<PAGE>

                  QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS
                 SUBJECT TO THE 1934 ACT REPORTING REQUIREMENTS

                                   FORM 10-QSB

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

     [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2002

                                       OR

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                        Commission File Number: 001-14005

                            FRISBY TECHNOLOGIES, INC.
        (Exact name of small business issuer as specified in its charter)

                     Delaware                          62-1411534
         (State or other Jurisdiction of            (I.R.S. Employer
         Incorporation or Organization)          Identification Number)

                             3195 Centre Park Blvd.
                             Winston-Salem, NC 27107
              (Address of Principal Executive Offices and Zip Code)
                                  336-784-7754
                           (Issuer's telephone number)


Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]

The number of shares outstanding of the issuer's Common Stock, par value $.001
per share, as of November 11, 2002 was 8,896,778.



<PAGE>

                            FRISBY TECHNOLOGIES, INC.


                                      INDEX

<TABLE>
<CAPTION>
                                                                                      PAGE NO.
                                                                                      --------
<S>            <C>                                                                    <C>
Part I         Financial Information

Item 1.        Consolidated Financial Statements

               Consolidated Balance Sheet -- September 30, 2002 (unaudited)               3

               Consolidated Statements of Operations -- Three-Month and
               Nine-Month Periods Ended September 30, 2002 (unaudited) and
               September 30, 2001 (unaudited)                                             4

               Consolidated Statement of Stockholders' Equity -- Nine-Month Period
               Ended September 30, 2002 (unaudited)                                       5

               Consolidated Statements of Cash Flows -- Nine-Month Period Ended
               September 30, 2002 (unaudited) and September 30, 2001 (unaudited)          6

               Notes to Financial Statements -- September 30, 2002 (unaudited)            7

Item 2.        Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                                  14

Item 3         Controls and Procedures                                                    23

Part II        Other Information

Item 1.        Legal Proceedings                                                          24

Item 2.        Changes in Securities and Use of Proceeds                                  24

Item 5.        Other Information                                                          25

Item 6.        Exhibits and Reports on Form 8-K                                           25


               Signatures                                                                 26

               Certifications                                                             27
</TABLE>



                                       2
<PAGE>

                         PART I -- FINANCIAL INFORMATION
                    ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS


                           FRISBY TECHNOLOGIES, INC.
                          Consolidated Balance Sheet
                              September 30, 2002
                                  (unaudited)


<TABLE>
<S>                                                               <C>
ASSETS
Current assets:
Cash and cash equivalents                                         $     95,650
Accounts receivable, less allowances                                 1,283,146
Inventory                                                            1,410,378
Prepaid expenses and other current assets                              253,012
                                                                  ------------
            Total current assets                                     3,042,186
Property and equipment, net                                            352,136
Intangible assets, net                                                 603,081
Other assets                                                           147,974
                                                                  ------------
             TOTAL ASSETS                                         $  4,145,377
                                                                  ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                  $  1,397,798
Accrued expenses and other current liabilities                       1,059,237
License fees payable                                                   112,315
                                                                  ------------
                                                                     2,569,350
Revolving credit facilities - net of debt discount                     808,193
Convertible debt                                                       483,776
                                                                  ------------
            Total current liabilities                                3,861,319

Other liabilities                                                      402,309

Minority interest                                                      (99,745)

Commitments and contingencies                                               --

Stockholders' equity:
Preferred stock, 1,000,000 shares authorized,
      no shares issued and outstanding                                      --
Common stock, $.001 par value; 30,000,000 shares authorized;
      8,875,351 shares issued and outstanding                            8,875
Additional paid-in capital                                          23,667,785
Common stock warrants outstanding                                      940,836
Unearned stock compensation                                            (18,975)
Accumulated deficit                                                (24,617,027)
                                                                  ------------
      Total stockholders' equity                                       (18,506)
                                                                  ------------
            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $  4,145,377
                                                                  ============
</TABLE>



                             See accompanying notes.



