FRISBY TECHNOLOGIES INC, 10KSB, 2000-04-14

FRISBY TECHNOLOGIES INC
10KSB, 2000-04-14
PLASTICS FOAM PRODUCTS

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United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-KSB

Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934

For the fiscal year ended December 31, 1999

[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934 for the Transition Period from _____________ to _______________

Commission File No. 1-14005

FRISBY TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

Delaware 62-1411534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3195 Centre Park Boulevard, Winston-Salem, North Carolina 27107
(Address of principal executive offices) (Zip Code)

77 East Main Street, Bay Shore, New York 11706
(Former Address of principal executive offices) (Zip Code)

Issuer's telephone number: (336) 784-7754

Securities registered under Section 12(b) of the Exchange Act:

Common Stock, $0.001 par value
(Title of Class)

Securities registered under Section 12(g) of the Exchange Act:

None
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No

State issuer's revenues for its most recent fiscal year. $6,237,900

State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 22, 2000 5,775,413

As of the close of business on March 22, 2000, the aggregate market value of the
registrant's common stock held by non-affiliates computed by reference to the
price at which the stock was sold was approximately $12,814,700. The shares are
currently traded on the NASDAQ SmallCap Market under the symbols "FRIZ" for the
Common Stock. The information required by Part III of this Form 10-KSB is
incorporated by reference to the Registrant's definitive proxy statement to be
filed with the Commission within 120 days.

<PAGE>

Part I

Item 1. Description of Business.

General

Frisby Technologies, Inc (the "Company" or "Frisby") is a developer and
marketer of innovative branded thermal management products for use in a broad
range of consumer and industrial products. The Company's patented, branded
products - ComforTemp(R) DCC(TM) insulating and cooling materials and
Thermasorb(R) thermal additives - provide thermal regulating benefits in both
hot and cold environments. The Company's current products are used in such
end-products as gloves, boots, athletic footwear, fashion apparel, performance
outerwear and home furnishings. In addition, further applications are currently
being identified with potential licensee/customers in the fields of medical
devices, temperature controlled packaging, and automotive interiors.

The Company believes that its thermal management technology is the first to
combine the two distinct technologies of thermal management phase change
materials ("PCMs") PCMs and microencapsulation to effect meaningful thermal
performance improvements within applications across broad markets. Thermal
management is the process by which the temperature of various materials can be
controlled or manipulated. PCMs are materials that change from liquid to solid
and solid to liquid as they release or absorb heat. Through the selection of
PCMs, the Company has the ability to control the temperature at which the phase
change occurs. Microencapsulation is the enclosing of PCMs inside a microscopic
shell to maintain the integrity of the enclosed materials. Microencapsulation
permits PCMs to be imbedded into a variety of host materials.

Products

The Company's thermal management products consist of a series of thermal
additives, which the Company sells under the brand name of Thermasorb(R), and
host materials containing Thermasorb(R) which are sold under the brand name of
ComforTemp(R) DCC(TM). Thermasorb(R) additives improve the thermal storage
capacity of such host materials as foams, fabric packages, gels, plastics and
rubber. In addition, these products address the expanding need for improved
thermal management capabilities in a wide variety of commercial products. In
response to the requirements of its licensee/customers, the Company has
developed applications of its products in other host materials such as epoxy
resins, gels, paints and composite materials.

Thermasorb(R) additives are a series of thermal management materials
developed using the latest advances in microencapsulation technology.
Thermasorb(R) MicroPCMs are micron-sized particles in the form of a dry
free-flowing powder, consisting of a heat absorbing core material encapsulated
within 3M's proprietary, durable shell wall. Thermasorb(R) additives can improve
the thermal storage capacity of a variety of host materials, including liquid,
foam, epoxy, composite materials, plastics and gels. For example, Thermasorb(R)
additives incorporated into solid materials enable those materials to absorb up
to ten times more heat than traditional insulating materials. Thermasorb(R)
additives are currently commercially available in a variety of temperature
settings ranging from 43(degree)F to 122(degree)F. The variety of the Company's
Thermasorb(R) additives allows for an engineered solution for a multitude of
thermal requirements.

ComforTemp(R)DCC(TM) products can be fabricated in different ways to have
the ability to retain or exclude heat thereby maintaining a more constant
temperature. ComforTemp(R)DCC(TM) materials recharge naturally depending on the
individual level of physical activity or other external conditions. For cold
weather apparel products, the greatest asset of ComforTemp(R)DCC(TM) is the
ability to retain body heat during periods of activity and to release the heat
back to the individual during periods of inactivity when the body is most in
need of warmth. For hot weather products, ComforTemp(R) DCC(TM) can be used to
facilitate the regulation of body heat generated during activity thereby
providing a cooling effect. By transforming a substance into a
ComforTemp(R)DCC(TM) enhanced material, the natural qualities of the host
material are complimented while producing a substance with thermal management
qualities.

Foams and Fabric Packages

ComforTemp(R)DCC(TM) products are lightweight, breathable materials which
have the added capability of wicking away moisture while maintaining comfort in
extreme hot or cold climates. For cold weather apparel products, the greatest
asset of ComforTemp(R)DCC(TM) is its ability to retain body heat during periods
of activity and to release the heat back to the individual during periods of
inactivity, when the body is most in need of warmth. This process is reversible.
For hot weather products, ComforTemp(R)DCC(TM) can be used to facilitate the
regulation of body heat generated during activity, thereby providing a cooling
effect. ComforTemp(R)DCC(TM) can also be used as a therapeutic or "climate
controlled" wrap for comfort or medical purposes.

ComforTemp(R)DCC(TM) fabric packages are provided by the lamination or
attachment by other means of ComforTemp(R)DCC(TM) foams to a wide variety of
fabrics. ComforTemp(R)DCC(TM) can be combined with a wide variety of high
performance fabrics using traditional fabrication techniques, such as lamination
and sewing. The choice of fabric is typically made by the Company's
licensee/customers in cooperation with the Company. A typical fabric used with
ComforTemp(R) DCC(TM) in performance winter apparel is polar fleece from mills
such as Malden Mills and Dyersburg. For active sports apparel, many
licensee/customers select fabrics with superior moisture management properties
such as CoolMax(R) from DuPont or fabrics with 2-way and 4-way stretch like
Lycra(R) from DuPont.

As a service to its licensee/customers, the Company may, from time to time,
create fabric packages for the licensee/customers using one of the Company's
approved laminators or fabricators, for which the Company receives a fee.
Alternatively, the licensee/customers may have this process done by an approved
fabricator.

Other Host Materials

ComforTemp(R)DCC(TM) gels, plastics and rubber compounds have also been
developed. The Company's gels can either be free-flowing and flexible for use as
a cold or warm compress or firm for use in footwear insoles or bike seat covers.
Some of the gels are microwaveable and have been tested to provide prolonged
warming compared to non- ComforTemp(R)DCC(TM) gels. The heated gels are useful
for end products such as temperature sensitive packaging applications and for
medical footwear inserts used by diabetes patients who typically suffer from
cold extremities resulting from poor circulation.

Finished Products

The Company recently purchased substantially all of the assets of Steele &
Associates ("Steele") and acquired Extreme Comfort, Inc. ("Extreme Comfort").
These two transactions enable the Company to sell finished products related to
thermal management. For example, the Steele division of the Company markets and
sells a line of micro-climate cooling vests under the SteeleVest(R) name.
Extreme Comfort markets and sells a variety of electrically operated personal
heating products under the Extreme Comfort(R) brand.

Purchasing

The Company outsources all of its production needs for the core phase
change materials, Thermasorb(R) MicroPCM, ComforTemp(R)DCC(TM) materials and
anticipates that it will continue to do so for the foreseeable future.
Currently, all of the Company's Thermasorb(R) additives are contract
manufactured to specifications provided by the Company to 3M. The Company and 3M
have entered into an arrangement that provides firm, fixed pricing for all of
the Company's anticipated microcapsule production requirements pursuant to which
the Company ensures its continuing access to such production capacity at
acceptable terms. This arrangement requires certain minimum volume purchases. In
the future, the Company may seek geographic diversity for its sources of
Thermasorb(R).

The Company currently relies upon three sources of foam in the U.S. and one
in Europe.

The Company monitors its products during each step of the manufacturing
process for quality assurance purposes. Core PCM is tested to ensure that the
quantity of heat the PCM can hold at different temperature levels adheres to the
Company's product specifications. After encapsulation of core PCM, the shell
wall is tested at 3M and validated by Frisby to ensure that the product
satisfies its thermal requirements. The foam and other host products are tested
prior to shipment to the Company's licensee/customers. Until the vendor has met
certain quality assurance requirements, all testing is performed by the
Company's quality assurance employees at the Company's North Carolina facility.
For qualified, certified vendors, testing may be performed by third party
representatives at the manufacturing site.

The Company historically has not had material losses of inventory and has
not experienced material losses due to cost and market fluctuations,
overstocking or technology. The Company maintains certain minimal inventory
requirements at every level of the manufacturing process (e.g. raw materials,
intermediary materials and finished goods). This inventory is needed to satisfy
scheduled customer orders as well as underanticipated requests and other
potential sales opportunities.

Sales and Marketing

Currently, the Company's strategy is based on (i) establishing
relationships with world class market leaders for new product applications and
launches, (ii) establishing ComforTemp(R)DCC(TM) as the recognized brand for
dynamic climate control products, similar to GoreTex(R) (for waterproofing) and
Thinsulate(TM) (for thermal insulation), and (iii) expanding through strategic
industry alliances, joint ventures and cross-licensing of complementary
products:

o Establishing relationships with market leaders for new product applications
and launches:

-- High-profile licensee/customers establish credibility for Frisby
brands

-- Increase penetration with existing licensee/customers

-- Revenue model includes significant product sales with increasing
annual minimum purchase requirements

-- Close collaboration with the Company's suppliers, licensee/customers
and their customers that have requested expanded use of the Company's
products

o Establishing ComforTemp(R)DCC(TM) as the recognized brand for dynamic
climate control products:

-- Similar to "Gore-Tex" or "Thinsulate" Co-Branding Models

-- The Company's brands benefit significantly from national promotional
campaigns of licensee/customers

-- Cooperative advertising leverages the Company's promotional spending
and accelerates brand recognition with consumers

-- Cost effective use of the Internet and QVC (where the Company's
products are featured) help communicate brand and performance features
to broad consumer base

o Expanding through strategic industry alliances, joint ventures and
cross-licensing of complementary products:

-- Global sales alliances will dramatically increase the number of "feet
on the street" selling for Company products

-- Development alliances will help expand product offerings, reduce
competition and accelerate time to market

-- Short-term exclusive licenses with market leaders are designed to
stimulate industry interest and target consumer support

The Company seeks to enter into agreements with companies that have very
strong brand names, excellent reputations for quality and performance and
extensive and established sales and distribution networks. A typical license
agreement with a licensee/customer: (i) identifies a defined end-use product
area in which to develop and commercialize products; (ii) requires the strategic
partner to purchase all of its requirements for ComforTemp(R)DCC(TM) materials
from the Company; (iii) establishes minimum annual purchases of such materials;
(iv) grants to the strategic partner a license, which may or may not be
exclusive, to use the Company's name and trademarks in conjunction with the
products produced; and (v) establishes a high level of quality control to ensure
each end product meets the Company's performance and quality standards.

The Company's strategic partners are also required to co-brand the
Company's products by including the Company's trademarks in all their marketing
materials, point of sale displays, and sales promotion efforts for end-use
products incorporating the Company's products. If necessary, the Company grants
exclusivity for a limited period of time in order to establish relationships
with market share leaders committed to pioneering the commercialization of
certain specific end-use products to create demand for the Company's products,
typically in a new field of use.

The Company does a significant amount of business with a limited number of
licensee/customers. Total revenues from the top two licensee/customers during
each period comprised approximately 26% (14% and 12%) and approximately 53% (35%
and 18%) of the Company's total revenues for the years ended December 31, 1999
and 1998, respectively. It is anticipated that this concentration will decline
significantly with expanded revenues.

Advertising

In addition to the coordinated efforts with licensee/customers, the Company
uses a variety of communication tools in order to build brand name recognition
of its Thermasorb(R) and ComforTemp(R)DCC(TM) products and trademarks. These
include use of advertising in trade and consumer media, public relations
professionals, direct mail, in-store displays and the Internet. Total expenses
related to communication in 1999 and 1998 were $1,470,000 and $1,360,000,
respectively. The Company has recently updated its Internet sites on the World
Wide Web at www.frisby.com and www.comfortemp.com. These web sites provide
information which end-users of the Company's products may use in conjunction
with their own web sites. The Company has recently created the (multi-lingual)
www.steele.com web site, the Company's first effort in e-commerce, where
complete cooling garments are offered directly to the consumer. The Company is
also generating sales with the web site www.extremecomfort.com. The sites
promote the Company's products and brands as well as its licensees' products.
The Company also attends and exhibits its products at numerous tradeshows during
the year.

Research and Development

Beginning in 1997, the product development focus shifted more toward
commercialization of its product and related applications and away from
government funded projects. The Company currently maintains several employees
devoted to new applications and improvements to the Company's core technology.
This effort is supplemented by existing and potential suppliers and
licensee/customers of the Company's products who are developing new materials
and processes within the field of their respective licenses, i.e., gels, foams,
etc. The Company's license agreements provide it with at least joint ownership
of any new intellectual property developed by its licensee/customers

Patents/Intellectual Property

The Company signed an exclusive license agreement in 1995 with Triangle
Research and Development Corporation ("TRDC") which holds innovative proprietary
technology in microencapsulated and thermal management technologies and with
which the Company had an existing agreement since 1991. The license gives the
Company the exclusive worldwide right to develop and commercialize this
technology with respect to certain applications in exchange for certain royalty
payments. In order to expand its rights in the TRDC technology, in January 1998,
the Company entered into an agreement with Outlast Technologies, Inc.
("Outlast") which expands the rights of the Company to include certain
combinations of the Company's products with fibers and fabrics. In September
1998, the Company entered into an agreement with TRDC that reduced the Company's
royalty rates. Additionally, the Company has been assigned TRDC's right to their
original license agreement for fabrics with Outlast. This assignment will result
in the Company receiving royalty income from Outlast subject to certain
obligations to TRDC.

The following table sets forth information regarding the patents currently
owned by or licensed to the Company.

Patent Expiration
Date of Patent Patent Number Description Industry (year)
- - -------------- ------------- ----------- -------- ------

<S> <C> <C> <C> <C>
2/28/89 4,807,696 Thermal Energy Storage Automotive, 2006
Apparatus Using Encapsulated Aerospace,
PCMs. Electronics

3/27/90 4,911,232 Heat Transfer Using MicroPCM Automotive 2007
Slurries Computers, Electronics

4/16/91 5,007,478 MicroPCM Slurry Heat Sink Computers, Electronics 2008

8/25/92 5,141,079 Cutting/Cooling Fluid All Industries 2009

9/15/92 5,146,625 Cooling Vest All Industries 2009

7/6/93 5,224,356 Thermal Energy Absorbing and Electronics 2010
Conducting Potting Materials

3/1/94 5,290,904 Thermally Enhanced Heat Shields Protective Apparel 2011

4/19/94 Des 346,063 Boot Warmer Footwear 2011

4/26/94 5,305,471 Insulated Cooling Vest All Industries 2011

11/22/94 5,366,801 Coated Fabric With Reversible Protective Apparel 2011
Enhanced Properties
5/16/95 5,415,222 Microclimate Cooling Garments Protective Apparel 2012

1/16/96 5,484,448 Garment and Method for Cooling All Industries 2013
Body Temperature

3/19/96 5,499,460 Moldable Foam Insole with Footwear 2013
Reversible Enhanced Thermal
Storage

3/21/96 5,623,772 Foot-Warming System for a Boot Footwear 2013

6/10/97 5,637,389 Thermally Enhanced Foam All Industries 2012
Insulation

9/8/98 5,804,297 Thermal Insulating Coating All Industries 2011
Using MicroPCMs

1/14/98 0611330* Coated Fabric With Reversible All Industries 2013
Enhanced Properties

9/1/99 0630195# Moldable Foam Insole With Footwear 2013
Reversible Enhanced Thermal
Storage
<FN>
#European Patent granted with respect to the invention covered by United States Patent No. 5,499,460
*European Patent granted with respect to the invention covered by United States Patent No. 5,366,801
</FN>
</TABLE>

Note: List only includes patents related to thermal management
technologies. Other patents not related to non-core business where attained as a
part of the Extreme Comfort acquisition.

The Company has registered the trademarks Thermasorb(R) and ComforTemp(R)
with the United States Patent and Trademark Office (the "PTO") and has applied
for registration of the trademark Comfort in the Extreme(TM) which application
has been allowed by the PTO. Effective March 9, 1998, the Company received a
registered Canadian trademark for ComforTemp(R). A trademark application has
also been submitted for ComforTemp(R) in the European Community, as well as in
most industrialized nations of the world including among others, Japan, China,
Russia and Korea.

