense or charges payable hereunder or under any other loan
documents executed in connection with this Convertible Note, then to interest
due and payable, with the balance applied to principal, or in such other order
as Lender shall determine at its option.

Single Principal Amount. Unless Lender exercises its rights under Section 5 as
to the entire principal balance of this Convertible Note, principal shall be
paid in full in a single payment on January 2, 2002. Interest thereon shall be
paid on a quarterly basis for the quarters ending June 30 and September 30, with
such payments being due on the first business day after the end of each such
quarter. Each payment shall be accompanied by a statement from Borrower setting
forth in reasonable detail the interest then due and payable for such quarter. A
final payment of all accrued and unpaid interest shall be made at the stated
maturity of this Convertible Note.

5. CONVERSION OF CONVERTIBLE NOTE.

         (a) Conversion Notice. At any time on or prior to the Maturity Date,
Lender shall have the right, subject to the terms of this Convertible Note, to
convert the outstanding principal balance and any accrued and unpaid interest
due under this Convertible Note, or a portion thereof, into either (i) shares of
common stock of the Borrower (the "Conversion Shares") or (ii) units, each of
which shall consist of one share of common stock of the Borrower and a warrant
to purchase one share of common stock of the Borrower at a warrant exercise
price of $6.00 (the "Units", and together with the Conversion Shares, the
"Conversion Securities"). Such warrants would be issued pursuant to a Warrant
Agreement, the form of which is attached hereto as Exhibit B. Upon conversion of
the full principal amount and all accrued but unpaid interest of this
Convertible Note, this Convertible Note will be discharged in full. In order to
exercise the conversion right referred to in this Section 5(a), Lender shall
surrender this Convertible Note to the Borrower at its principal office together
with the completed Conversion Form attached hereto as Exhibit A (the "Conversion
Form"). Upon such surrender, the Borrower shall issue a certificate or
certificates in the name of Lender for the largest number of whole shares of
common stock to which Lender shall be entitled and, if this Convertible Note is
converted in whole, in lieu of any fractional share of the common stock to which
the Lender shall be entitled, cash equal to remaining unconverted principal
balance. If Lender is converting the Convertible Note into Units, the Borrower
shall also execute and deliver to Lender the Warrant Agreement setting forth the
applicable number of shares for which the warrant granted thereunder is
exercisable, determined by dividing the portion of the principal amount and/or
accrued but
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unpaid interest of the Convertible Note that Lender elects to convert by the
Conversion Price for the Units, as adjusted pursuant to Section 5(c). If the
Lender is converting the Convertible Note into Conversion Shares, the number of
Conversion Shares into which this Convertible Note is convertible will be
determined by dividing the portion of the principal amount and/or accrued but
unpaid interest of the Convertible Note that Lender elects to convert by the
Conversion Price for the Conversion Shares, as adjusted pursuant to Section
5(c). Upon conversion of this Convertible Note in part only, the Borrower shall
execute and deliver to the Lender a new Convertible Note, dated the date of the
Convertible Note presented for conversion, in the principal amount equal to the
unconverted principal amount of such Convertible Note. The "Conversion Price"
will be (i) for the Units, $4 per Unit, and (ii) for the Conversion Shares, the
higher of (x) $1.12, or (y) 85% of the 10-day average closing trading price of
the Company's common stock on the NASDAQ Stock Market on the date of conversion.
Notwithstanding anything contained herein to the contrary, this Convertible Note
may not be converted into more than 1,417,959 shares of common stock of the
Borrower in the aggregate, prior to giving effect to any adjustments to the
Conversion Price as provided for in Section 5(c).

         (b) Reservation of Shares. The Borrower will at all times authorize and
reserve, and will keep available, solely for delivery upon the conversion of
this Convertible Note, shares of common stock as from time to time shall be
sufficient to effect the conversion of the outstanding principal amount and all
accrued and unpaid interest of this Convertible Note; and if at any time the
number of authorized but unissued shares of common stock shall not be sufficient
to effect the conversion of the entire outstanding principal amount and all
accrued but unpaid interest of this Convertible Note, in addition to such other
remedies as shall be available to the Lender, the Borrower will use its best
efforts to take such corporate action as may, acting on the advice of its
counsel, be necessary to increase its authorized but unissued shares of common
stock to such number of shares as shall be sufficient for such purposes.