                                       3
<PAGE>

                            FRISBY TECHNOLOGIES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                 Three-Month Period Ended           Nine-Month Period Ended
                                                                       September 30                       September 30
                                                               -----------------------------       -----------------------------
                                                                  2002              2001              2002              2001
                                                               -----------       -----------       -----------       -----------
<S>                                                            <C>               <C>               <C>               <C>
Net revenues                                                   $ 1,505,715       $ 2,694,354       $ 5,065,260       $ 6,122,319

Cost of sales                                                    1,577,044         1,790,090         4,517,879         4,208,554
                                                               -----------       -----------       -----------       -----------

Gross profit                                                       (71,329)          904,264           547,381         1,913,765

Operating expenses:
       Sales and marketing                                         457,902           841,355         1,817,356         2,477,495
       General and administrative                                  762,516           752,052         1,895,316         2,158,522
       Other - Goodwill and long-lived asset impairment            321,296                --           321,296                --
                                                               -----------       -----------       -----------       -----------
                                                                 1,541,714         1,593,407         4,033,968         4,636,017

Loss from operations                                            (1,613,043)         (689,143)       (3,486,587)       (2,722,252)

Interest income                                                        534             2,329             2,675            23,536
Interest expense                                                   (71,263)         (133,883)         (191,639)         (260,698)
Other income (expense), net                                            222             2,667             1,258             3,785
Minority interest                                                   37,597            25,996            78,885            44,689
                                                               -----------       -----------       -----------       -----------

Loss before provision for income taxes                          (1,645,953)         (792,034)       (3,595,408)       (2,910,940)
Provision for income taxes                                              --                --                --                --
                                                               -----------       -----------       -----------       -----------

Net loss before cumulative effect of an accounting change      $(1,645,953)      $  (792,034)      $(3,595,408)      $(2,910,940)

Cumulative effect of an accounting change                               --                --          (400,000)               --
                                                               -----------       -----------       -----------       -----------

Net loss                                                       $(1,645,953)      $  (792,034)      $(3,995,408)      $(2,910,940)
                                                               ===========       ===========       ===========       ===========

Net loss per common share - basic and diluted
  before cumulative effect of an accounting change             $     (0.19)      $     (0.11)      $     (0.41)      $     (0.41)
                                                               ===========       ===========       ===========       ===========

Net loss per common share - basic and diluted                  $     (0.19)      $     (0.11)      $     (0.45)      $     (0.41)
                                                               ===========       ===========       ===========       ===========
</TABLE>


                             See accompanying notes.



                                       4
<PAGE>

                            FRISBY TECHNOLOGIES, INC.
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                               Common
                                                              Additional        Stock      Unearned
                                                                Paid-in        Warrants      Stock      Accumulated
                                          Common Stock          Capital       Outstanding Compensation    Deficit          Total
                                   ------------------------   ------------    ----------- ------------  ------------    -----------
                                      Shares       Amount
<S>                                <C>            <C>         <C>             <C>         <C>           <C>             <C>
Balance at December 31, 2001          8,771,656   $   8,772   $ 23,532,941    $  303,800   $ (28,873)   $(20,621,619)   $ 3,195,021

Net Loss                                     --          --             --            --          --      (3,995,408)    (3,995,408)

Issuance of Common Stock
 and Common Stock Warrants
 for services                            90,152          90        180,509        55,176          --              --        235,775

Issuance of Common Stock
 Warrants related to revolving
  credit facility                            --          --             --       581,860          --              --        581,860

Expenses related to the issuance
 and registration of securities              --          --        (59,901)           --          --              --        (59,901)

Amortization of unearned
 stock compensation                          --          --             --            --       9,898              --          9,898

Issuance of Common Stock -
 Employee Stock Purchase Plan            13,543          13         14,236            --          --              --         14,249
                                   ------------   ---------   ------------    ----------   ---------    ------------    -----------

Balance at September 30, 2002         8,875,351   $   8,875   $ 23,667,785    $  940,836   $ (18,975)   $(24,617,027)   $   (18,506)
                                   ============   =========   ============    ==========   =========    ============    ===========
</TABLE>