The Company and its partners have several patents pending and also intends
to file for additional patents related to its technologies and products.

In addition to its licenses and trademarks, the Company is developing
considerable proprietary technology and trade secrets with respect to the
selection of the raw material(s) to be used for the capsules' core material,
shell wall materials and the composition of the capsule which the Company
believes accords it a considerable competitive advantage. The Company believes
that significant barriers have been created for potential competitors by
securing licenses under patents which grant and protect its rights to a wide
variety of applications, spanning a broad spectrum of industries and end-use
products. In order to further protect its proprietary trade secrets and
know-how, the Company generally requires any person having access to such
confidential information to execute an agreement whereby such person agrees to
keep such information confidential.

Competition

The Company's Thermasorb(R) additives and ComforTemp(R)DCC(TM) foams
compete with a wide variety of natural and synthetic insulating products,
including other applications of MicroPCMs and bulk PCMs, open and closed cell
foams, synthetic insulators (e.g., Thinsulate(R)), fleece, wool and down. The
Company believes that its ComforTemp(R)DCC(TM) foams offer significant benefits
over natural and synthetic insulation materials and foams not containing
MicroPCMs because of (i) the ability of the ComforTemp(R)DCC(TM) foam to absorb
heat and release it when cooling occurs; (ii) its lightweight, low bulk
characteristics; (iii) its durability; (iv) its rechargeability; (v) its ability
to be customized to a particular temperature within a wide range of temperatures
in a wide variety of applications; (vi) its minimal maintenance requirements;
and (vii) its ability to be combined with other available heat management
materials. The Company's products also have the capacity to function reversibly.
Depending on the placement of the ComforTemp(R)DCC(TM) foam, it may be
engineered to absorb, reject or regulate heat.

The Company competes directly with Outlast in certain applications. The
license granted to Outlast by TRDC permits it to market applications of fibers
and fabrics with reversible enhanced thermal storage properties ("MicroPCM
Fibers and Fabrics"). The Company believes that the principal area of
competition with Outlast involves applications where MicroPCM Fibers or Fabrics
less than 2mm thick may be used instead of combinations including the Company's
ComforTemp(R)DCC(TM) foam. The Company believes that products incorporating its
ComforTemp(R)DCC(TM) foam will offer significant advantages over such fabric
applications because fabrics will not have sufficient mass of MicroPCMs to
provide a significant thermal management solution.

The Company competes with other companies, such as Phase Change
Laboratories, Inc., that utilize bulk PCMs primarily for heat retention
products. The Company believes Thermasorb(R) additives and ComforTemp(R)DCC(TM)
foams offer superior performance characteristics compared to its competitors'
products because microencapsulation obviates the need for containment of the PCM
in a sealed bag or other packaging which may tear or leak resulting in
contamination of the end product.

The Company's products also compete with active mechanical and solid
cooling alternatives (e.g., fans, conductive heat sinks) currently utilized for
selected electronics and computer cooling applications and certain medical
products. For these applications, Thermasorb(R) will compete within a fragmented
product market comprised of specialty firms, including Aavid Thermal
Technologies, Inc. and various smaller companies, including Advanced Ceramics
Corporation, Thermacore, Inc., Chipcoolers, Inc. and Marlow Industries, Inc. The
Company believes that Thermasorb(R) would be an effective means to enhance the
performance of thermal solutions being provided by these and other firms,
resulting in a fertile area for strategic partnerships within this segment of
the industry.

Employees

As of December 31, 1999, the Company employed approximately 32 full-time
employees of which 5 were management personnel, 15 were sales personnel, 5 were
product development personnel, 4 were administrative personnel, and 3 were
inventory purchasing, quality assurance and warehouse personnel.

Item 2. Description of Properties

The Company's North Carolina operations have been consolidated into the
Frisby Technologies Center, a 20,000 square foot facility located on 8 acres at
3195 Centre Park Boulevard, Winston-Salem, North Carolina. This facility is used
as corporate headquarters, sales and marketing offices, a technology development
and test center and a warehouse. The lease includes a 12-year lease term and
annual rent payments ranging from $147,000 to $202,000. The Frisby Technologies
Center can be expanded in the future, if necessary.

The Company also maintains a small office in Long Island, New York, for
which it pays a nominal sum.

The Steele division and Extreme Comfort unit each lease 2,000 square feet
in Kingston, Washington and Eugene, Oregon, respectively.

The Company's facilities and all of its operations are subject to the plant
and laboratory safety requirements of various federal, state and local
occupational safety and health laws. The Company believes it has complied in all
material respects with regard to governmental regulations applicable to it.

Item 3. Legal Proceedings.

The Company is not currently involved in any legal proceedings. In the
ordinary course of its business, the Company, from time to time, may be subject
to litigation.

Item 4. Submission of Matters to a Vote of Security Holders.

All matters submitted to a vote of security holders were contained in the
Company's 1999 proxy statement.
<PAGE>
Part II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Company's securities are traded on the NASDAQ SmallCap Market under the
symbol "FRIZ".

The outstanding shares of Common Stock are currently held by approximately
1,700 shareholders of record. The transfer agent and registrar is American Stock
Transfer & Trust Company.

The following table sets forth the high and low closing prices for the Common
Stock for the periods indicated.
<TABLE>
<CAPTION>

High Low
1999
<S> <C> <C>
Fourth Quarter........................................ $5.81 $4.00
Third Quarter......................................... $6.75 $4.25
Second Quarter ...................................... $4.86 $3.25
First Quarter......................................... $5.13 $3.63

1998
Fourth Quarter........................................ $5.75 $2.25
Third Quarter......................................... $6.88 $3.00
Second Quarter........................................ $9.13 $6.50
</TABLE>

The Company has paid no dividends on its common stock for the last two
years and does not expect to pay dividends in the future.

<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operation.

The following management's discussion and analysis and this Form 10-KSB
contain forward-looking statements which involve risks and uncertainties. When
used herein, the words "anticipate," "believe," "estimate," and "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are subject to
numerous risks and uncertainties that could cause actual results, performance
and achievements to differ materially from those described or implied in the
forward-looking statements, and reported results should not be considered an
indication of future performance. Those potential risks and uncertainties
include without limitation; the need for further development of certain Frisby
Technologies' products and markets, the development of alternative technologies
by third parties, the uncertainty of the future economic environment, and the
uncertainty of market acceptance and demand for the Company's products in the
future.

The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements.

General

The following discussion should be read in conjunction with the Company's
consolidated audited financial statements for the years ended December 31, 1999
and 1998, appearing elsewhere in this Form 10-KSB. The financial information for
the year ended December 31, 1997 is presented for comparison purposes only.

The following table sets forth certain operating data in dollars for the
years indicated:
<TABLE>
<CAPTION>

Years Ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C>
<C>
Revenues:
Product sales ......................... $ 5,528,000 $2,198,000 $ 474,000
Research and development projects...... 246,000 196,000 487,000
Licenses and royalties................. 464,000 475,000 301,000
------- ------- -------
Total revenues.............................. 6,238,000 2,869,000 1,262,000
Cost of sales:
Product sales.......................... 4,491,000 2,126,000 452,000
Research and development projects...... 236,000 159,000 258,000
Licenses and royalties................. 470,000 234,000 265,000
------- ------- -------
Total costs of sales........................ 5,197,000 2,519,000 975,000
--------- --------- -------

Gross profit................................ 1,041,000 350,000 287,000
Selling and marketing expense............... 2,943,000 2,234,000 315,000
General and administrative expense.......... 3,905,000 2,401,000 900,000
--------- --------- -------
Loss from operations........................ (5,807,000) (4,285,000) (928,000)
Interest (income) expense................... (179,000) (366,000) 37,000
------- --------- -------
Loss before income taxes.................... (5,628,000) (3,919,000) (965,000)
Provision for income taxes.................. -- -- 45,000
------- --------- -------
Net loss ................................... $ (5,628,000) ($3,919,000) $ (1,010,000)
============= ============ =============
Net loss per common share - basic and diluted
$ (1.01) $ (.84) $ (.36)
========== ========= =========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>

December 31, December 31,
1998 1999
------------------ -------------------

<S> <C> <C>
Working capital $ 8,515,000 $ 1,957,000
Total assets 13,113,000 8,420,000
Long-term liabilities 1,467,000 1,420,000
Total liabilities 3,395,000 4,141,000
Total shareholders' equity 9,718,000 4,278,000
</TABLE>

Years ended December 31, 1999 and 1998

Revenues. The Company generates revenue from three primary sources: (i)
sales of its Thermasorb(R) and ComforTemp(R)DCC(TM) products for use in its
strategic partners' products; (ii) license fees and royalties from the use of
Thermasorb(R) and ComforTemp(R) trademarks by strategic partners in end-user
products, as well as other fees earned in connection with its agreements with
strategic partners; and (iii) revenue from research and development contracts
related to the United States Government and from private companies. Total
revenues for the year ended December 31, 1999 increased by $3,369,000 to
$6,238,000 from $2,869,000 for the year ended December 31, 1998.

The majority of this increase was generated by increased product sales.
Product sales for the year ended December 31, 1999 increased by $3,330,000 to
$5,528,000 from $2,198,000 for the year ended December 31, 1998. This product
sales increase reflects three factors: (1) large increase in product sales
purchased by existing customers such as Titleist and Footjoy Worldwide; (2)
sales to new licensees such as Schoeller Textil AG and Pacific Coast Feathers;
and (3) sales by the recently-acquired SteeleVest(R) and Extreme Comfort units.

Cost of sales. The Company's cost of sales consists of: (i) direct and
indirect costs incurred in connection with product sales; (ii) royalty payments
required to be made in accordance with the technology licensing agreements;
(iii) the amortization expense associated with the transaction with the inventor
to lower the royalty rates (described in Note 10 to the consolidated financial
statements); and (iv) direct and indirect costs incurred in connection with
revenue from research and development contracts. Total cost of sales for the
year ended December 31, 1999 increased by $2,678,000 to $5,197,000 from
$2,519,000 for the year ended December 31, 1998.

The majority of this increase was generated by increased product sales. Cost of
sales related to products for the year ended December 31, 1999 increased by
$2,365,000 to $4,491,000 from $2,126,000 for the year ended December 31, 1998.
This increase corresponds to the product sales increase above. Gross margin on
product sales increased in 1999 over 1998 due to lower ComforTemp(R) costs from
new foam manufacturers. The Company expects these improvements will continue to
benefit future margins.

Additionally, cost of sales related to license fees and royalties for the year
ended December 31, 1999 increased by $236,000 to $470,000 from $234,000 for the
year ended December 31, 1998 due to amortization of intangible and royalties
expense related to the transaction with the inventor.

Selling and marketing expense. Selling and marketing expenses for the year
ended December 31, 1999 increased by $709,000 to $2,943,000 from $2,234,000 for
the year ended December 31, 1998. This increase results from the Company's
increased marketing and advertising activity in order to build brand name
recognition of its ComforTemp(R) products and trademarks. These activities
included the hiring of additional sales personnel, advertising placements in
many national trade and consumer publications and tradeshow participation.
Additionally, selling expense related to the recently acquired SteeleVest(R) and
Extreme Comfort units contributed to this increase.

General and administrative expense. General and administrative expenses for
the year ended December 31, 1999 increased by $1,504,000 to $3,905,000 from
$2,401,000 for the year ended December 31, 1998. The increase reflects the
increase in personnel and personnel-related expenses. Additionally, fees and
expenses paid to consultants have also increased over the comparable period for
the prior year. These increases are in connection with the expansion of the
Company's operations and commercialization of its thermal management products.
The Company does not anticipate general and administrative expenses to increase
significantly under the current business model.

Interest income. Interest income for the year ended December 31, 1999
decreased by $188,000 to $179,000 from $367,000 for the year ended December 31,
1998. This decrease reflects the higher cash and investment balances in the
prior year, due to receipts of proceeds from the Initial Public Offering ("IPO")
in April 1998 and the use of cash throughout the subsequent twenty-one month
period.

Net loss. As a result of the foregoing, the net loss for the year ended
December 31, 1999 increased to $5,628,000 from $3,919,000 for the year ended
December 31, 1998.

Liquidity and Capital Resources

From its inception through December 31, 1999, the Company has incurred
cumulative losses of approximately $10,615,000. The Company has financed its
operations to date through research and development contracts relating to United
States government programs, bank borrowings and issuance of common stock and
convertible preferred stock.

At December 31, 1999, the Company had working capital of $1,957,000,
including cash of $1,172,000, accounts receivable of $1,849,000 and inventory of
$1,097,000, offset by accounts payable of $1,622,000 and accrued expenses and
other current liabilities of $1,099,000.

Cash used by operating activities was $5,778,000 and $4,554,000
respectively, for the years ended December 31, 1999 and 1998. The principal
factor contributing to the cash used in operating activities for the year ended
December 31, 1999 and 1998 were the net loss for each of the respective periods.
Cash provided by investing activities was $481,000 for the year ended December
31, 1999. The principal investing activities for 1999 were: a sale of marketable
securities offset in part by an installment payment to TRDC for the agreement
signed in September 1998, the purchase of the assets of Steele, the acquisition
of Extreme Comfort and the purchase of equipment for the development facility in
North Carolina. The principal investing activity for 1998 was the purchase of
short-term investments. Cash provided by financing activities was $13,002,000
for the year ended December 31, 1998. The principal financing activities for the
year ended December 31, 1998 was the receipt of the net proceeds of $2,479,000
from the exercise of a Convertible Preferred Stock Option and of $10,523,000
from the Company's IPO.

The Company has incurred cumulative losses since its inception and,
therefore, has not been subject to significant federal income taxes. Through
December 31, 1999, the Company has generated net operating loss carryforwards in
excess of $9,700,000 that may be available to reduce future available taxable
income and future tax liabilities. These carryforwards expire in years through
2019. The Tax Reform Act of 1986 provides for an annual limitation on the use of
net operating loss carryforwards (following certain ownership changes) that
could significantly limit the Company's ability to utilize these carryforwards.
As a result of the IPO, the Company's ability to utilize the aforementioned
carryforwards as of the IPO date will be limited on an annual basis.
Additionally, because the United States tax laws limit the time during which
these carryforwards may be applied against future taxes, the Company may not be
able to take full advantage of these attributes for federal tax purposes.

As of December 31, 1999, the Company has a $2,000,000 line of credit with a
bank. The line of credit bears interest at the lower of the bank's prime rate or
a two point spread versus the London Interbank Overnight Rate ("LIBOR"). The
full amount of the line was available. In February, 2000 the Company entered
into a revised $2,000,000 line of credit with another bank. This new line ("the
New Line") replaced the existing line and is maintained for working capital
purposes at least until an equity or debt investment is secured. The New Line is
a committed facility, which is secured by substantially all of the Company's
assets, and bears interest at the bank's prime rate plus 200 basis points.

The Company has signed a definitive agreement with Schoeller Textil AG for
the establishment of Schoeller Frisby Technologies GmbH, a joint venture to
expand the European distribution of the Company's products. The Company believes
that the initial equity and debt contribution to this joint venture will not
exceed $1 million. The joint venture began operations in January 2000.

Based on the Company's current operating plan, the Company believes that
the cash available as a result of the committed portion of the financing
activity mentioned above will be sufficient to satisfy its operational and
capital requirements through December 2000. Such belief is based upon certain
assumptions, and there can be no assurance that such assumptions are correct. In
the event that the Company's plans change, or its available cash, cash flow from
operations and available line of credit are insufficient to fund operations due
to unanticipated delays, problems, expenses or otherwise, the Company would be
required to seek additional financing sooner than anticipated. Further,
depending on the Company's progress in marketing its product line, gaining
acceptance of its thermal management technology and its other products and
services among the business community or the identification of strategic
acquisition or licensing opportunities, the Company may determine that it is
advisable to raise additional capital sooner than was anticipated.

Inflation

The impact of general inflation on the Company's business has been
insignificant to date and the Company believes that it will continue to be
insignificant for the foreseeable future.

Year 2000

During 1999, Frisby successfully completed its comprehensive program to
address the Year 2000 issue. As expected, the Company did not experience any
material adverse effects on its business, products, results of operations or
financial condition as a result of the Year 2000 issue. Frisby will continue to
monitor its own operations, and the operations of third parties that are
critical to Frisby's operations, for potential Year 2000-related problems.
However, the Company does not anticipate that it will discover any future Year
2000 issues that will have a material effect on its business products, results
of operations or financial condition.

Item 7. Financial Statements.

The information required by this item is incorporated by reference to the
Company's financial statements.

Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.

None

Part III

The information required by Part III of this Form 10-KSB is incorporated by
reference to the Registrant's definitive proxy statement to be filed with the
Commission within 120 days.

PART IV

Item 13. Exhibits and Reports on Form 8-K.