         (c) Adjustments to Conversion Price. If the Borrower shall at any time
make distributions to the holders of the common stock payable in securities of
the Borrower (excluding dividends or distributions payable in common stock),
then provision shall be made so that the Lender shall receive upon conversion of
this Note, whether in whole or in part, in addition to the number of Conversion
Securities receivable upon conversion thereof, the amount of securities which
the Lender would have received had this Convertible Note been converted into
Conversion Securities on the record date established by the Board of Directors
of the Borrower for determining stockholders entitled to receive such dividend
or distribution and had the Lender thereafter, during the period from the date
of such event to and including the conversion date, retained such securities
receivable by the Lender as aforesaid during such period.

         In case of any reclassification, capital reorganization or other change
of outstanding shares of common stock of the Borrower (other than a change in
par value or as a result of an issuance of common stock by way of dividend or
other dividend or distribution described in another paragraph of this Section
5(c)), the Borrower shall cause effective provision to be made so that the
Lender shall have the right thereafter, by converting this Convertible Note, to
acquire the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, capital reorganization or other change as
if Lender had converted this Convertible Note in its entirety immediately prior
to such reclassification, capital reorganization or other change of outstanding
shares of common stock. Any such provision shall include provision for
adjustments which shall be nearly equivalent as much as may be practicable to
the adjustments provided for in this Convertible Note. The foregoing provisions
of this Section shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of common stock.

         If the Borrower shall at any time (i) make a subdivision of shares of
common stock outstanding, or (ii) pay a dividend or make a distribution in
shares of common stock, the Conversion Price in effect immediately prior to such
action shall be proportionately decreased and in case the Borrower shall at any
time reduce the number of shares of common stock outstanding, by combination or
otherwise, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased. Any adjustment made pursuant to this
paragraph shall, in the case of a subdivision or combination, become effective
as of the effective date thereof.

         Upon a Change of Control, then, as a condition to the consummation of
such transaction, adequate provision shall be made so that the Lender shall
thereafter be entitled to receive, upon conversion of this Convertible Note, in
whole or in part, the number of shares of capital stock or other securities or
property of the Borrower, or of the successor corporation, resulting from such
merger, consolidation, share exchange or sale, lease, exchange or transfer, that
would have been received by the Lender had this Convertible Note been converted
into Conversion Securities immediately prior to the consummation of such
transaction. For purposes of this Section 5(c), "Change of Control" shall mean
(a) any reorganization, merger, business combination (by tender offer or
otherwise), consolidation or share exchange involving the Borrower in one or in
a series of related transactions, or (b) a sale, lease or transfer of all or
substantially all of the assets of the Borrower (including, for purposes of this
section, intellectual property rights which, in the aggregate, constitute
substantially all of the corporation's material assets); unless, in each case,
the Borrower's stockholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale (by virtue
of securities issued as consideration for the corporation's acquisition or sale
or otherwise) hold at least seventy-five percent (75%) of the voting power of
the surviving or acquiring entity.

         (d) No Waiver. The adjustment provision set forth in Section 5(c) shall
not be deemed to constitute, and shall not constitute, a waiver of any covenants
or other obligations of Borrower in the Loan Documents (as hereinafter defined)
or other agreements between Borrower and Lender, which require Borrower to
obtain Lender's prior written consent before engaging in any transactions giving
rise to an adjustment of the Conversion Securities pursuant to Section 5(c).