                             See accompanying notes



                                       5
<PAGE>

                            FRISBY TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                   Nine month period ended
                                                                        September 30,
                                                                  --------------------------
                                                                     2002           2001
                                                                  -----------    -----------
<S>                                                               <C>            <C>
OPERATING ACTIVITIES:
Net loss                                                          $(3,995,408)   $(2,910,940)
Adjustments to reconcile net loss to net cash used in operating
    activities:
Depreciation and amortization                                         243,896        328,771
Non cash consulting and other expenses                                245,673        159,558
Cumulative effect of an accounting change                             400,000             --
Loss on impairment of goodwill and other long-lived assets            321,296             --
Amortization of debt discount                                         140,053        158,823
Provision for doubtful accounts and returns                          (124,427)      (134,533)
    Changes in assets and liabilities:
Accounts receivable                                                   538,185       (828,542)
Inventories                                                           287,216        402,947
Other current assets                                                 (103,390)       (73,646)
Other non-current assets                                              143,583        (70,060)
Accounts payable                                                      158,090        772,943
Accrued expenses and other liabilities                                 22,871       (284,593)
License fees payable                                                   22,083        (83,777)
                                                                  -----------    -----------
Net cash used in operating activities                              (1,700,279)    (2,563,049)
                                                                  -----------    -----------

INVESTING ACTIVITIES:
Purchases of property and equipment                                    (4,043)       (10,733)
Purchase of intangible assets                                         (12,366)       (38,183)
                                                                  -----------    -----------
Net cash used in investing activities                                 (16,409)       (48,916)
                                                                  -----------    -----------

FINANCING ACTIVITIES:
Net proceeds from line of credit                                    1,250,000     (1,453,469)
Net proceeds from convertible debt                                    483,776      1,500,000
Net proceeds from unsecured debt                                     (250,000)       150,000
Proceeds from exercise of stock options                                    --         15,303
Proceeds from employee stock purchases                                 14,249         19,204
Proceeds from private placement                                            --      1,450,800
Payments related to issuance and registration of securities           (59,901)       (71,965)
                                                                  -----------    -----------
Net cash provided by financing activities                           1,438,124      1,609,873
                                                                  -----------    -----------

Net decrease in cash and cash equivalents                            (278,564)    (1,002,092)
Cash and cash equivalents - beginning of period                       374,214      1,024,636
                                                                  -----------    -----------
Cash and cash equivalents - end of period                         $    95,650    $    22,544
                                                                  ===========    ===========
</TABLE>


                             See accompanying notes



                                       6
<PAGE>

                            FRISBY TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2002
                                   (UNAUDITED)

1. Description of Business

        Founded in 1989, Frisby Technologies, Inc. (together with its
subsidiary, the "Company") is engaged in 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) products
utilize licensed patents and the Company's proprietary microencapsulated phase
change material technology to enhance thermal characteristics (i.e., insulation,
cooling or temperature control properties) in a variety of consumer and
industrial products.

        Since its inception, the Company has devoted substantial effort towards
building sales and marketing infrastructure, conducting product research and
development and raising capital. In the course of such activities, the Company
has sustained operating losses and currently expects such losses to continue in
the near future. The Company continues to focus on gaining market acceptance of
its thermal management products and raising capital in order to help finance
operations. The Company's accumulated deficit aggregated $24,617,027 through
September 30, 2002.

        The Company is urgently attempting to secure financing and has taken
steps to minimize operating expenses. In addition, the Company is currently
considering the possibility of a merger and/or the potential sale of some or all
of its assets. No assurance can be given that the Company will be able to
identify a buyer or an acceptable merger partner or will be able to complete
such a transaction on acceptable terms, in a timely manner or at all. In the
event the Company is unable to complete any of the aforementioned transactions
or to secure sufficient financing on acceptable terms or in a timely manner, it
would be unable to continue its operating plan through December 2002 and beyond
and may voluntarily seek protection from its creditors under federal bankruptcy
laws, which would have a material adverse effect on the Company's business,
financial condition and prospects.