(a) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Registration
No. 333-45121:

3.2 By-Laws

4.1 Form of Common Stock Certificate

4.2 Form of Representative's Option

10.2 Stock Option Plan

10.3 Amended Employment Agreement dated as of December 8, 1997 between the
Company and Gregory S. Frisby

10.4 Employment Agreement dated December 6, 1997 between the Company and Douglas
J. McCrosson

10.5 Shareholder Agreement dated December 10, 1997 between the Company, Gregory
S. Frisby and Jeffry D. Frisby

10.7.1 License Agreement dated May 1, 1995 between the Company and Triangle
Research and Development Corp. ("TRDC")

10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC to
Delta Thermal Systems, Inc.

10.8 License Agreement effective January 1, 1998 between the Company and Outlast
Technologies, Inc.

10.10 License Agreement dated January 23, 1997 between the Company and Wells
Lamont Division, Marmon Holdings, Inc.

10.11 License Agreement dated February 1, 1997 between the Company and Cove Shoe
Company, Inc.

10.13 License Agreement dated February 10, 1997 between the Company and Genfoot,
Inc. and Genfoot America, Inc.

10.16 Arrangement dated January 21, 1998 between the Company and Minnesota
Mining & Manufacturing, Inc.

10.20 Memorandum of Understanding dated December 11, 1997 between the Company
and Foamex International, Inc.

10.21 Memorandum of Understanding dated January 15, 1998 between the Company and
LaCrosse Footwear, Inc.

(b) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed with the Company's Form 10-QSB for the fiscal
quarter ended March 31, 1998.

3.1 Amended and Restated Certificate of Incorporation

10.1 Amended MUSI Stockholder Agreement

(c) The following exhibit is hereby incorporated by reference from the
corresponding exhibits filed with the Company's Form 10-QSB for the fiscal
quarter ended June 30, 1998:

10.25 Consulting Agreement dated April 13, 1998 between the Company and GGC,
Inc.

(d) The following exhibit is incorporated by reference from the corresponding
exhibits filed with the Company's Form 10-KSB for the fiscal year ended December
31, 1998:

10.7.1.1 Amendment to License Agreement between the Company and TRDC

(e) Exhibits

10.27 Loan Agreement dated February 29, 2000 by and between the Company and Bank
of America, N.A.

10.28 Lease Agreement dated January 14, 2000 by and between the Company and
Visible Goth, LLC

23.1 Consent of Independent Auditors

27.1 Financial data schedule

(f) Reports on Form 8-K

None.

<PAGE>

Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Frisby Technologies, Inc.

By: /s/ Gregory S. Frisby
---------------------
Gregory S. Frisby
Chief Executive Officer

Dated: April 14, 2000

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dated indicated.
<TABLE>
<CAPTION>

Signature Title Date

<S> <C> <C>
/s/ Gregory S. Frisby Chairman of the Board of Directors; CEO April 14, 2000
- - ---------------------------
Gregory S. Frisby

/s/ Stephen P. Villa Chief Financial Officer and Treasurer April 14, 2000
- - ---------------------------
Stephen P. Villa

/s/ Jeffry D. Frisby Director April 14, 2000
- - ---------------------------
Jeffry D. Frisby

/s/ Pietro A. Motta Director April 14, 2000
- - ---------------------------
Pietro A. Motta

/s/ Domenico DeSole Director April 14, 2000
- - ---------------------------
Domenico DeSole

/s/ Robert C. Grayson Director April 14, 2000
- - ---------------------------
Robert C. Grayson
</TABLE>

<PAGE>

Item 7. Financial Statements.

Frisby Technologies, Inc.

Index to Consolidated Financial Statements

<S> <C>
Report of Independent Auditors..................................................................... F-2

Consolidated Balance Sheet as of December 31, 1999................................................. F-3

Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998................................................................................... F-4

Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999 and 1998................................................................ F-5

Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998 .................................................................................. F-6

Notes to Consolidated Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE>

Report of Independent Auditors

The Stockholders
Frisby Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Frisby
Technologies, Inc. as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Frisby
Technologies, Inc. as of December 31, 1999, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

/s/ Ernst & Young LLP

Winston-Salem, NC
January 27, 2000, except for Note 12 as
to which the date is April 14, 2000

F-2
<PAGE>

Frisby Technologies, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>

December 31,
1999
-------------------
Assets
Current assets:
<S> <C>
Cash and cash equivalents ............................................ $ 1,171,579
Accounts receivable, less allowance for doubtful accounts of $60,000 . 1,849,436
Inventory ............................................................ 1,097,049
Prepaid expenses and other current assets ............................ 559,820
------------
Total current assets ..................................................... 4,677,884
Property and equipment, net .............................................. 604,921
Intangible assets, less accumulated amortization of $284,391.............. 2,838,603
Other assets ............................................................. 298,439
------------
Total assets ......................................................... $ 8,419,847
============

Liabilities and stockholders' equity
Current liabilities:
Accounts payable ..................................................... $ 1,622,280
Note payable - short term ............................................ 549,981
Accrued expenses and other current liabilities ....................... 239,999
License fees payable ................................................. 282,565
Deferred license revenues ............................................ 26,254
------
Total current liabilities ................................................ 2,721,079
Accrued license agreement costs .......................................... 120,250
Other liability .......................................................... 1,300,000
---------
Total liabilities ........................................................ 4,141,329

Commitments and contingencies

Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized;
no shares issued and outstanding
Common Stock, $.001 par value; 10,000,000 shares authorized;
5,748,113 shares issued and outstanding ............................ 5,748
Additional paid-in capital ........................................... 14,888,201
Accumulated deficit .................................................. (10,615,431)
-----------
Total stockholders' equity ............................................... 4,278,518
---------
Total liabilities and stockholders' equity ............................... $ 8,419,847
============

</TABLE>
See accompanying notes.

F-3
<PAGE>

Frisby Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>

Year ended
December 31,
------------

1999 1998
-------------------- -------------------

<S> <C> <C>
Revenues:
Product sales $ 5,528,437 $ 2,198,275
Research and development projects 245,640 196,345
Licenses and royalties 463,823 474,519
-------------------- -------------------

Total revenues 6,237,900 2,869,139
-------------------- -------------------

Cost of sales:
Product sales 4,490,693 2,125,730
Research and development projects 235,738 158,856
Licenses and royalties 470,559 234,403
-------------------- -------------------

Total cost of sales 5,196,990 2,518,989
-------------------- -------------------

Gross profit 1,040,910 350,150
Selling and marketing expense 2,943,284 2,234,499
General and administrative expense 3,904,611 2,400,930
-------------------- -------------------

Loss from operations (5,806,985) (4,285,279)
Interest income, net 178,679 366,635
Provision for income taxes -- --
==================== ===================

Net loss $ (5,628,306) $ (3,918,644)
==================== ===================

Net loss per common share - basic and diluted $ (1.01) $ (0.84)
==================== ===================

Shares used in the calculation of basic and
diluted net loss per common share 5,570,005 4,637,325
==================== ===================

</TABLE>

See accompanying notes.

F-4
<PAGE>

Frisby Technologies, Inc.
Consolidated Statements of Stockholders' Equity

Preferred Stock Common Stock
--------------- ------------

Shares Amount Shares Amount
------ ------ ------ ------

<S> <C> <C> <C> <C>
Balance at
January 1, 1998...... -- -- 3,280,613 $3,281

Net loss ................... -- -- -- --

Unrealized gains on
marketable securities .... -- -- -- --

Comprehensive (loss) ....... -- -- -- --

Exercise of preferred stock
option, net of $21,000 of
related costs and expenses 587,500 $2,479,000 -- --

Initial public offering, net
of $2,495,907 of related
costs and expenses ....... -- -- 1,840,000 1,840

Issuance of options and
warrants to consultants
and pursuant to
acquisition of intangible
assets ................... -- -- -- --
------- ---------- --------- ------

Balance at December 31, 1998 587,500 2,479,000 5,120,613 5,121

Conversion of
Preferred Stock ............ (587,500) (2,479,000) 587,500 587

Net Loss ................... -- -- -- --

Sale of Marketable
Securities .............. -- -- -- --

Comprehensive (loss)........ -- -- -- --

Issuance of Common Stock
Pursuant to acquisition of
Extreme Comfort............. -- -- 40,000 40
------- ----------- ------ --
Balance at December 31, 1999 -- $ -- 5,748,113 $5,748
======= =========== ========= ======
</TABLE>

Accumulated
Additional Other
Paid-In Comprehensive Accumulated
Capital Income Deficit Total
------- ------ ------- -----

<S> <C> <C> <C> <C>
Balance at
January 1, 1998...... $1,540,575 -- $(1,068,481) $475,375

Net loss ................... -- -- (3,918,644) (3,918,644)

Unrealized gains on
marketable securities .... -- 21,000 -- 21,000
------

Comprehensive (loss) ....... -- -- -- (3,897,644)

Exercise of preferred stock
option, net of $21,000 of
related costs and expenses -- -- -- 2,479,000

Initial public offering, net
of $2,495,907 of related
costs and expenses ....... 10,382,253 -- -- 10,384,093

Issuance of options and
warrants to consultants
and pursuant to
acquisition of intangible 277,000 -- -- 277,000
assets ................... ---------- ------ ----------- ----------

Balance at December 31, 1998 12,199,828 21,000 (4,987,125) 9,717,824

Conversion of
Preferred Stock ............ 2,478,413 -- -- --

Net Loss ................... -- -- (5,628,306) (5,628,306)

Sale of Marketable
Securities .............. -- (21,000) -- (21,000)
--------

Comprehensive (loss)........ -- -- -- (5,649,306)

Issuance of Common Stock
Pursuant to acquisition of
Extreme Comfort............ 209,960 -- -- 210,000
------- ------- ------------ ----------
Balance at December 31, 1999 $14,888,201 $ -- $(10,615,431) $4,278,518
=========== ======== ============ ==========

See accompanying notes
</TABLE>
F-5

<PAGE>

Frisby Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

Year ended
December 31,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net loss ............................................................... $ (5,628,306) $ (3,918,644)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 177,658 37,003
Non cash consulting expense ...................................... 70,000 180,000
Amortization of intangibles ...................................... 233,091 51,300
Provision for doubtful accounts .................................. 5,000 30,000
Changes in assets and liabilities, prior to effect of acquisition:
Accounts receivable ........................................... (785,105) (723,532)
Inventory ..................................................... (308,202) (423,883)
Other current assets .......................................... 50,308 (491,904)
Other non-current assets ...................................... 93,653 --
Accounts payable .............................................. 471,369 318,410
Accrued expenses and other current liabilities ................ (145,533) 322,390
License fees payable .......................................... 92,838 24,086
Deferred license revenues ..................................... (104,996) 41,250
------------ ------------
Net cash used in operating activities .................................. (5,778,225) (4,553,524)
------------ ------------

Investing activities
Purchases of property and equipment .................................... (472,845) (447,878)
Purchases of short-term investments .................................... -- (9,956,255)
Proceeds from sale of short-term investments ........................... 1,534,684 8,421,572
Purchase of intangible assets .......................................... (400,000) (325,000)
Purchase of business, net of cash acquired ............................. (180,801) --
------------ ------------
Net cash provided by (used in) investing activities .................... 481,038 (2,307,561)
------------ ------------
Financing activities
Net proceeds from exercise of convertible preferred stock option ....... -- 2,479,000
Net proceeds from initial public offering .............................. -- 10,523,001
Payment of transaction costs ........................................... (47,372) --
------------ ------------
Net cash (used in) provided by financing activities .................... (47,372) 13,002,001
------------ ------------
Net (decrease) increase in cash and cash equivalents ................... (5,344,559) 6,140,916
Cash and cash equivalents - beginning of period ........................ 6,516,138 375,222
------------ ------------
Cash and cash equivalents - end of period .............................. $ 1,171,579 $ 6,516,138
============ ============
</TABLE>

See accompanying notes

F-6
<PAGE>
Frisby Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 1999

1. Summary of Significant Accounting Policies

Organization and Business

Frisby Technologies, Inc. and its subsidiary (the "Company") is engaged in
one business segment, the development and commercialization of branded thermal
management products for use in a broad range of consumer and industrial
products. The Company's Thermasorb(R) and ComforTemp(R) DCC(TM) products utilize
licensed patents and the Company's proprietary MicroPCM technology to enhance
thermal characteristics (i.e., insulation, cooling or temperature control
properties) in a variety of consumer and industrial products.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany balances and transactions are
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

Revenues from sales of products are recognized upon shipment. License
revenues are recorded ratably over the license period, which generally ranges
between two and three years. Royalty revenues are recorded when the Company's
strategic partners report sales of products containing Thermasorb(R) and
ComforTemp(R) DCC(TM).

F-7
<PAGE>
Cash and Cash Equivalents

The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.

Marketable Securities

Available-for-sale securities are stated at fair value, with the unrealized
gains and losses reported in other comprehensive income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.

Depreciation and Amortization

The Company's fixed assets are stated at cost. Depreciation is provided
over the estimated useful lives (three to ten years) of the assets under the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful life of the
asset.

Intangible assets, consisting of goodwill from acquisitions, the assignment
of rights under a third-party license agreement and the reduction of future
license and royalty fees, are being amortized on a straight-line basis over
estimated life of the underlying asset.

Net Loss Per Share

The denominator used in the computation of basic and diluted net loss per
share for the years ended December 31, 1999 and 1998 was 5,570,005 and
4,637,325, respectively; the weighted-average shares. The calculation of diluted
net loss per share excludes shares of common stock issuable upon the exercise of
stock options and warrants (Notes 5,6, and 10) as the effect of such exercises
would be antidilutive.

Fair Value of Financial Instruments

The reported amounts of cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair values.

Inventories

Inventories consist substantially of finished goods and are stated at the
lower of cost or market. Cost is determined by the weighted-average method.

F-8
<PAGE>
Advertising and Promotional Expense

The cost of advertising, including creation and placement, and promotional
activities is expensed as incurred. The Company incurred approximately
$1,470,000 and $1,360,000 of advertising and promotional costs for the years
ended December 31, 1999 and 1998, respectively.

Long-Lived Assets

The Company reviews the carrying value of its long-lived assets in
determining the ultimate recoverability of their unamortized values using future
undiscounted cash flow analyses if there are indicators of impairment.

Stock Based Compensation

Stock based compensation expense for the Company's employee stock option
plan is recognized under the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized. Pro forma information
regarding net income and earnings per share required by Statement of Financial
Accounting Standards ("SFAS') No. 123, Accounting for Stock-Based Compensation
is set forth in Note 6.

Recent Accounting Pronouncements

In June 1998, the Financial Standards Board issued SFAS No.133, Accounting
for Derivative Instruments and Hedging Activities, which is required to be
adopted in fiscal years beginning after June 15, 2000. Under the statement, all
derivatives will be required to be recognized on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
change in fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. Under the statement, any ineffective portion of a
derivative's change in fair value must be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS No.133 will have on
the earnings and financial position of the Company.

Reclassifications

Certain amounts in prior years have been reclassified to conform with the
current period presentation.

F-9
<PAGE>
2. Significant Concentrations

The Company currently outsources the manufacture of all of its products,
including Thermasorb(R) and ComforTemp(R) DCC(TM), to a limited number of
manufacturers. In September 1998, the Company and a supplier entered into a
Memorandum of Understanding (see Note 10(c)), for its anticipated Thermasorb(R)
requirements. Four licensed vendors currently manufacture the Company's
ComforTemp(R) DCC(TM) foam products.

At December 31, 1999, two licensee/customers accounted for approximately
27% (16% and 11%) of the Company's accounts receivable. The Company performs
credit evaluations of its strategic partners' financial condition and payment
history prior to extending credit. Consistent with industry standards,
receivables are payable in accordance with the terms of the underlying contracts
and collateral is not required.

3. Property and Equipment

Property and equipment consist of the following as of December 31, 1999:

Leasehold improvements ..... $ 56,391
Furniture ................... 16,362
Equipment ................... 957,270
----------
1,030,023
Less accumulated depreciation 425,102
----------
$ 604,921
==========

4. Line of Credit

During 1999, the Company's existing available line of credit with a bank
(the "Line"), was renewed at a limit of $2,000,000. The Line is maintained for
working capital purposes. The Line bears interest at the lower of the bank's
prime rate or a two point spread versus the London Interbank Overnight Rate
("LIBOR") and expires on June 30, 2000. At December 31, 1999 no amounts were
outstanding under the Line. Substantially all of the Company's assets are
pledged as security for any outstanding borrowing under the Line. See Note 12.

As part of the Extreme Comfort acquisition, the Company assumed an existing
line of credit that had outstanding advances of $549,981. This amount was fully
repaid in January 2000 and the line of credit was terminated.

F-10
<PAGE>
5. Stockholders' Equity

On December 29, 1997, the Company sold 441,327 shares of Common Stock and
an option to purchase 587,500 shares of the Company's Convertible Preferred
Stock at an exercise price of $4.26 per share expiring on February 27, 1998 in a
private placement for an aggregate purchase price of $2,500,000. The Company
allocated $353,000 of the purchase price as the estimated value of the option.
This transaction resulted in net proceeds of approximately $1,543,000, after the
payment of related costs and expenses. On February 27, 1998, the foreign
investor exercised the Convertible Preferred Stock option. This transaction
resulted in net proceeds to the Company of $2,479,000, after the payment of
related costs and expenses. Each share of Convertible Preferred Stock was
convertible into one share of Common Stock on April 6, 1999.