         (e) Miscellaneous. Subject to the provisions of this Section 5, any
such conversion shall be deemed to have been made at the close of business on
the date that this Convertible Note shall have been surrendered for conversion
together with the Conversion Form, so that the rights of the Lender as a holder
of this Convertible Note shall cease at such time and the person or persons
entitled to receive the Conversion Shares or Units, as the case may be, upon
conversion of this Convertible Note shall be treated for all purposes

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as having become record holder or holders of such Conversion Shares or Units at
such time and such conversion shall be at the Conversion Price in effect at such
time. Notwithstanding the foregoing, no such surrender on any date when the
stock transfer books of the Borrower shall be closed shall be effective to
constitute the person or persons entitled to receive the Conversion Shares or
the Units, as the case may be, upon such conversion as the record holder or
holders of such Conversion Shares or Units on such date, but such surrender
shall be effective to constitute the person or persons entitled to receive such
Units or Conversion Shares, as the case may be, as the record holder or holders
thereof for all purposes at the close of business on the next succeeding day on
which such stock transfer books are open and such conversion shall be at the
Conversion Price in effect at the close of business on such next succeeding day.
If the last day for the exercise of the conversion rights shall not be a
business day, then such conversion right may be exercised on the next succeeding
business day.

6. WAIVERS, CONSENTS AND COVENANTS. Borrower, any endorser, or guarantor hereof
or any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waive presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice (excluding notices to be given under the Loan
Agreement) required to be given under the law to any Obligor in connection with
the delivery, acceptance, performance, default or enforcement of this
Convertible Note, any endorsement or guaranty of this Convertible Note, or any
other documents executed in connection with this Convertible Note or any other
note or other loan documents now or hereafter executed in connection with any
obligation of Borrower to Lender (the "Loan Documents"); (b) consent to all
delays, extensions or renewals of this Convertible Note or the Loan Documents,
or waivers of any term hereof or of the Loan Documents, or release or discharge
by Lender of any of Obligors, or release, substitution or exchange of any
security for the payment hereof, or the failure to act on the part of Lender, or
any indulgence shown by Lender (without notice to or further assent from any of
Obligors), and agree that no such action, failure to act or failure to exercise
any right or remedy by Lender shall in any way affect or impair the obligations
of any Obligors or be construed as a waiver by Lender of, or otherwise affect,
any of Lender's rights under this Convertible Note, under any endorsement or
guaranty of this Convertible Note or under any of the Loan Documents; and (c)
agree to pay, on demand, all reasonable costs and expenses of collection or
defense of this Convertible Note or of any endorsement or guaranty hereof and/or
the enforcement or defense of Lender's rights with respect to, or the
administration, supervision, preservation, protection of, or realization upon,
any property securing payment hereof, including, without limitation, reasonable
attorney's fees, including fees related to any suit, mediation or arbitration
proceeding, out of court payment agreement, trial, appeal, bankruptcy
proceedings or other proceeding, provided such costs, fees and expenses shall
not exceed 15% of the obligations due hereunder.

7. PREPAYMENTS. Prepayments may be made in whole or in part at any time on any
loan for which the Rate is based on the Prime Rate or on any other fluctuating
Rate or index which may change daily. All prepayments of principal shall be
applied in the inverse order of maturity, or in such other order as Lender shall
determine in its sole discretion. Notwithstanding the foregoing, prior to making
any prepayment of the principal amount due under this Convertible Note, Borrower
will provide Lender with ten (10) business days prior written notice of its
election to make such prepayment and the amount of such prepayment. Lender shall
have the right, upon notice to Borrower prior to the expiration of such ten (10)
business day period, to elect to convert the then outstanding principal balance
of this Convertible Note, in whole or in part, as provided for in Section 5. If
Lender does not exercise its conversion rights at that time, Borrower may then
make such prepayment as provided for herein.

8. DELINQUENCY CHARGE. To the extent permitted by law, a delinquency charge may
be imposed in an amount not to exceed four percent (4%) of the unpaid portion of
any payment that is more than fifteen days late. Unless the terms of this
Convertible Note call for repayment of the entire balance of this Convertible
Note (both principal and interest) in a single payment and not for installments
of interest or principal and interest, the 4% delinquency charge may be imposed
not only with respect to regular installments of principal or interest or
principal and interest, but also with respect to any other payment in default
under this Convertible Note (other than a previous delinquency charge),
including without limitation a single payment of principal due at the maturity
of this Convertible Note. In the event any installment, or portion thereof, is
not paid in a timely manner, subsequent payments will be applied first to the
past due balance (which shall not include any previous delinquency charges),
specifically to the oldest maturing installment, and a separate delinquency
charge will be imposed for each payment that becomes due until the default is
cured.