On April 1, 1998, the Company consummated an Initial Public Offering (the
"IPO") of 1,600,000 shares of Common Stock at a price of $7.00 per share. On May
15, 1998, the underwriter in connection with the IPO exercised its
over-allotment option to purchase 240,000 additional shares of Common Stock at a
price of $7.00 per share. The total net proceeds to the Company amounted to
approximately $10,400,000 after the underwriters' discount and related expenses.
The underwriter has an additional option to purchase 160,000 shares of common
stock at an exercise price of 165% of the IPO price or $11.55 per share expiring
in April 2003.

In April 1998, the Company entered into a consulting agreement with a
company controlled by a member of the Company's Board of Directors. In addition
to a monthly fee, the Company issued warrants to purchase 110,000 shares of the
Company's Common Stock at an exercise price of $7.25 per share expiring in April
2003. Additionally, the Company issued options to consultants to purchase 4,000
shares of the Company's Common Stock at an exercise price of $7.00 per share
expiring in April 2003. The exercise prices of the above mentioned warrants and
options were equal to the market price of the Company's Common Stock at the date
of grant. The aggregate fair market value of these warrants and options of
$250,000 is being charged to expense over the respective service periods.

6. Stock Based Compensation Plan

In March 1998, the stockholders adopted a Stock Option plan pursuant to
which 250,000 shares of Common Stock are reserved for issuance to key employees,
officers, directors and consultants of the Company. In June 1999, the
stockholders voted to increase the shares of Common Stock under the Plan to
750,000.

F-11
<PAGE>

The following table summarizes activity in stock options:
<TABLE>
<CAPTION>

Shares Weighted-
Under Average
Option Exercise Price
-------------------- ---------------------------------

<S> <C> <C>
Balance at December 31, 1997 -- $ --
Grants 190,500 $6.29
Forfeitures (14,000) $7.00
--------------------
Balance at December 31, 1998 176,500 $6.23
Grants 174,950 $4.09
Forfeitures (1,000) $3.63
--------------------
Balance at December 31, 1999 350,450 $5.18
--------------------

Weighted-average fair value of
option issued during 1999 $2.06

</TABLE>

The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>

Weighted-
Average
Remaining
Options Options Contractual
Exercise Price Outstanding Exercisable Life
------------------------ --------------------- ------------------- --------------------

F-12

<PAGE>
At December 31, 1999, the Company has reserved 1,120,000 shares of common
stock for issuance of all options and warrants outstanding.

Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its stock options under the fair value of that statement. The fair value for
these options was estimated at the date of grant using the Black-Sholes option
pricing model with the following weighted-average assumptions for the year ended
December 31, 1999: risk-free interest rate of 5.0%; no dividend yield;
volatility factor of the expected market price of the Company's Common Stock of
0.70 and a weighted-average expected life of the options of three years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

Pro forma net loss $ (5,729,743)
=================
Pro forma basic and diluted loss per share $ (1.03)
=================

The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.

7. Income Taxes

Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary
differences expected to be recovered or settled. Significant components of the
Company's deferred tax assets and liabilities are as follows:

Accounts receivable reserve $12,000
License agreement costs 47,000
Deferred license revenues 52,000
Net operating loss carryforward 1,839,000
---------
Total deferred tax assets 1,950,000
Valuation allowance for deferred tax assets (1,950,000)
----------
Net deferred tax assets $ --
==========

As a result of losses from operations through December 31, 1999, the
Company has available a net operating loss carryforward ("NOL") of approximately
$9,719,000 for Federal income tax purposes that expires in years through 2019.
Utilization of the NOL is subject to an annual limitation under Internal Revenue
Code Section 382 due to certain ownership changes the Company underwent in 1998.

F-13
<PAGE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which the NOL can be utilized and the temporary differences become deductible.
Since the Company has incurred losses in previous years and it anticipates
additional losses in 2000, the Company has established a valuation allowance for
deferred tax assets at December 31, 1999.

The income tax benefit differs from the amounts computed by applying the
statutory United States Federal income tax rate as a result of the following:
<TABLE>
<CAPTION>

Year Ended
December 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Benefit for Federal income taxes at the statutory rate................. $(1,913,624) $(1,332,339)
State income taxes, net of Federal income tax benefit.................. (249,741) (134,229)
Permanent differences.................................................. 9,279 (8,759)
Other .............................................................. (6,563) (19,326)
Losses not currently deductible........................................ 2,160,649 1,494,653
------------- -------------
$ ----- $ -----
============== ==============
</TABLE>

8. Related Party Transactions

(a) Frisby Aerospace, Inc. ("Frisby Aerospace"), certain former
stockholders of which were also stockholders of the Company, charged the Company
for space and related services in 1998. These charges, which were non-interest
bearing, were based upon estimates of square footage used for facilities and
actual expenses incurred by Frisby Aerospace on behalf of the Company.
Management believes that such allocations were reasonable. These charges
aggregated approximately $36,000 for the year ended December 31, 1998 and were
included in cost of sales in the accompanying statements of operations.

9. Acquisitions

During 1999, the Company acquired selected assets of Steele and Associates,
Inc. and acquired 100% of the outstanding shares of Extreme Comfort, Inc. These
acquisitions have been accounted for as purchase transactions and consist of the
purchase of assets with an estimated fair value of $200,800 and the assumption
of liabilities of $643,774. Goodwill associated with the acquisitions is being
amortized using the straight-line method over 10 years.

The results of operations of these acquisitions have been included in the
Company's financial statements beginning on the date the acquisitions were
consummated. The aggregate pro forma impact on the Company's operations,
operating income and earnings per share is not material to the consolidated
results of the operations.

F-14
<PAGE>

10. License Arrangements and Other Commitments

(a) The Company signed an Exclusive License Agreement (the "TRDC License")
in 1995 with a research and development corporation which holds innovative
proprietary technology in microencapsulated and thermal management technologies
and with which the Company had an existing agreement since 1991. The TRDC
License gives the Company the exclusive worldwide right to develop and
commercialize this technology with respect to certain applications in exchange
for royalties that range from 1% to 5% of product sales revenue and 12.5% to 50%
of license fees and royalty revenues, as defined. Minimum annual payments are
required in accordance with the TRDC License and are payable as follows:

2000 $102,000
2001 126,000
2002 and thereafter 150,000

The Company is expensing such minimum annual payments on a straight-line
basis over the period in which such payments fluctuate. Accordingly, the charge
was approximately $73,000 for each of the years ended December 31, 1999 and
1998.

In September 1998, the Company entered into an agreement with TRDC that
reduced the Company's existing royalty rates described above to 1% to 2% of
product sales revenue and 10% to 12.5% of license fees and royalty revenues.
Additionally, the Company has been assigned TRDC's right to their original
license agreement for fabrics with Outlast. This assignment resulted in the
Company receiving royalty income from Outlast Technologies, Inc. ("Outlast")
subject to certain payback to TRDC. As consideration, the Company has given TRDC
a combination of cash, stock options and a put agreement.

(b) The rights to the TRDC Technology relating to MicroPCM Fibers and
Fabrics were licensed by TRDC to Outlast prior to the Company obtaining the TRDC
License. In order to expand its rights in the TRDC Technology, in January 1998,
the Company entered into an agreement with Outlast, which expands the rights of
the Company to include certain combinations of the Company's products with
fibers and fabrics. The agreement provides for the Company to meet minimum
annual payments of $350,000 to $600,000 per year from 2000 through 2002,
provided the Company elects to maintain the exclusivity granted by the license.
The Company expensed the minimum annual payment of $250,000 and $150,000 in 1999
and 1998, respectively. If subsequent to the initial licensing period the
Company elects to extend the exclusivity granted by the license, the minimum
annual payment for the five years thereafter will be $1,000,000.

(c) The Company and its Thermasorb(R) supplier have entered into an
Memorandum of Understanding for a long-term supply agreement that provides firm,
fixed pricing for all of the Company's anticipated requirements for
Thermasorb(R) additives. The agreement includes annual purchase requirements
over the term of the agreement and subjects the Company to a maximum penalty of
$1,960,000 if no future purchases are made.

F-15

(d) In February 1999, the Company entered into an operating lease agreement
with an unrelated entity for a facility in North Carolina. The Company completed
its move into this facility during January 2000. The lease term is for 12 years
and monthly payments are expected to commence in April, 2000. This lease
includes scheduled rent escalations throughout the lease term, which will be
expensed on a straight-line basis over the lease term. The Company has also
entered into several operating leases for computer equipment. Rent expense was
approximately $207,000 and $89,000 for the years ended December 31, 1999 and
1998, respectively. Future minimum payments under these leases are as follows:

2000 $ 206,000
2001 178,000
2002 153,000
2003 183,000
2004 183,000
Thereafter 1,359,000
------------------------
$ 2,262,000
========================

Upon execution of the North Carolina lease, the Company will receive an
equity interest in the lessor, which vests after the twelve-year lease period.
Notwithstanding the equity interest, the Company believes that the rental
payments represent an arms-length price for the lease.

11. Retirement Plan

Substantially all employees meeting certain service requirements are
eligible to participate in a 401(k)/Profit Sharing Plan. The Company currently
matches 50% of the employee's first 6% pre-tax contribution. The Company
matching contribution and any related plan fees were approximately $43,100 and
$7,300 for the year ended December 31, 1999 and 1998, respectively. Under the
Plan, participants are permitted to contribute from their compensation any
amount up to the lesser of 12% of their annual gross salary or the maximum
deferral allowed under the Internal Revenue Code.

The Company is entitled to also make optional profit sharing contributions
at its discretion. During the years ended December 31, 1999 and 1998, the
Company did not make any profit sharing contributions to the Plan.

12. Subsequent Events

In February, 2000 the Company entered into a revised $2,000,000 line of
credit with another bank. This new line ("the New Line") replaced the existing
line and is maintained for working capital purposes at least until an equity or
debt investment is secured. The New Line is a committed facility, which is
secured by substantially all of the Company assets, and bears interest at the
bank's prime rate plus 200 basis points. The New Line includes the possibility
that a personal guarantee of the CEO and another board member will be required.

On April 14, 2000 the Company received a firm commitment letter from an
investor group for $4 million of a potential aggregate equity transaction in the
Company of up to $7.5 million. The proposed transaction includes both the
Company's common stock and warrants and has been approved by the Company's Board
of Directors. Based on the Company's current operating plan, the Company
believes that the cash available as a result of the committed portion of the
financing activity mentioned above will be sufficient to satisfy its operational
and capital requirements through December 2000. The Company anticipates that
this transaction will close on or before May 15, 2000.

F-16

BANK OF AMERICA, N.A.

LOAN AGREEMENT

This Loan Agreement (the "Agreement") dated as of February 29, 2000, by and
between BANK OF AMERICA, N.A., a national banking association ("Bank") 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, Bank 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. 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.

F. Loans. Collectively, the loans, credit facilities and Hedge
Agreements described in Section 2 hereof and any other existing or
subsequent loan or extension of credit by Bank to the Borrower that is
subject to this Agreement.

G. Loan Documents. Loan Documents means this Loan Agreement and any
and all promissory notes executed by Borrower in favor of Bank and all
other documents, instruments, guaranties, certificates and agreements
executed and/or delivered by Borrower, any guarantor or third party in
connection with any Loan.

H. Material Adverse Effect. Any material adverse effect on (i) the
business, assets, operations or financial or other condition of Borrower
and its subsidiaries, (ii) the Borrower's ability to pay the Obligations in
accordance with the terms thereof, or (iii) the Collateral or Bank's
security interest in the Collateral or the priority of such security
interest.

I. Note. the promissory note described in Section 2 hereof.

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 Bank 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 Bank under this Agreement or any of the
other Loan Documents, as well as all obligations of the Borrower pursuant
to any Hedge Agreements.

K. Permitted Liens. Collectively, (i) all liens or security interests
securing indebtedness owed to Bank, (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 Bank, the Borrower will
establish reserves satisfactory to the Bank, (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 Bank, the Borrower will establish reserves satisfactory to the Bank;
and (vi) purchase money security interests granted by the Borrower in the
ordinary course of its business.

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. The prime rate of the Bank, as announced or otherwise
established from time to time. The Prime Rate is a reference rate used for
pricing commercial and consumer loans and is not necessarily the best or
lowest rate to any borrower on any loan from the Bank.

N. Tangible Net Worth. The amount by which Borrower's total assets
exceed total liabilities in accordance with GAAP, minus (i) goodwill, (ii)
contract rights, (iii) leasehold improvements, (iv) assets representing
claims on (A) shareholders, directors, or officers or (B) Affiliates, and
(v) other assets constituting intangible assets, including, without
limitation, any 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. Subject to the terms of this Agreement, Bank hereby agrees to make
a revolving credit facility available to Borrower, as follows:

A. Revolving Line of Credit. (i) Subject to the terms hereof, Bank
agrees to extend a revolving line of credit (the "Revolver") to Borrower,
in the original principal amount of Two Million Dollars ($2,000,000), for
the purpose of providing temporary financing of the Borrower's short-term
working capital needs, prior to the closing of a private placement of
capital stock of the Borrower and receipt of the proceeds thereof (the
"Private Placement"). Provided that no default has occurred hereunder, the
Borrower may obtain advances from time to time under the Revolver, and may
repay and re-borrow under the Revolver, subject to the Borrowing Base
Agreement attached hereto as Exhibit A and by reference made a part hereof.
To evidence the Revolver, Borrower shall execute and deliver to Bank a
promissory note (the "Note") in the principal amount of $2,000,000, which
Note shall bear interest and be payable in accordance with the terms set
forth hereinbelow. The Revolver shall mature and become payable in full on
July 31, 2000, which date shall be the "Maturity Date".

(ii) Fees. (a) The Borrower shall pay a commitment fee to the Bank for
the Revolver in the amount of $40,000, of which $10,000 will be refundable
to the Borrower if the Private Placement is closed and net proceeds
therefrom of not less than $6,500,000 are received on or before June 1,
2000.

(b) The Borrower shall also pay an availability fee for the
Revolver quarterly in arrears, in the amount of one-half percent
(1/2%) of the average unused balance of the Revolver during each
quarter.

(iii) Interest and Principal. Interest on the principal amount
outstanding under the Revolver from time to time shall accrue at a variable
rate of the Prime Rate, plus two hundred basis points (2.00%) per annum,
which accrued interest shall be payable monthly in arrears. The interest
rate payable on the Revolver shall be subject to change The interest rate
shall become the Prime Rate plus 50 basis points (.50%) if the Private
Placement is closed and gross proceeds of not less than $6,500,000 are
received by the Borrower on or before June 1, 2000. The principal of the
Note shall be repaid in full on the Maturity Date, together with all
accrued but unpaid interest.

(iv) Collateral Security. Repayment in full of all Obligations of the
Borrower shall be secured by the Collateral.

(v) Guaranties. Subject to the limitation set forth below, repayment in
full of all Obligations of the Borrower shall be personally, and jointly and
severally, guaranteed by Gregory S. Frisby and Jeffry D. Frisby (the
"Guarantors"), pursuant to guaranty agreements in form satisfactory to the Bank
(the "Guaranties"). It is provided, however, that the Guaranties will be
released upon the closing of the Private Placement and receipt by the Borrower
of gross proceeds of not less than $6,500,000 therefrom on or before June 1,
2000. It is further provided that each of the Guarantors shall be required to
maintain minimum liquidity, as determined by the Bank, in an amount of not less
than $500,000 at all times, the calculation of which minimum liquidity shall
exclude all of the Guarantors' ownership interests in the Borrower and all home
equity lines of credit. Notwithstanding the foregoing agreement to guarantee all
of the Obligations of the Borrower, the Guarantors shall not be required to
guarantee payment of any principal amounts outstanding under the Loan, up to or
equal to Three Hundred Thousand Dollars ($300,000), at any time and so long as
the principal amount outstanding under the Loan does not exceed $300,000, and no
default has occurred under this Agreement. If, however, at any time the
principal amount outstanding hereunder does not exceed $300,000 and a default
occurs (as described in Section 8 below), which default is not cured by the
Borrower within thirty (30) days following notice thereof from the Bank, the
Guarantors shall be deemed to be guarantors of all Obligations of the Borrower.

B. Hedge Agreements Borrower shall have the option to fix the interest
rate on all or any portion of the Loan, at any time, through the use of a Hedge
Agreement purchased from the Bank at the market rate for such products. For
purposes hereof, a "Hedge Agreement" means any agreement between Borrower and
Bank, or any affiliate of Bank, now existing or hereafter entered into, which
provides for an interest rate or commodity swap, cap, floor, collar, forward
foreign exchange transaction, currency swap, cross-currency swap, currency
option, or any combination of, or option with respect to, these or similar
transactions, for the purpose of hedging Borrower's exposure to fluctuations in
interest rates, currency valuations or commodity prices. Notwithstanding any
other terms of this Agreement, any loan subject to a Hedge Agreement shall be
prepayable only in accordance with, and subject to any fees imposed under, the
terms of such Hedging Agreement.

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 Bank a security interest in and lien upon all of
the property described below:

A. A first and prior 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 first priority security interest in and lien upon all
of the Borrower's accounts, inventory, and general intangibles, and a first
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.

Borrower agrees and undertakes to execute and deliver to the Bank such
deeds of trust, security agreements, pledge agreements, assignments, financing
statements, subordinations, certificates, waivers, estoppel agreements, and
other documentation, in form acceptable to the Bank, as may be reasonably
requested by the Bank in connection with the Collateral. Borrower further agrees
that all of the Collateral shall secure all of the Obligations of the Borrower
to the Bank. It is specifically agreed and acknowledged by the parties hereto
that Borrower has entered into, or will enter into, a joint venture with
Schoeller Textil AG, and that the personal and real property to be owned by such
joint venture shall not be deemed to be Collateral, as herein defined.

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

A. Bank 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 Bank or counsel for
the Bank may reasonably request.

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

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

D. The Borrower shall have provided to the Bank, in form and content
satisfactory to the Bank and its counsel, an opinion of its counsel, stating
that (i) the Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the corporate and
legal authority to own its property and carry on its business as now being
conducted; (ii) this Agreement has been duly executed and delivered by the
Borrower and constitutes the legal, valid and binding obligation of the
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; and
(iii) the Loan Documents when duly executed and delivered by the Borrower to the
Bank in accordance with the provisions hereof, will constitute the legal, valid,
and binding obligations of the 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.

E. All terms and conditions of the Bank's commitment letters to the
Borrower for the Loan have been satisfied and fulfilled, to the reasonable
satisfaction of the Bank.

F. 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 December 31, 1998 annual
financial statements, and in its subsequent quarterly financial statements.

G. 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.

H. 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 Bank 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 and
has the power and authority to own its property and to carry on its
business in each jurisdiction in which Borrower does 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.

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, except as
disclosed in Schedule A 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.

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 Bank, except as disclosed in Schedule B
attached hereto.

G. Taxes. All 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 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 Bank 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
September 30, 1999. To the best of its knowledge, all factual information
furnished by Borrower to Bank 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 Bank 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, 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 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 compliance with
all applicable environmental laws. Borrower agrees to permit Bank, 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 an
environmental investigation and audit (including taking physical samples)
to insure that Borrower is complying with this covenant. Borrower agrees to
reimburse Bank on demand for the reasonable costs of one such environmental
investigation and audit annually. Borrower shall provide Bank, its agents,
contractors, employees and representatives with access to and copies of any
and all data and documents relating to or dealing with any Hazardous
Materials used, generated, manufactured, stored or disposed of by
Borrower's business operations within five (5) days of the request
therefore.

K. No Material Adverse Effect. Neither this Agreement nor any of the
Loan Documents, nor any written statements when furnished to the Bank 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 disclosed to the Bank in writing that would
reasonably be deemed to have a Material Adverse Effect on the Borrower.

L. Year 2000 Compliance. Borrower represents that it has (i) initiated
a review and assessment of all areas within its and each of its
subsidiaries' businesses and operations (including those affected by
suppliers and vendors) that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by Borrower or
any of its subsidiaries may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline for addressing
the Year 2000 Problem on a timely basis and (iii) to date, implemented that
plan in accordance with that timetable. Borrower represents that all
computer applications that are material to its or any of its subsidiaries'
business and operations will on a timely basis be able to perform properly
date-sensitive functions for all dates before and after January 1, 2000
(that is, be "Year 2000 compliant"), except to the extent that a failure to
do so will not have a material adverse effect on its business, financial
condition, or ability to repay the Loan.

M. Continuation of Representation and Warranties. All representations
and warranties made under this Agreement shall be deemed to be made at and
as of the date hereof and at and as of the date of any future advance under
the Loan; provided, however, that the Borrower shall have no duty to update
any schedules or exhibits to this Agreement at the time of any advance
absent the occurrence of a change that would 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 Bank
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 at
December 31, 1999 and as of the end of each fiscal quarter thereafter.

B. Financial Statements and Other Information. Maintain a system of
accounting satisfactory to Bank and in accordance with GAAP applied on a
consistent basis throughout the period involved, permit Bank'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 Bank may desire.
Borrower agrees to reimburse the Bank on demand for the reasonable costs of

one such inspection annually. Unless written notice of another location is
given to Bank, 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 Bank and by
independent certified public accountants acceptable to Bank.

In addition, Borrower will:

(i) Furnish to Bank audited consolidated financial statements of
Borrower for each fiscal year of Borrower, within 120 days after the close
of each such fiscal year.

(ii) Furnish to Bank 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 30 days after the end of each month.

(iii) Furnish to Bank 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 as required in
paragraphs i and ii above, containing (a) a certification that the
financial statements of even 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 Bank may request, with
respect to compliance with this Agreement, and the other Loan Documents,
including computations of all quantitative covenants, which compliance
certificate shall be substantially in the form of Exhibit B attached
hereto.

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

C. 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 Bank and with respect to insurance on
the Collateral, to contain a mortgagee clause naming Bank 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 Bank of any cancellation
thereof. Satisfactory evidence of such insurance will be supplied to Bank
prior to funding under the Loan and 30 days prior to each policy renewal.

D. Existence and Compliance. Maintain its existence, good standing and
qualification to do business, where required 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.

E. Adverse Conditions or Events. Promptly advise Bank in writing of
(i) any condition, event or act which comes to its attention that Borrower
reasonably believes would or might 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 or partially uninsured loss
through fire, theft, liability or property damage in excess of an aggregate
of $500,000.00.

F. Taxes and Other Obligations. Pay all of its taxes, assessments and
other obligations, 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.

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

H. Notification of Environmental Claims. Borrower shall immediately
advise Bank 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; 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. Borrower shall immediately notify Bank of any remedial action
taken by Borrower with respect to Borrower's business operations.

I. Notification of Lack of Year 2000 Compliance. Borrower further
represents that it will promptly notify the Bank in the event Borrower
discovers or determines that any computer application that is material to
its or any of its subsidiaries' businesses and operations is not Year 2000
compliant, except to the extent that such failure will not have a material
adverse effect on its business, financial condition or ability to repay the
Loan.

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 Bank (and without limiting any requirement of any other
Loan Documents):

A. Ownership and Management. Make or permit to be made any material
change in the ownership or executive management of the Borrower.

B. Transfer of Assets or Control. Sell, lease, sell and leaseback,
assign or otherwise dispose of or transfer any assets, except in the normal
course of its business, or enter into any merger or consolidation, or
transfer control or ownership of the Borrower or form or acquire any
subsidiary. It is provided, however, that this covenant shall not prohibit
Borrower from entering into that certain joint venture with Schoeller
Textil AG, as has been disclosed to the Bank prior to the date hereof.

C. Liens. Grant, suffer or permit any contractual or noncontractual
lien on or security interest in its assets, 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 advances to employees of
the Borrower for expenses incurred in the ordinary course of business.

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 Bank, except for normal trade debts incurred in the ordinary
course of Borrower's business; and existing indebtedness disclosed to Bank
in writing and acknowledged by Bank prior to the date of this Agreement.

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 the general character of business as
conducted at the date hereof, or engage in any type of business not
reasonably related to its business as presently conducted.

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. 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 Bank
or any affiliate or subsidiary of Bank of America Corporation, and such default
shall continue uncured for a period of thirty (30) days; provided, further, that
if the Borrower has undertaken to cure any such default and is diligently
prosecuting such cure, to the reasonable satisfaction of Bank, it shall not
constitute a default under this Agreement if the subject default remains uncured
beyond thirty (30) days.

9. REMEDIES UPON DEFAULT. If an event of default shall occur, Bank 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: Stephen Villa
Chief Financial Officer

With a copy to:

Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, New York 11501
Attn: Norman Friedland, Esq.

Bank: Bank of America, N.A.
380 Knollwood Street
Winston-Salem, NC 27103
Attn: Ty Daurity
Commercial Banking Officer

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.

11. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
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 Bank's in-house counsel), incurred by Bank in connection with (A)
negotiation and preparation of this Agreement and each of the Loan Documents,
and (B) Bank's continued administration thereof. 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 Bank 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
Bank 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 Bank, and no delay in exercising any right shall operate as
a waiver thereof, nor shall any single or partial exercise by Bank 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 Bank, 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 Bank, its successors and assigns; however, no assignment or
other transfer of Borrower's rights or obligations hereunder shall be made
or be effective without Bank'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 Bank shall be
in form and content satisfactory to Bank 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.

F. Indemnification. Borrower shall indemnify, defend and hold Bank and
its successors and assigns 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 Bank, 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 Bank to make any
advances under the Line of Credit shall not have expired.

H. Updated Appraisals and Maintenance of Collateral Value. Bank may at
its option, at Borrower's expense, obtain an appraisal of any Collateral
securing payment of the Loan, which appraisal shall be prepared in
accordance with applicable bank regulatory agency regulations and the
written instructions from Bank by a third-party appraiser engaged directly
by Bank. The costs of each such appraisal shall be payable by Borrower to
Bank on demand. If such appraisal shows the market value of the Collateral
has declined, Borrower agrees that, upon demand by Bank, it will
immediately either pledge additional collateral in form and substance
satisfactory to Bank or make such payments as shall be necessary to reduce
the principal balance outstanding under the Loan.

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 DISPUTES OF J.A.M.S./ENDISPUTE, INC., OR ANY SUCCESSOR THEREOF
("J.A.M.S."), 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 THE COUNTY OF
THE BORROWER'S DOMICILE AT TIME OF THE EXECUTION OF THIS AGREEMENT AND
ADMINISTERED BY J.A.M.S., WHICH WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS
UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE
AMERICAN ARBITRATION ASSOCIATION WILL SERVE. 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) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT
BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III)
LIMIT THE RIGHT OF THE BANK 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 BANK 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.

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

BORROWER:

FRISBY TECHNOLOGIES, INC.

ATTEST:
By:/s/ Stephen Villa
-------------------
/s/ Douglas McCrosson Title: Chief Financial Officer
- - --------------------- -----------------------

Secretary
[Corporate Seal]

BANK:

BANK OF AMERICA, N.A.

By:/s/
-------------------------------
Title: Commercial Banking Officer
---------------------------
<PAGE>

EXHIBIT A
BORROWING BASE AGREEMENT

[ THIS BORROWING BASE AGREEMENT CONTAINS SOME PROVISIONS PRECEDED BY BOXES. IF
MARKED, THE PROVISION APPLIES TO THIS TRANSACTION. IF NOT MARKED, THE PROVISION
DOES NOT APPLY TO THIS TRANSACTION.]

1. Borrowing Base. The aggregate principal amount of all amounts from time
to time advanced pursuant to the terms of that promissory note dated
February___, 2000 in the principal amount of $2,000,000 (the "Note") shall not
exceed the Maximum Amount.

"Maximum Amount" shall mean the lesser of $2,000,000 or the Borrowing Base.
The "Borrowing Base" at any time, shall be equal to 80% of Eligible Accounts
Receivable, plus 50% of Eligible Inventory, plus 50% of the net book value of
Equipment, as follows:

As used herein, "Eligible Accounts Receivable" shall mean all Accounts
Receivable of Borrower which have been created in the ordinary course of
Borrower's business and for which Borrower's right to receive payment is
absolute and not contingent upon the fulfillment of any condition whatsoever,
and shall not include:

[x] any account which remains unpaid more than ninety (90) days past
the invoice date;

[x] any account for which there exists a right of set off, defense or
discount (except regular discounts allowed in the ordinary course of
business to promote prompt payment) and for which no defense or
counterclaim has been asserted;

[_] any account which represents an obligation of any local, state or
federal governmental agency or entity;

[x] Any account which arises out of a contract or order which, by its
terms, forbids or makes void or unenforceable any assignment by Borrower to
Bank of the account receivable arising with respect thereto;

[x] Any account arising from a "sale on approval," "sale or return,"
"consignment," or subject to any other repurchase or return agreement;

[_] any account which represents an obligation of a customer which
is not a resident of the United States, unless such account is supported
by a letter of credit in form and substance acceptable to Bank;

[x] Any account which arises from the sale or lease to or performance
of services for, or represents an obligation of, an employee, affiliate,
partner, parent or subsidiary of Borrower;

[x] Any account which represents an obligation of a Customer of
Borrower when 80% or more of Borrower's accounts from such Customer are not
eligible pursuant to the foregoing formula;

[x] Any unapplied credits over 90 days old;

and any account on which the Bank is not or does not continue to be,
in the Bank's sole discretion, satisfied with the credit standing of the
Customer of Borrower in relation to the amount of credit extended.

"Accounts Receivable" shall mean all of the Borrower's accounts,
instruments, contract rights, chattel paper, documents, and general intangibles
arising from the sale of goods and/or the rendition of services by the Borrower
in the ordinary course of business, and the proceeds thereof and all security
and guaranties therefor, whether now existing or hereafter created, and all
returned, reclaimed or repossessed goods, and all books and records pertaining
to the foregoing.

"Eligible Inventory" shall mean the Borrower's finished goods inventory,
which is currently salable.

"Equipment" means all non-obsolete machinery and equipment that is
currently useable in the normal course of business of the Borrower.

2. Advances. The amounts of advances under the Note shall be determined in
the sole discretion of the Bank consistent with the value of the Eligible
Accounts Receivable, the Eligible Inventory, and the Equipment, taking into
account all fluctuations of the value thereof in light of the Bank's experience
and sound business principles. The Bank shall be under no obligation to make any
advance to Borrower in excess of the limitations stated above.

3. Reporting. In addition to any reporting requirements required under the
Loan Agreement to which this Borrowing Base Agreement is attached, the Borrower
will submit the following in form and substance satisfactory to Bank:

[x] Accounts Receivable Aging. Not later than fifteen (15) days after
and as of the end of each month, a listing of accounts receivable aged from
date of invoice.

[x] Borrowing Base Certificate. Not later than thirty (30) days after
the end of each fiscal month, Borrower will submit a Borrowing Base
Certificate in the form attached hereto as Exhibit A-1. Borrower shall also
submit a Borrowing Base Certificate with any request for an advance under
the Note, if the most recent Borrowing Base Certificate was provided to the
Bank more than ten days prior to such request.

4. [ ] Lock Box Arrangement. Bank and Borrower shall, upon request of Bank,
establish and maintain one or more special lock box or blocked accounts for the
collection of the Accounts Receivables. Each such special account shall be with
a bank satisfactory to the Bank (which may be an affiliate of the Bank) and
shall be subject to the Bank's standard form agreement. Any checks or other
remittances against Accounts Receivables which are received by the Borrower
shall be held in trust for the Bank and turned over by the Borrower to the Bank
or to a person designated by the Bank in the identical form received (except for
any necessary endorsement) as speedily as possible.

5. Mandatory Payment. In the event the aggregate principal outstanding
balance of advances under the Revolver exceeds the Maximum Amount, Borrower
shall immediately and without notice or demand of any kind, make such payments
as shall be necessary to reduce the principal balance of the Revolver below the
Maximum Amount.

Borrower: Bank:

FRISBY TECHNOLOGIES, INC. BANK OF AMERICA, N.A.

By: /s/Stephen Villa (Seal) By: /s/________________(Seal)
Name: STEPHEN VILLA Name: /s/________________
Title: Chief Financial Officer Title: Commercial Banking Officer

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EXHIBIT A-1
BORROWING BASE CERTIFICATE

Status as of _______________, 19___.

In accordance with the terms of the Borrowing Base Agreement attached as Exhibit
A to that Loan Agreement dated February ___, 2000, by and between Frisby
Technologies, Inc. and Bank of America, N.A., we hereby represent and warrant as
follows:
<TABLE>
<CAPTION>

<S> <C> <C>
1. Total Accounts Receivable $____________

2. Less ineligible accounts receivable
(as set forth in the Borrowing Base
Agreement) $____________

3. Eligible Accounts Receivable $____________

4. 80% of Eligible Accounts Receivable $____________

5. Eligible Inventory: $____________

6. 50% of Eligible Inventory $____________

7. Net Book Value ("NBV")
of Equipment $____________

8. 50% of NBV of Equipment $____________

9. Line 4 + Line 6 + Line 8 $____________

10. Maximum loan amount $2,000,000.00

11. Outstanding balance as of report date $____________

12. Available for further advances (lesser of line 9 or line 10
minus line 11) $____________

13. If line 12 is negative, amount to be
repaid immediately to Bank $____________

</TABLE>

The undersigned does hereby certify that the foregoing is true and correct.
The undersigned does further acknowledge that the Bank is relying upon this
certificate and any supporting documents to grant or continue to grant credit to
it, and further warrants and represents that no event of default has occurred,
or would, with the passage of time or the giving of notice, or both, occur under
the above-referenced Loan Agreement.

Borrower:

FRISBY TECHNOLOGIES, INC.