9. EVENTS OF DEFAULT. The occurrence of a "Default" under Section 8 of the Loan
Agreement shall constitute an event of default hereunder (an "Event of
Default").

10. REMEDIES UPON DEFAULT. Whenever there is an Event of Default under this
Convertible Note (a) the entire balance outstanding hereunder and all other
obligations of any Obligor to Lender (however acquired or evidenced) shall, at
the option of Lender, become immediately due and payable and any obligation of
Lender to permit further borrowing under this Convertible Note shall immediately
cease and terminate, and/or (b) to the extent permitted by law, the Rate of
interest on the unpaid principal shall be increased at Lender's discretion up to
the maximum rate allowed by law, or if none, a per annum rate of interest equal
to the Prime Rate plus 4% (the "Default Rate"). The provisions herein for a
Default Rate and a delinquency charge shall not be deemed to extend the time for
any payment hereunder or to constitute a "grace period" giving Obligors a right
to cure any default. At Lender's option, any accrued and unpaid interest, fees
or charges may, for purposes of computing and accruing interest on a daily basis
after the due date of the Convertible Note or any installment thereof, be deemed
to be a part of the principal balance, and interest shall accrue on a daily
compounded basis after such date at the Default Rate provided in this
Convertible Note until the entire outstanding balance of principal and interest
is paid in full. Lender is hereby authorized at any time to set off and charge
against any deposit accounts of any Obligor, as well as any money, instruments,
securities, documents, chattel paper, credits, claims, demands, income and any
other property, rights and interests of any Obligor which at any time shall come
into the possession or custody or under the control of Lender or any of its
agents, affiliates or correspondents, without notice or demand, any and all
obligations due hereunder. Additionally, Lender shall

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have all rights and remedies available under each of the Loan Documents, as well
as all rights and remedies available at law or in equity.

11. NON-WAIVER. The failure at any time of Lender to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor shall
it be a bar to the exercise of any of its options or rights at a later date. All
rights and remedies of Lender shall be cumulative and may be pursued singly,
successively or together, at the option of Lender. The acceptance by Lender of
any partial payment shall not constitute a waiver of any default or of any of
Lender's rights under this Convertible Note. No waiver of any of its rights
hereunder, and no modification or amendment of this Convertible Note, shall be
deemed to be made by Lender unless the same shall be in writing, duly signed on
behalf of Lender; each such waiver shall apply only with respect to the specific
instance involved, and shall in no way impair the rights of Lender or the
obligations of Obligor to Lender in any other respect at any other time,

12. APPLICABLE LAW, VENUE AND JURISDICTION. This Convertible Note and the rights
and obligations of Borrower and Lender shall be governed by and interpreted in
accordance with the law of the State of New York. In any litigation in
connection with or to enforce this Convertible Note or any endorsement or
guaranty of this Convertible Note or any Loan Documents, Obligors, and each of
them, irrevocably consent to and confer personal jurisdiction on the courts of
the State of New York or the United States located within the State of New York
and expressly waive any objections as to venue in any such courts. Nothing
contained herein shall, however, prevent Lender from bringing any action or
exercising any rights within any other state or jurisdiction or from obtaining
personal jurisdiction by any other means available under applicable law.

13. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of
this Convertible Note shall not affect the enforceability or validity of any
other provision herein and the invalidity or unenforceability of any provision
of this Convertible Note or of the Loan Documents to any person or circumstance
shall not affect the enforceability or validity of such provision as it may
apply to other persons or circumstances.

14. BINDING EFFECT. This Convertible Note shall be binding upon and inure to the
benefit of Borrower, Obligors and Lender and their respective successors,
assigns, heirs and personal representatives, provided, however, that no
obligations of Borrower or Obligors hereunder can be assigned without prior
written consent of Lender.