By:________________________________
Title: ____________________________

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SCHEDULE A
(Pending Litigation)

<PAGE>

SCHEDULE B
(Liens, encumbrances and leases)

<PAGE>

EXHIBIT B
(Form of Compliance Certificate)

COMPLIANCE CERTIFICATE

This Compliance Certificate is delivered pursuant to Section 6(B)(iii) of
the Loan Agreement dated as of February__, 2000 (together with all amendments
and modifications, if any, from time to time made thereto, the "Loan
Agreement"), between Frisby Technologies, Inc. (the "Borrower") and Bank of
America, N.A. Unless otherwise defined, terms used herein have the meanings
provided in the Loan Agreement.

The undersigned, being the duly elected, qualified and acting Chief
Financial Officer of the Borrower, on behalf of the Borrower and solely in his
or her capacity as an officer of the Borrower, hereby certifies and warrants
that:

1. He/she is the Chief Financial Officer of the Borrower and that, as such,
he/she is authorized to execute this certificate on behalf of the Borrower.

2. As of ________________, 20____:

(a) The Borrower was not in default of any of the provisions
of the Loan Agreement during the period as to which this
Compliance Certificate relates;

(b) The Borrower's Tangible Net Worth was $__________________;

IN WITNESS WHEREOF, the undersigned has executed and delivered this
certificate, this ______ day of ______________, 20____.

FRISBY TECHNOLOGIES, INC.

By: _____________________________________
Title: Chief Financial Officer

STATE OF NORTH CAROLINA)
LEASE AGREEMENT
COUNTY OF FORSYTH )

THIS LEASE, (the "Lease") made and entered into this, 14 day of January,
1999, by and between Visible Goth, LLC hereinafter called "LANDLORD" and FRISBY
TECHNOLOGIES, INC., hereinafter referred to as "TENANT".

RECITALS:

IN CONSIDERATION of the mutual covenants contained herein, the parties
agree as follows:

1. Description of Leased Premises. Landlord is the developer of a single
tenant building containing approximately 20,000 SF (the "Building") to be
located on 8 acres at Centre Park Boulevard, Winston-Salem, Forsyth County,
North Carolina, 27101 being more fully described on Exhibit "A" attached hereto
and hereby made a part hereof.

The Premises shall consist of said Building (and other improvements) in the
approximate amount of 20,000 SF, being more fully described and shown on the
attached floor plan as Exhibit "B". The Premises shall be for the exclusive use
of Tenant, its agents, servants, employees and invitees for showroom and related
uses.

Landlord represents and warrants that it is the contract owner in fee
simple of the Premises and that there are no covenants, restrictions or zoning
or other regulations which prevent or are violated by, this Lease or the use of
the Premises as contemplated herein.

2. Term: The term of this Lease shall be for a period of Twenty (20) years,
beginning on date Landlord tenders premises to Tenant (in turnkey condition as
more specifically described in the attached specifications and floor plan) the
"Commencement Date" and continue for Two Hundred and Forty (240) consecutive
months through the "Termination Date". Landlord shall deliver Premises to Tenant
One Hundred Fifty (150) days following Landlord obtaining building permit.
Tenant shall have an additional thirty (30) days before commencement of rent
payment to prepare Premises for occupancy. Tenant shall have an additional
thirty (30) days before commencement of rent payment to prepare Premises for
occupancy.

3. Base Rent: Tenant shall pay for rental for the Premises in the amount
of:

Years Annual Net Rent Monthly Net Rent

1 $146,979.00 $12,248.25
2 $146,979.00 $12,248.25
3 $151,979.00 $12,664.92
4 $181,979.00 $15,164.92
5 $181,979.00 $15,164.92
6 $186,979.00 $15,581.58
7 $186,979.00 $15,581.58
8 $186,979.00 $15,581.58
9 $196,979.00 $16,414.92
10 $196,979.00 $16,414.92
11 $201,979.00 $16,831.58
12 $201,979.00 $16,831.58
13-20 $170,000.00 $14,166.67

4. Tenant to Pay Pro-Rata Share of Operating Expenses:

(A) Tenant shall pay electricity to the demised premises.

(B) The Premises contains 20,000 square feet of rentable area which comprises
100 percent of the total Building rentable area.

(C) For purposes of this section, the term "Lease Year" shall mean a period of
twelve (12) months or less, commencing with the term commencement date and
ending on the following December 31st; each successive period of twelve (12)
months or less commencing with January 1, immediately preceding the expiration
of the term.

(D) Tenant shall pay an amount equal to 100 percent of the operating expenses
for those services of the Building. For the purpose of this paragraph,
"Operating Expenses" shall mean (but not to be limited to) the following
incurred by the Landlord with respect to the Building of which the Premises form
a part: property taxes, casualty and liability insurance, water, sewer, building
maintenance and repairs to common areas and tenant premises, pest control,
security services, management fees (not to exceed 3% of base rent) and all other
expenses paid in connection with the operation of the Building properly
chargeable against income. These expenses will be itemized and billed monthly
with payment due with the following month's rent. Failure to pay these expenses
on a timely basis will be considered a material breach of this Lease entitling
Landlord to exercise any rights or remedies contained herein or provided by law
or other authority.

(E) Any refunds or credits that are received by Landlord with respect to
operating expenses billed to tenants shall be credited to each such tenant's
account in the billing cycle following the receipt of refund or credit by
Landlord.

(F) Tenant may inspect and or audit Landlord's books and records relating to
operating expenses for the Building. Tenant may conduct any reasonable
examination of the books and records at the Landlord's place of business with
provided written notice is sent to Landlord not less than 4 days prior to any
inspection.

5. Occupancy and Acceptance of Premises: Landlord shall deliver actual
possession of the Premises to Tenant on the Commencement Date. Tenant may accept
early occupancy, provided however, in such event Tenant shall pay to Landlord
base initial rental calculated on a daily basis assuming a 365 day year, for
each day Tenant shall occupy the Premises prior to the Commencement Date. If
permission is given to Tenant to occupy the Demised Premises prior to the date
of commencement of the term hereof such occupancy shall be subject to all the
provisions of this Lease except those relating to the term of this Lease.

In the event the Premises are not completed and ready for Tenant's
occupancy by the Commencement Date as set forth above, the parties hereto shall
execute an Amendment modifying this Lease to confirm the actual commencement
date and termination date of the Lease Term. In the event the Premises are not
ready by the Commencement Date, Landlord will continue to provide office space
at the current location under the same terms and conditions then in existence
and, in addition, Landlord shall give Tenant a credit of $1,000.00 per day
against future rental due under this lease until Premises are delivered.

6. Late Payment of Rent: All monthly installments of rent herein stipulated
are due in advance, without prior offset of deduction, on the first (1st) of
each month during the term hereof. All rents not received by the Landlord by the
tenth (10th) day of each month during the term hereof shall be past due and
Tenant shall be charged a late fee equal to 5% of the total monthly amount due.
Landlord shall invoice Tenant for any such past due rent charges.

7. Use: The Premises shall be used and occupied only for Office, Research
and Development, Prototype Assembly and Storage use and shall not be used or
occupied for any other purpose without the prior written consent of Landlord.
These uses are permitted pursuant to the Conditions, Covenants and Restrictions
applicable to tenants in the Centre 311 Business Park. Tenant shall not conduct,
or allow to be conducted, on or within the Premises any business or permit any
act which in any way increases the cost of fire insurance on the Building or
constitutes a nuisance or is contrary to or in violation of the laws, statutes
or ordinances of local, state or federal governments having jurisdiction. Any
violation of this provision by Tenant shall be a material breach of this lease,
entitling Landlord to exercise any rights or remedies contained herein or
provided by law or other authority.

8. Quiet Enjoyment: The Landlord covenants that Tenant, upon paying the
Landlord the rental stipulated herein together with all other charges reserved
herein, and performing the covenants, promises and agreements herein, shall
peaceably and quietly have, hold and enjoy the Premises and all rights,
easements, appurtenances and privileges belonging or appertaining thereto,
during the full term hereby granted and any extensions or renewals thereof.

9. Common Areas: As used in this Lease, Common Areas shall mean all areas
of the entire building which are available for the common use of Tenant and
which are not held for the exclusive use of the Tenant or other Tenants,
including but not limited to corridors, restrooms, stairs, elevators, the
parking areas and entrances and exits thereto, driveways and truck serviceways,
sidewalks, landscaped areas, access roads and other areas and facilities
provided for the common or joint use and benefit of occupants of the building,
their employees, agents, customers and invitees.

Tenant agrees to abide by and conform to Building Rules and Regulations and
shall be responsible for the compliance with same by its employees, agents,
customers and invitees. The failure of Landlord to enforce any such Rules and
Regulations shall not be deemed to be a waiver. Pursuant to Paragraph 4 Tenant
is obligated to pay Landlord it's proportionate share of any such costs.

10. Assignment and Subletting: Tenant covenants and agrees that neither
this Lease nor the term hereby granted, nor any part thereof, will be assigned,
mortgaged, pledged, encumbered or otherwise transferred, by operation of law or
otherwise, and that the Premises will not be sublet or advertised for subletting
or occupied, by anyone other than Tenant, or for any purpose other than as
hereinabove set forth, without the prior written consent of Landlord, not to be
unreasonably withheld.

11. Landlord's Repairs: The Landlord shall maintain and keep in good
condition and repair the roof, supporting walls, sewage sanitary system and
shall effect repairs necessary. The Landlord shall also maintain and repair
plumbing, mechanical, heating and air conditioning and electrical systems
installed by Landlord, floor and wallcoverings, light fixtures, window frames
and glass, window blinds, doors, door locks, and security systems, if any.
Pursuant to Paragraph 4 Tenant is obligated to pay Landlord it's proportionate
share of any such costs. However, the Landlord shall not be responsible for such
maintenance and repairs in the event the same are required as a result of the
negligence or willful act of the Tenant or its clients, customers, licensees,
assignees, agents, employees or invitees and further, in any such event, the
cost of such maintenance and repairs so required shall be the sole
responsibility of the Tenant.

12. Tenant's Repairs/Alterations: The Tenant shall submit to the Landlord
for Landlord's prior written approval all of the plans and specifications for
any structural alterations, additions or improvements in and to the Premises All
such alterations, additions or improvements shall be made in accordance with
applicable city, county, state and federal laws and ordinances, and building and
zoning rules and regulations. Tenant shall be liable for all damages or injuries
which may result to any person or property by reason of or resulting from any
alterations, additions or improvements made by it to the Premises and shall hold
the Landlord harmless with respect thereto. All additions and improvements made
by the Tenant shall become a part of the Premises and shall, upon the
termination or expiration of this Lease, belong to the Landlord.

At Landlord's option, Landlord may require that Tenant remove any or all
alterations or improvements at Tenant's expense upon termination of the Lease.

13. Subordination and Attornment: Tenant agrees that this Lease shall be
subject and subordinate to any mortgages or deeds of trust now or hereafter
placed upon the Premises and to all modifications thereto. Subordination is
conditioned upon non disturbance. Tenant agrees at any time to execute any and
all documents necessary to effectuate this subordination. Tenant agrees to
attorn to the mortgagee, trustee, or beneficiary under any such mortgage or deed
of trust or the purchaser at a sale pursuant to the foreclosure thereof. In the
event of the sale, assignment, or transfer by Landlord of its interest in the
Premises to a successor in interest who expressly assumes the obligation of the
Landlord hereunder, the Landlord shall thereupon be released or discharged from
all of its covenants and obligations hereunder, except such obligations shall
have accrued prior to any such sale, assignment, or transfer; and Tenant agrees
to look solely to any successor in interest of the landlord for performance of
any such obligations.

14. Change in Ownership of Premises: If the ownership of the Premises or
the name or address of the party entitled to receive rent hereunder shall be
changed, the Tenant shall, until receipt of proper notice of such change,
continue to pay the rent and other charges herein reserved accrued and to accrue
hereunder to the party to whom and in the manner in which the last preceding
installment of rent or other charge has paid, and each such payment shall, to
the extent thereof, exonerate and discharge the Tenant.

15. Condemnation: If the whole of the Building or such substantial portion
thereof as will make Premises unusable for the purposes referred to herein
shall, be condemned by any legally constituted authority for any public use or
purpose, then in either of said events the term hereby granted shall cease from
the time when possession thereof is taken by the condemning authority, and
rental shall be accounted for as between Landlord and Tenant as of that date. In
the event the portion condemned is such that the remaining portion can, after
restoration and repair, be made useable for Tenant's purposes, then this Lease
shall not terminate; however, the rent shall be reduced equitably to the amount
of the Premises taken. In such an event, Landlord shall make such repairs as may
be necessary as soon as the same can be reasonably accomplished. Such
termination, however, shall be without prejudice to the rights of either
Landlord or Tenant, or both, to recover compensation and damage caused by
condemnation from condemnor. It is further understood and agreed that neither
the Tenant nor Landlord shall have any rights in any award made to the other by
any condemnation authority.

16. Right of Landlord to Enter: The Tenant agrees that upon reasonable
notice the Landlord or its agents may at all reasonable times enter upon the
Premises for the purpose of inspection or repair of the Building or the Building
systems and such other purposes as Landlord may deem necessary or proper for the
reasonable protection of Landlord's interest in the Premises, the same shall be
done without interference with Tenant's use of the Premises and shall be subject
to Tenant's reasonable requirements concerning security and access. In addition,
the Landlord may enter the Premises upon reasonable notice at all reasonable
times to exhibit the Premises to prospective purchasers. During the three (3)
months immediately preceding the final expiration of the term created hereunder
or any renewal thereof, the Landlord may exhibit the Premises upon reasonable
notice to prospective Tenants and/or affix a notice that the Premises are for
rent; such notice shall not be greater than four (4) square feet in area, and
shall be affixed to a suitable part thereof, exclusive of doors and windows and
so as to not obstruct the Tenant's signs. For the purposes of this paragraph,
the term "Reasonable Notice" shall be defined as a time of not less than 24
hours unless otherwise mutually agreed upon.

17. Taxes: Landlord agrees to pay, before they become delinquent, all
taxes, assessments and governmental charges of any kind and nature whatsoever
(hereinafter collectively referred to as "Taxes") lawfully levied or assessed
against the Building and the grounds, parking areas, driveways and alleys around
the Building, except any taxes attributable to the operation of Tenant's
business or Tenant's property. Pursuant to Paragraph 4 Tenant is obligated to
pay Landlord it's proportionate share of any such costs.

If at any time during the term of this Lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges levied, assessed or imposed on real estate
and the improvements thereof, there shall be levied, assessed or imposed on
Landlord a capital levy or other tax directly on the rents received therefrom
and/or a franchise tax, assessment, levy or charge measured by or based, in
whole or in part, upon such rents for the present or any future building or
buildings on the Premises, then all such taxes, assessments, levies or charges,
or the part thereof so measured or based, shall be deemed to be included within
the term "taxes" for the purposes hereof.

18. Fire and Extended Coverage Insurance: Landlord agrees to keep in force
policies of fire and extended coverage insurance which shall insure the Building
against such perils or loss as Landlord may deem appropriate including vandalism
and malicious mischief, in an amount equal to one hundred percent (100%) of the
replacement cost of the Building and the improvements installed by the Landlord.
Pursuant to Paragraph 4 Tenant is obligated to pay Landlord it's proportionate
share of any such costs.

Tenant agrees to maintain and keep in force, at its expense and throughout
the term hereof, insurance against fire and such other risks as are from
time-to-time included in standard extended coverage endorsements including
vandalism and malicious mischief, insuring Tenant's stock-in-trade, trade
fixtures, furniture, furnishings, floor and wall coverings, special equipment
and all other items of personal property of Tenant located on or within the
Premises and all such other improvements as are made by the Tenant to the
Premises.

Landlord and Tenant hereby mutually release and discharge the other from
loss or damage to the described Premises or the contents, including any
improvements and betterments located in or on the described Premises, to the
extent such loss or damage is insured by the described fire and extended
coverage insurance.

Both Landlord and Tenant agree to furnish the other a certificate of
insurance evidencing the required fire and extended coverage insurance and
giving the certificate holder thirty (30) days notice of intent to cancel,
non-renew or amend such insurance.

If Tenant elects to satisfy this condition by self insuring, it may do so
provided it provides Landlord and Landlord's insurance agent with (1)
documentation establishing values of Tenant installed fixtures, furnishings,
equipment, inventory and process equipment or other material used in Tenant's
operation; (2) provide Landlord with financial statements and other information
evidencing Tenant's financial ability to maintain the Premises and contents as
self insured and (3) that Landlord's attorney shall prepare an agreement
regarding subrogation of claims in the event of a casualty loss of Tenant's
fixtures, furnishings and/or inventory.