15. CONTROLLING DOCUMENT. To the extent that this Convertible Note conflicts
with or is in any way incompatible with any other Loan Document concerning this
obligation, the Convertible Note shall control over any other document, and if
the Convertible Note does not address an issue, then each other document shall
control to the extent that it deals most specifically with an issue,

16. 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 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 NEW YORK COUNTY,
NEW YORK, AND ADMINISTERED BY A.A.A. WHO WILL APPOINT AN ARBITRATOR. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.

     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 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.

Borrower represents to lender that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by, all terms
and conditions of this convertible note and hereby executes this convertible
note under seal as of the date here above written.

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NOTICE OF FINAL AGREEMENT. THIS WRITTEN CONVERTIBLE PROMISSORY NOTE REPRESENTS
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.

FRISBY TECHNOLOGIES, INC.

By: /s/ Gregory S. Frisby           (Seal)
    --------------------------------

Name:    Gregory S. Frisby

Title:   Chairman and CEO

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

Attest (If Applicable)
[Corporate Seal]

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                                    EXHIBIT A

                                 CONVERSION FORM

FRISBY TECHNOLOGIES, INC.

                  The undersigned, MUSI INVESTMENTS S.A., pursuant to the
provisions of the within Convertible Note, hereby elects to convert
$________________ of the unpaid principal amount and/or accrued but unpaid
interest of such Note into the number of [Conversion Shares] [Units] of Frisby
Technologies, Inc. into which such unpaid principal amount (or if this is a
partial conversion, the amount set forth above) is convertible at the Conversion
Price, as adjusted. The [Conversion Shares] [Units] shall be registered in the
name of MUSI Investments S.A. whose address is 231 Val des Bons Malades, L-2121
Luxembourg-Kirchberg.

Dated:______________

                                MUSI INVESTMENTS S.A.

                                ____________________
                                Signature
                                ____________________
                                Address
                                ____________________<PAGE>   1
                                                                     EXHIBIT 4.3

                                                           Date:  May 14, 2001

                               SECURITY AGREEMENT

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

MUSI INVESTMENTS S.A.                  FRISBY TECHNOLOGIES, INC.

   231 VAL DES BONS MALADES            3195 CENTRE PARK BOULEVARD
   L-2121 LUXEMBOURG-KIRCHBERG         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:____

_______________________________________________________________________________
_______________________________________________________________________________

Reference is made to that certain Loan Agreement dated May 14, 2001 (the "Loan
Agreement") between Lender and Debtor. Capitalized terms used herein and not
otherwise defined herein shall have the meaning ascribed to them in the Loan
Agreement.

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

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

     A. TYPES OF COLLATERAL (check as applicable)

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

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

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

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

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

[X]  FIXTURES:

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

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

[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

                                       1
<PAGE>   2

          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) A 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 4% per annum. If Debtor is not the obligor of the
     Obligation, and in the event any amount paid to Lender on any Obligation is
     subsequently recovered from Lender in or as a result of any bankruptcy,
     insolvency or fraudulent conveyance proceeding, Debtor shall be liable to
     Lender for the amounts so recovered up to the fair market value of the
     Collateral whether or not the Collateral has been released or the security
     interest terminated. In the event the Collateral has been released or the
     security interest terminated the fair market value of the Collateral shall
     be determined, at Lender's option, as of the date the Collateral was
     released, the security interest terminated, or said amounts were recovered.

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

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

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

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

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

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

     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.

                                       2
<PAGE>   3

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

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

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

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

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

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

     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.

                                       3
<PAGE>   4

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

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

                                       4
<PAGE>   5

7. DEFAULT.

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

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

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

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

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

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

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

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

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

8. GENERAL.

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

                                       5
<PAGE>   6

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

     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

                                       6
<PAGE>   7

               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.

MUSI INVESTMENTS S.A.                         FRISBY TECHNOLOGIES, INC.

By: /s/ Luca Bassani Antivari                 By: /s/ Gregory S. Frisby
   -------------------------------                -----------------------

Name:  Luca Bassani Antivari                  Name:  Gregory S. Frisby
     ----------------------------                  ----------------------

Title:___________________________             Title:  Chairman and CEO
                                                    ---------------------

                                              Attest (If Applicable)

                                              [Corporate Seal]

                                       7

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