19. Damage and Destruction: In the event the Premises are damaged by any
peril covered by standard policies of fire and extended coverage insurance to an
extent which is less than fifty percent (50%) of the cost of replacement of the
Premises, the damage to that portion of the Premises which Landlord is obligated
to insure pursuant to the immediately preceding paragraph hereof, shall promptly
be repaired by landlord, at Landlord's expense but in no event shall Landlord be
required to repair or replace Tenant's stock-in-trade, trade fixtures,
furniture, furnishings, special equipment and personal property which Tenant is
required to insure pursuant to the immediately preceding paragraph hereof. In
the event of such damage and (a) Landlord is not required to repair as provided
herein, or (b) the Premises are damaged to the extent of fifty percent (50%) or
more of the cost of replacement of the Premises, or (c) the Building is damaged
to the extent of fifty percent (50%) or more of the cost of replacement, or (d)
such damage is twenty-five percent (25%) or more of the cost of replacement of
the Premises and the same occurs during the last year of initial term or any
extensions or renewal terms of this Lease, then, in any such event (s), Landlord
may elect either to repair or rebuild the Premises or the Building of which the
Premises are a part, as the case may be, or to terminate this Lease upon giving
notice of such election, in writing, to Tenant within thirty (30) days after the
happening of the event causing such damage.

If such damage, repairing or rebuilding shall render the Premises
untenantable, in whole or in part, a proportionate abatement of the rent and
additional rent stipulated herein shall be allowed from the date such damage
occurred until the date Landlord completes the repairs or rebuilding, said
proportion shall be computed on the basis of the relation which the gross
leasable area of the space rendered untenantable bears to the gross leasable
area of the Premises. If Landlord is required or elects to repair the Premises
as provided herein, Tenant shall repair or replace its floor and wall coverings
pursuant to the terms hereof, in a manner and to at least a condition equal to
that prior to such damage or destruction; in addition, Tenant shall repair or
replace its stock-in-trade, trade fixtures, furniture, furnishings, special
equipment in a manner and to a condition Tenant deems appropriate and adequate
for the conduct of its business within the Premises. In addition, Tenant is
hereby given the sole option to terminate this Lease in the event repairing or
rebuilding to be effected by Landlord and required hereunder cannot be completed
within ninety (90) days from the date of the occurrence of the damage and
destruction.

20. Liability of Landlord: Tenant waives all claims against Landlord for
damages to goods or for injuries to persons on or about the Premises or common
areas from any causes arising at any time other than damages or injuries
directly resulting from Landlord's negligence. The Tenant will indemnify
Landlord on account of any damage or injury to any persons, or to the goods of
any person, arising from the use of the Premises by the Tenant, or arising from
the failure of Tenant to keep the Premises in good condition as provided herein.
The Landlord shall indemnify Tenant on account of any damage or injury to any
persons, or to goods of any person, arising from the use of the Premises by the
Landlord. Landlord shall not be liable to the Tenant for any damage by or from
any act of negligence of any other occupancy of the same Building. The Tenant
agrees to pay for all damages to the Building, as well as all damage or injuries
suffered by Tenant or occupants thereof caused by Tenant's negligence.

Landlord is specifically not responsible under any circumstance for any
damage to any computer, computer component, or computer peripheral, hardware or
software damaged by any interruption, usage or variation for whatever reason in
the electrical distribution system in the building, unless resulting from
Landlord's negligence.

21. Liability Insurance: In addition to the policies of fire and extended
coverage insurance to be kept and maintained by Landlord and Tenant pursuant to
paragraph 18 hereinabove, Landlord and Tenant shall each obtain and keep in
force during the term hereof and any extension or renewal terms, policies of
commercial general liability providing bodily injury and property damage
liability with combined single limits of not less than One Million Dollars
($1,000,000.00). The Tenant shall, in addition, name the Landlord as additional
insured under such liability policy. Pursuant to Paragraph 4 Tenant is obligated
to pay Landlord it's proportionate share of any such costs.

Both Landlord and Tenant agree to furnish the other a certificate of
insurance evidencing the required liability coverage and giving the certificate
holder thirty (30) days notice of intent to cancel, non-renew or amend such
insurance.

22. Parking: Landlord shall make available to Tenant, seventy five (75)
parking spaces for visitors and employees which will be provided on the lot upon
which the Building is constructed.

23. Signs: Landlord agrees that Tenant shall install its Tenant signage and
logo in a manner consistent with the sign ordinance of City of Winston Salem
Forsyth County Unified Development Ordinance.

24. Utilities: Tenant shall pay for water and sewer used within the
Premises. Tenant shall pay its separately metered charges for electricity and
gas used within the Premises.

25. Janitorial Services: Tenant shall provide janitorial services to the
interior of its Premises.

26. Extermination: The Landlord shall provide pest control service within
the Premises and Tenant shall pay the cost for this service. Pursuant to
Paragraph 4 Tenant is obligated to pay Landlord it's proportionate share of any
such costs.

27. Plate Glass Breakage: Landlord shall be responsible for repair and
replacement in the event of plate glass damage or breakage, except in the event
of negligence of Tenant. Pursuant to Paragraph 4 Tenant is obligated to pay
Landlord it's proportionate share of any such costs unless such damage or
breakages is due to negligence of Landlord.

28. Garbage Removal: Landlord will be responsible for providing a dumpster
for garbage and arrange for its systematic pickup. Pursuant to Paragraph 4
Tenant is obligated to pay Landlord it's proportionate share of any such costs.

29. Fire Extinguishers: In the event a fire extinguisher is provided by
Landlord on the Premises, Landlord shall be responsible for the maintenance
thereof. Pursuant to Paragraph 4 Tenant is obligated to pay Landlord it's
proportionate share of any such costs.

30. Storing of Flammable Materials: The Tenant agrees that it shall not
store nor shall it use any dangerous and/or flammable material(s) within or
around Premises in a manner which violates any law or which may cause the costs
incurred by Landlord with respect to taxes and insurance regarding the Premises
to increase in which case Tenant shall bear the cost of any such increase.

31. Replacement of Light Bulbs: The Landlord shall replace all light bulbs
within Premises. Tenant shall pay the cost of said replacement. Pursuant to
Paragraph 4 Tenant is obligated to pay Landlord it's proportionate share of any
such costs.

32. Removal of Tenant's Fixtures: The Tenant shall have the privilege at
any time, on or before vacating the Premises, of removing any or all of its
personal property, equipment and fixtures, and Tenant shall repair any damages
caused by the removal thereof and shall leave the Premises in good and clean
condition and repair.

33. Default by Tenant: In the event Tenant shall fail to pay monthly rental
by the tenth (10th) day of the month for three consecutive months or four times
during a twelve month period; or if Tenant is adjudicated a bankrupt; or if
Tenant files a petition on bankruptcy under any section or provision of the
bankruptcy law; or if an involuntary petition in bankruptcy is filed against
Tenant, and same is not withdrawn or dismissed within sixty (60) days from the
filing thereof; or if a receiver or trustee is appointed for Tenant's property
and the order appointing such receiver or trustee remains in force for thirty
(30) days after the entry of such order; or if, whether voluntarily or
involuntarily, Tenant takes advantage of any debtor relief proceedings under any
present or future law, whereby the rent or any part thereof is, or is proposed
to be, reduced or payment thereof deferred; or if Tenant makes an assignment for
the benefit of creditors; or if Tenant's effects should be levied upon or
attached under process against Tenant, not satisfied or dissolved within thirty
(30) days after written notice from Landlord to tenant to obtain satisfaction
thereof; or if Tenant shall vacate or abandon the Premises; or if Tenant shall
fail to perform or observe any other covenant, agreement, or condition to be
performed or kept by the Tenant under the terms and provisions of this Lease,
and such failure in any one such event shall continue for thirty (30) days after
written notice thereof has been given by Landlord to Tenant; then in any one of
such events, Landlord shall have the right, at the option of the Landlord, then
or at any time thereafter while such default or defaults shall continue, to
elect either: (1) to cure such defaults at the expense of Tenant and without
prejudice to any other remedies which Landlord might otherwise have, any payment
made or expenses incurred by Landlord incurring such default shall bear interest
thereon at eighteen percent (18%) per annum, or at such maximum legal rate as
permitted by North Carolina law, whichever shall be lower, to be and become
additional rent to be paid by Tenant with the next installment or rent falling
due thereafter; or (2) to re-enter the Premises and dispossess Tenant and anyone
claiming under Tenant, by summary proceedings pursuant to the laws of the State
of North Carolina, and remove their effects, and take complete possession of the
Premises and either (i) declare this Lease forfeited and the term ended, or (ii)
elect to continue this Lease in full force and effect, but with the right at any
time thereafter to declare this Lease forfeited and the term ended; or (iii)
exercise any other remedies or maintain any action permitted to Landlord
pursuant to the laws of the State of North Carolina, or any other applicable
laws. In such re-entry the Landlord may, under process of law, have all persons
and Tenant's personal property removed from the Premises. Tenant hereby
covenants in such event of default for itself and all others occupying the
Premises under Tenant, to peacefully yield up and surrender the Premises to the
Landlord. Should Landlord justifiably declare this Lease forfeited and the term
ended subject to due process, the Landlord shall be entitled to recover from
Tenant the rental and all other sums due and owing by Tenant to the date of
termination, plus the costs of curing all of Tenant's defaults existing at or
prior to the date of termination, plus the deficiency, if any, between Tenant's
rental hereunder and the rental obtained by Landlord on another Lease for the
balance of the term remaining under this Lease should Landlord, following
default as aforesaid, elect to continue this Lease in full force. Landlord shall
use its best efforts to rent the Premises by private negotiations, with or
without advertising and on the best terms available for the remainder of the
term hereof, or for such longer or shorter period as Landlord shall deem
advisable. Tenant shall remain liable for all rentals and other charges and
costs imposed on Tenant herein, in the amounts, at the times and upon the
conditions as herein provided, but Landlord shall credit against such liability
of the Tenant all amounts received by Landlord from such reletting after first
reimbursing itself for all costs incurred in curing Tenant's defaults and
re-entering, preparing and refinishing the Premises for reletting, and reletting
the Premises, and for the payment of any procurement fee or commission paid to
obtain another Tenant, and for all attorney fees and legal costs incurred by
landlord.

34. Re-Entry by Landlord: No re-entry by Landlord or any action brought by
Landlord to oust Tenant from the Premises shall operate to terminate this Lease
unless Landlord shall give written notice of termination to Tenant, in which
event Tenant's liability shall be as above provided. No right or remedy granted
to Landlord herein is intended to be exclusive of any other right or remedy, and
cumulative and in addition to any other right or remedy hereunder or now or
hereafter existing in law or equity or by statute. In the event of termination
of this Lease, Tenant waives any and all rights to redeem the Premises either
given by any stature now in effect or hereafter enacted.

35. Waiver of Rights: No waiver by Landlord or Tenant of any provision
hereof shall be deemed to be a waiver of any other provision hereof or of any
subsequent breach by Tenant of the same or any other provision. Landlord's
consent to or approval of any act shall not be deemed to render unnecessary the
obtaining of Landlord's consent to or approval of any subsequent act by Tenant.
The acceptance of rent hereunder by Landlord shall not be a waiver of any
preceding breach by Tenant of any provision hereof other than failure of Tenant
to pay the particular rent so accepted regardless of Landlord's knowledge of
said preceding breach at the time of acceptance of such rent.

36. Notices. All notices and demands of any kind which Landlord and Tenant
may be required to give or serve upon the other party may be given and shall be
deemed to have been given by depositing one copy of it in the United States
Mail, postage paid, certified mail, return receipt requested, addressed as
follows:

LANDLORD: Visible Goth, LLC
c/o JDL Castle Corporation
P.O. Box 1395
Winston-Salem, NC 27102

TENANT: Frisby Technologies, Inc.
Attn.: Greg Frisby
77 East Main Street Suite 2000
Bay Shore NY 11706

Either party may in addition deliver written notice by hand delivery.
Further, the parties hereto may give or receive notice by or from their
respective attorneys and may, by like notice, designate a new address to which
subsequent notice shall be directed.

37. Compliance with Laws: Tenant shall promptly execute and comply with all
laws, ordinances, rules regulations and requirements of any or all federal,
state and municipal authorities having jurisdiction over the manner in which the
Tenant's business is conducted, but only insofar as these laws, ordinances,
rules and regulations and requirements are violated by the conduct of Tenant's
business.

38. Surrender: Upon the termination of this Lease or any extensions or
renewals hereof, the Tenant shall surrender the Premises in good and clean
condition and repair as when received, excepting only normal wear and tear and
damage by fire and other casualty damage covered by insurance and paid to
Landlord. Tenant shall not remain in the Premises without the benefit of a
written Lease or Renewal Agreement executed by the parties hereto prior to the
expiration of the then existing term. No other holding over of the Premises
shall be allowed on any basis whatsoever, except as otherwise herein provided.

39. Holdover: In the event Tenant remains in possession of the leased
Premises after the expiration of the term of this Lease, without having first
extended this Lease by written agreement with Landlord, and without either party
realizing the term of this Lease has expired, such holding over shall not be
construed as a renewal or extension of this Lease. Such holding over shall be
deemed to have created and be construed as tenancy from month to month,
terminable on 30 days notice in writing from either party to the other. The
monthly rental to be paid shall be the same monthly rental payable during the
last month of the term of the Lease. All other terms and conditions of this
Lease shall continue to be applicable for both Landlord and Tenant.

If Tenant fails to surrender the Premises to Landlord on expiration of the
term as required by this paragraph, Tenant shall hold Landlord harmless from all
damages resulting from Tenant's failure to surrender the Premises, including
without limitation, claims made by the succeeding Tenant resulting from Tenant's
failure to surrender the Premises.

40. Liens: Unless an unsafe condition exists which Landlord is unable or
refuses to repair or replace in a timely manner, if Tenant shall cause any
material to be furnished to the Premises or labor to be performed thereon or
therein, Landlord shall not under any circumstances be liable for the payment of
any expenses incurred or for the value of any work done or material furnished.
All such work shall be at Tenant's expense and Tenant shall be solely and wholly
responsible to all contractors, laborers, and material men furnishing labor and
material to the Premises. Nothing herein shall authorize the Tenant or any
person dealing through, with or under Tenant to charge the Premises or any
interest of the Landlord therein or this Lease with any mechanic's liens or
other lien or encumbrance whatever. On the contrary, (and notices is hereby
given) the right and power to charge any lien or encumbrance of any kind against
the Landlord or its estate is hereby expressly denied.

41. Benefits, Burdens and Entire Agreement: This Lease is binding on and
benefits the parties hereto and their respective heirs, legal representatives,
successors, nominees and assigns. Liabilities hereunder shall be joint and
several upon all who sign this agreement. Throughout this agreement the
masculine gender shall be deemed to include the feminine, the feminine the
masculine, the singular the plural and the plural the singular.

This Lease contains the entire agreement between the parties hereto with
respect to the Premises leased hereunder; further this Lease may not be
modified, altered or amended, except by an instrument in writing, executed by
the parties hereto or their respective heirs, legal representatives, successors,
nominees or assigns and which instrument shall be attached hereto as an
amendment to this Lease and shall thereby become a part hereof.

42. Attorney's Fees: If either the Landlord or Tenant files an action to
enforce any agreement contained in this Lease, or for breach of any covenant or
condition, the prevailing party in any such action, shall be reimbursed by the
other party for reasonable attorneys' fees in the action.

43. Governing Law: This Lease shall be governed by and construed under the
laws of the State of North Carolina.

44. Estoppel Certificates: Tenant may be required, from time to time, to
execute and deliver to Landlord a similar certificate for purpose of
refinancing, syndication, sale of property, etc. In such event, Tenant shall
have ten (10) days from its receipt thereof from Landlord to execute and deliver
such fully executed certificate to Landlord. Tenant's failure to execute said
certificate shall constitute a default hereunder.

45. Non Compete Clause: Landlord shall not lease any space in the Building
which houses Frisby Technologies, Inc. to any competitor engaged in the research
and/or manufacture of thermal management products.

46. Termination of Lease Agreement: Tenant shall have the right to
terminate this Lease at the end of the twelfth (12th) year upon notice given to
Landlord at the end of the eleventh (11th) Lease year. Tenant will remain in
possession of this space during the twelfth (12th) Lease year following notice.

47. Frisby Technologies, Inc. Option to Renew: Provided Tenant is not in
default hereunder, the term of this Lease may be extended at the option of the
Tenant for periods of time not less than five (5) years nor greater than ten
(10) years per option period. Each such option shall be exercised by written
notice to Landlord on or before the end of next-to-last Lease year of the
initial term or renewal term then in effect. The rental payments for each option
period shall be subject to negotiations immediately following Landlord's receipt
of renewal request notice.

(SIGNATURE PAGE TO FOLLOW)

<PAGE>

IN TESTIMONY WHEREOF, this lease has been executed by the parties hereto, in
duplicate originals, as of the date first above written.

Frisby Technologies, Inc., TENANT

BY: /s/ Gregory S. Frisby(SEAL)
---------------------------
Greg Frisby, President

ATTEST:/s/ Douglas McCrosson
---------------------
Secretary

NEW YORK
COUNTY OF SUFFOLK

I, Andrew B. Siben, Notary Public for said County and State, certify that
personally came before me this day and acknowledged that he/she is the Secretary
of Frisby Technologies, Inc. the foregoing instrument was signed in its name by
its Chairman sealed with its corporate seal, and attested by as its Secretary.

Witness my hand and official seal, this the 12th day of January, 1999.

(Official Seal) Notary Public

My commission expires December 31, 1999. /s/Andrew B. Siben
------------------

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

Visible Goth, LLC., LANDLORD

/s/ W. David Shannon
- - ------------------------------------------
W. David Shannon (SEAL)
Managing Member

STATE OF NORTH CAROLINA
COUNTY OF FORSYTH

I, Mary Ann Crump, a Notary Public in and for the aforesaid County and
State do hereby certify that W. David Shannon personally appeared before me this
date and acknowledged the due execution of the foregoing instrument for the
purpose therein expressed.

WITNESS my hand and Notarial Seal, this the 15th day of January, 1999.

My Commission Expires: November 9, 2001

<PAGE>

EXHIBIT "A"

(Survey)

This exhibit is appended to the Lease Agreement for reference purposes and will
be substituted for an Exhibit "A" which shall show the construction site plan
and legal description for the leased premises.

<PAGE>

EXHIBIT "B"

WORK LETTER AGREEMENT AND SPECIFICATIONS
FRISBY TECHNOLOGIES, INC. LEASE PREMISES
FRISBY TECHNOLOGIES CENTER

BUILDING EXTERIOR

Structure

The building is steel with brick masonry cladding.

Glass

Windows areas will consist of an aluminum framing system pre-finished
with a color selected to compliment the building facade as shown on
the attached elevation. Glass will consist of double pane insulated
units to enhance mechanical performance and compliment the building
exterior.

Landscape/Hardscape/Courtyard/Patio

The site shall contain amenities including hardscaping of sidewalks
and appropriate landscape. Landscaping shall compliment the building
and its surroundings and will be at a minimum consistent with the
appearance of other buildings in the Park.

CEILINGS AND INTERIOR FINISHES

Ceilings must be at least nine feet (9') in offices clear from floor to the
lowest obstruction. With the exception of areas shown on finished schedule,
ceilings will receive acoustical treatment. Protrusions of fixtures into traffic
ways shall be avoided. Ceiling will be 15' in sections 1a, 8, 9, 17, 19, 20 and
25. Ceiling will be 10' in Section 13a, 14a & 15. Ceiling will be 18' in Section
16. Ceilings must be a flat plane in each room and suspended with fluorescent
recessed fixtures and finished as follows.

Restrooms: Acoustical tile or lay in panels with textured or patterned
surface.

Offices and Conference Rooms: Acoustical tile or lay in panels with
textured or patterned.

Breakroom Areas: Acoustical tile will be provided.

CORRIDORS/OPEN OFFICES

Wall Coverings

Prior to occupancy, all wall space will be covered as provided for in
the attached finish schedule.

Doors: Exterior

Exterior doors must be 8 ft high heavy duty, full flush, hollow steel
construction, insulated tempered glass. Exterior doors shall be
weather-tight, equipped with automatic door closures and open outward.
Hinges, pivots, and pins shall be installed in a manner which prevents
removal when the door is closed and locked.

Doors: Interior

Doors will have heavy duty hardware with hardware stops. Building
standard doors shall be 8 ft high solid core wood with lever hardware.
Passage locks will be provided. Doors to private offices shall be
master keyed. Hardware for doors in the means of egress shall conform
to NFPA Standard No. 101.

Partitions

Partitions and dividers will be provided as shown on floor plans
attached.

Partitions: Permanent

Permanent partitions will be provided as necessary to surround
corridors, toilet rooms and janitor closets and will extend from the
structural slab to the structural ceilings above.

Partitions: Subdividing

Office subdividing partitions will extend from the finished floor to
the finished ceiling.

FLOOR COVERING AND PERIMETERS

Floor covering may be either resilient flooring, carpet or wood as shown on
finished schedule.

Office Areas/Carpet: Prior to occupancy carpet will cover all office
areas as shown on the attached Finished Schedule.

Breakroom/Wet Lab/Lounge/QA: Resilient flooring will be used in these
areas.

Executive Restrooms: Three (3) executive restrooms will be provided.
Restrooms shall have ceramic tile.

Toilet Service Areas: Ceramic tile or VCT shall be used in all toilet
areas.

Carpet - Physical Requirements:

Carpet pile construction: Level loop, textured loop, level cut pile,
or level cut/uncut pile

Pile weight: Twenty-eight (28) ounces per square yard

Secondary Back: Synthetic fiber or jute for glue-down installation.

Static Buildup: 3.5 KV maximum with built-in static dissipation is
recommended: "Static-Controlled" is acceptable.

Carpet - Installation: Carpet must be installed in accordance with
manufacturing instructions to lay smoothly and evenly.

DRINKING FOUNTAINS

The Lessor shall provide 2 or more drinking fountains.

RESTROOMS on each floor. Each toilet room shall have sufficient water closets
enclosed with stall partitions and doors, urinals (in Men's Room), and hot and
cold water. Two shower stalls shall be provided in each restroom. Water closets
and urinals shall not be visible when the exterior door is open. Each main
toilet room shall contain:

Equipment:

A lavatory for each water closet.

A single full width mirror spanning the entire distance from sink to sink

3GCFI plugs along the sink bank in each restroom

A continuous shelf located approximately 18 inches above sink height for
placement of toiletries.

A toilet paper dispenser in each water closet stall

A dual access partition mounted dual roll toilet paper dispenser stainless
steel for each water stall

A coat hook on inside face of door to each water closet stall

One (1) paper towel dispenser, and waste receptacle at each end of both the
Woman's and Men's lavatories

One surface mounted horizontal liquid soap dispenser for each lavatory

One recessed dual napkin/tampon dispenser and disposal in each Women's
lavatory

A recessed toilet seat covers dispenser in each water stall

Full continuous vanities with cabinets will be provided in each restroom
spanning the entire distance from sink to sink. (Material and colors TBD.)

Fixtures including ceramic tile.

EXECUTIVE RESTROOMS

Landlord shall provide three (3) executive restrooms. Restrooms shall
have superior finishes including ceramic tile floor, vinyl covered wall
covering, incandescent can lights, commode, sink, vanity and restroom
fixtures.

HEATING AND AIR CONDITIONING

A new heating and air conditioning system shall be installed sized to
accommodate load required and ducted to provide distribution in accordance with
the floor plan attached.

Zone Control: Individual air control will be provided for 12 zones. All
areas will be equipped with override controls for extended hours of
operation.

VENTILATION

Outside air shall be provided to all office space for a minimum of fifteen (15)
cubic feet per minute (CFM) for each person or 0.2 CFM per square foot,
whichever is greater. Economizer cycle free cooling, using outside air, may be
used for cooling.

ELECTRICAL: GENERAL

The Lessor shall be responsible for meeting the applicable requirements of the
National Electric Code, the National Electric Safety Code, Standards of the
National Electric Manufacturers' Association, Insulated Power Cable Engineers'
Association, the American Institute of Electrical Engineers, and local codes and
ordinances. Main service facilities will be enclosed. Distribution panels must
be circuit breaker type with twenty percent (20%) spare power load and circuits.

LIGHTING: INTERIOR

Low brightness, parabolic type 2' x 4' fluorescent fixtures using no more than
2.0 watts per square foot shall be provided and shown on Plan
Notes/Specifications to be provided.

Ballasts are to be rapid - start, thermally protected, voltage regulating type,
UL listed and ETL approved.

CEO Office, CFO Office and Executive Station, Board Room, Reception and Display
in each area recessed incandescent lights as appropriate.

CEO and executive area closet, a light will be provided inside.

Storage, open lab and warehouse area shall be lit with surface mounted
fluorescent fixtures. Open lab will have a higher level of lighting.

Building entrances and parking areas will be lighted.

JANITORIAL SERVICES

Will be located by the loading dock and contain a plumbing and a wash-sink.

NETWORK ROOM

Shall be located by the Mechanical room and have air conditioning piped directly
in.

PORTABLE FIRE EXTINGUISHERS

Portable type fire extinguishers meeting requirements of NFPA Standard No. 10
shall be provided. Inspection (quick check) and maintenance (thorough check) of
these extinguishers shall be done in accordance with NFPA Standard No. 10.

EXIT AND EMERGENCY LIGHTING

Emergency lighting must provide at least 0.5 foot candle of illumination
throughout the exit path, including exit access routes, or other routes such as
passageways to the outside of the building.

FIRE SYSTEM

Shall include sprinklers and smoke detectors were applicable.

LAN/WAN TELEPHONE DATA, ETC.

The Lessor will provide the required conduit.

ELECTRICAL

Engineering/Marketing: Each station has three duplex receptacles (one dedicated
and two shared) either wall fed or power pole. Landlord will provide 3 linear
feet of overhead and base cabinets with sink.

Administrative: Each station had three duplex receptacles (one dedicated and two
shared). Four stations can be fed from each doghouse or power pole connection.
Four (4) doghouse connector feeds are required. The A coffee machine and
refrigerator will be placed in this area. The Lessor will provide matching
built-ins for floor and overhead cabinets approximately six (6) feet long and
three (3) feet deep and will consist of a wet-sink with hot and cold running
water. The unit will be installed in the file, fax repro room adjacent to the
Administration area. It will also have running hot and cold water.

Reception: Reception and desk will be installed by Tenant between two single
door entries from reception to lease space. It will require 38 inches of
clearance from the sheet rock wall to the corner containing the lateral file.
The feeds will be installed by routing or using flat wire. Additional
requirements for seating area will be required.

CEO Administration: Feed to be determined . Landlord will provide three linear
feet of overhead and base cabinets with sink.

Typical Office Layout for VP's, Directors and Managers: Typical layout will
require two duplex receptacles located on the same wall as the U shaped station
and additional duplex receptacles for credenza and chairs.

File Room, Fax, Repro, etc. Each will require duplex receptacles for fax, repro,
coffee machines, etc., in addition to normal requirements.

Break Room: Will require outlets for coffee machine, microwave, refrigerator,
etc. Landlord will provide six linear feet overhead and base cabinets with sink
in the breakroom.

Conference Rooms: Provide floor mounted duplex receptacles to allow power to
desk unit location to be confirmed via furniture layout. Board Room: Provide two
(2) doghouse connectors to provide power to conference room via under table
connections.

CEO's Office: Provide floor mounted duplex receptacles to allow power to desk
unit location to be confirmed via furniture layout and workstation to be located
behind the desk.

Dock Level Freight: Freight will be brought directly from the dock into the
Warehouse through a roll up door.

Open Lab: Provide blocking and installation and installation for basketball
hoop.

LAB REQUIREMENTS

Loading dock space to accommodate freight trucks (53 foot trailers plus cab)
with floating dock: also, loading ramp for other truck deliveries (2 garage
doors total)

Required Electrical: 600 A service; adequate 110 V outlets for all areas; all
220 V (single phase, 20A except where noted) outlets to have twistlock
receptacles; other special electrical requirements - see below.

Required plumbing: Hook ups for 2 sinks (hot and cold water) for wet lab
benchtop, placement depending on final benchtop layout; hook-ups for water (cold
only) in each hood; hook ups for washing machine and utility sink (open lab).

Required air: 2 hook ups for air in each hood, air stubbed out at least three
places above lab benches top; air stubbed out at least three places in the open
lab, QA and warehouse. Required safety: 2 eye wash stations, one shower, all to
be located in wet lab area near hoods; fire extinguishers and sprinkler system
per code.

Wet Lab Area: Approximately 50 ft of wall space will be needed for benchtop
furniture with two corners. Electrical wire molding to be run 44 inches off the
floor (above the benchtop); this wire molding to carry (at least) three separate
110 circuits and one 220 circuit (twistlock receptacles for 220 V service) air
access; tiled floor with drains; separate AC zone

QA Area: 110 V in walls; air access; tiled floor with drains; separate AC zone

Open Lab Area: 110 V and 220 V in walls around periphery; exact number depends
on area and wall space. High ceiling ideal (greater than 15 feet ) to
accommodate racks to hold products; access; separate AC zone; special 100A
service to be located here (see below) to operate shop machinery.

SPECIAL REQUIREMENTS/EQUIPMENT: Provided by Tenant. Landlord to provide outlets.

Environmental Chamber (Walk-In)

o To be placed in open lab area
o Overall dimensions: 196 inch width* 152 inch depth*106 inch height
o Electrical: 460V, 3 phase 60 HZ 100 A service
o Plumbing: .075 inch NPT (one inlet, one outlet) cooling water
o Plumbing: .075 inch FPT (one inlet, one outlet) humidity water
o Drain: 1.00 inch PVC socket (minimum three outlets)
o Vent connection: flanged fitting for dryer air

Air Compressor; 240 V 3 phase, 30 A service; lines to open lab QA, wet lab,
and warehouse areas; separate room or storage area to house unit (due to noise)
or locate outside.

Lab Hood Venting: Circular duct needed for two fumehoods to draw air
outside: one eight inch duct (35 CFM exhaust) and one ten inch duct (1100 CFM
exhaust at 0.1 inches w.g. static pressure.

Washing Machine and Dryer (excellent residential quality grade): standard
plumbing and electrical requirements. Landlord will provide washing machine and
dryer.

Provide 40 volt three phase 200 amp service panel in warehouse.

Chiller. 240 V 3 phase, 100 A service needed to accommodate 15 ton chiller
in open lab (ideally located near penetrable outside wall).

Exhaust Fan: Depending on building layout, one wall mounted exhaust fan may
be needed in open lab or special ventilation accommodation should be made for
open area. Landlord will install.

Provide 460 volt 3 phase 200 amp service panel in warehouse.

SECURITY SYSTEM

Landlord shall provide a security system that includes coded card entry at all
external and internal entrances accessible to the public and which is
consistent
with the requirements contracted for during June and July 1998 with Radar
Security Alarm, Inc., Winston-Salem, NC.

ALLOWANCES
Sign: $ 6,000.00
Lobby $ 15,000.00
CEO/Board Room $ 10,000.00

The total of $31,000.00 to be used at Tenant's discretion.

<PAGE>

EXHIBIT "C-2"

Marked up copy of Building Floor Plan Schematic marked by Tenant to show
proposed changes which will be incorporated into construction drawings.

<PAGE>

Frisby Technologies Inc.
Facility Finish Schedule

ID ITEM FLOOR WALL CVR
- - -- ---- ----- --------
1a CEO Oak V
1b CEO Bath CT V
1c CEO Closet Oak P
2 CFO Oak V
3 VP Carpet P
4 Directors Carpet P
5 Managers Carpet P
6a Engineering Carpet P
6b Fileroom/Fax VCT P
7a Administrative Carpet P
7b Fileroom/Fax VCT P
8a Executive Station Oak P
9 Boardroom Oak V
10 Breakroom VCT P
11a Conference Room Carpet V
(Exec. Area)
11b Conference Room Carpet V
(Eng./Mktg Area)
12 Executive Baths CT V
13a Wet Lab VCT P
13b Lab Office (Wet) VCT P
14a Dry Lab VCT P
14b Lab Office (Dry) VCT P
15 Small Open Lab VCT P
16 Open Lab (Large) Oak/VCT P
17 Warehouse Cement P
18 Warehouse Office VCT P
19 Reception Oak V
20 Display Oak V
21 Environmental VCT P
Chamber Area
22 General Washroom CT P
(M/F)
23 Janitorial VCT P
24 Network Room VCT P
25 Executive Reception Oak P
Area
26 Short Hallway to Oak P
Restroom &
Breakroom

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-95437) pertaining to the 1998 Stock Option Plan of Frisby
Technologies, Inc. of our report dated January 27, 2000, except for Note 12, as
to which the date is April 14, 2000, with respect to the consolidated financial
statements of Frisby Technologies, Inc. included in its Annual Report (Form
10-KSB) for the year ended December 31, 1999.

/s/Ernst & Young LLP

Winston-Salem, North Carolina
January 27, 2000, except for Note 12,
as to which the date is April 14, 2000

<ARTICLE> 5
<CIK> 0001051904
<NAME> FRISBY TECHNOLOGIES, INC.

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-31-1999
<CASH> 1,171,579
<SECURITIES> 0
<RECEIVABLES> 1,909,436
<ALLOWANCES> (60,000)
<INVENTORY> 1,097,049
<CURRENT-ASSETS> 4,677,884
<PP&E> 1,030,023
<DEPRECIATION> (425,102)
<TOTAL-ASSETS> 8,419,847
<CURRENT-LIABILITIES> 2,721,079
<BONDS> 0
0
0
<COMMON> 5,748
<OTHER-SE> 4,272,770
<TOTAL-LIABILITY-AND-EQUITY> 8,419,847
<SALES> 5,528,437
<TOTAL-REVENUES> 6,237,900
<CGS> 4,490,693
<TOTAL-COSTS> 5,196,990
<OTHER-EXPENSES> 6,847,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (178,679)
<INCOME-PRETAX> (5,628,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,628,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,628,306)
<EPS-BASIC> (1.01)
<EPS-DILUTED> (1.01)

</TABLE>