2. Basis of Presentation

        The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States and reflect all normal recurring adjustments which, in the opinion
of management, are necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. The preparation of financial statements in conformity with accounting
principles generally



                                       7
<PAGE>

accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates and assumptions.

        The accompanying financial statements should be read in conjunction with
the audited consolidated financial statements of Frisby Technologies, Inc. (the
"Company") as of and for the year ended December 31, 2001 and the notes thereto
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2001, filed with the Securities and Exchange Commission.


3. Summary of Significant Accounting Policies

Net Loss Per Share

        Net loss per share for the three- and nine-month periods ended September
30, 2002 and 2001 is based on the weighted average number of common shares
outstanding during the period in accordance with the Statement of Financial
Accounting Standard ("SFAS") No. 128 "Earnings Per Share."

        Shares used in the computation of net loss per share for the three- and
nine-month periods ended September 30, 2002 were 8,875,149 and 8,862,127,
respectively. Shares used in the computation of net loss per share for the
three- and nine-month periods ended September 30, 2001 were 7,253,361 and
7,109,078, respectively. The number of shares used in the calculation of net
loss per share on a basic and diluted basis is the same. The calculation of
diluted net loss per share excludes shares of common stock issuable upon the
exercise of stock options and warrants, as the effect of such exercises would be
anti-dilutive.

Reclassifications

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


4. Credit Facilities

        On October 25, 2001, the Company executed an unsecured promissory note
evidencing a $250,000 loan made to the Company by Southern Spear, Inc., a
stockholder of the Company, the proceeds of which were used for general working
capital purposes. The note bore interest at a rate of 8% and was payable on the
earlier of 60 days from the date of the note or 5 business days after receipt by
the Company of payment of certain outstanding accounts receivable. The maturity
date of the note was subsequently amended to January 31, 2002, at which time the
note was repaid in full.



                                       8
<PAGE>

        Effective as of January 10, 2002, the Company entered into separate
three-year revolving credit facilities totaling $1,250,000 with two lenders,
DAMAD Holding AG ("DAMAD") and Bluwat AG ("Bluwat"), both of Switzerland. DAMAD
is the parent company of Southern Spear, Inc. Both credit facilities provide
interest at the prime rate plus 75 basis points, payable quarterly, and are
secured by substantially all of the Company's assets and a limited guaranty by
Gregory S. Frisby, the Company's Chairman and Chief Executive Officer, of
one-third of the outstanding loan balance. At September 30, 2002, the Company
was not in compliance with certain covenants required by the credit facilities
and has requested a waiver of compliance from the lenders. Because these waivers
have not yet been received, the indebtedness is classified as a current
liability. The Company currently anticipates that these waivers, should they be
granted would not extend beyond a twelve-month period. If either lender does not
grant a waiver, the Company currently expects that such non-granting lender
would give notice of default to the Company, in which case the Company would
have thirty days to cure the default or, if the Company has undertaken to cure
the default, such longer period as it is diligently prosecuting such cure to the
reasonable satisfaction of the lender. If the default is not cured prior to the
end of the cure period: the entire unpaid balance owed to the lender would
become due and payable; the interest rate, to the extent permitted by law, could
be increased by the lender up to the maximum rate allowed by law, or if none, a
per annum rate of interest equal to the prime rate plus 3.75%; any accrued and
unpaid interest, fees or charges could be deemed by lender to be a part of the
principal balance, with interest to accrue on a daily compounded basis until the
entire outstanding principal and accrued interest is paid in full; and the
lender would have all rights available to it at law or in equity.

        At September 30, 2002, a total of $1,250,000 was outstanding under these
credit facilities. In connection with the credit facilities, DAMAD became
entitled to designate one nominee to the Company's Board of Directors, but did
not designate a nominee for election at the Company's 2002 annual meeting of
stockholders. The lenders received five-year warrants to purchase an aggregate
of 868,055 shares of the Company's common stock at an exercise price of $1.44
per share, subject to adjustment in the event of certain dilutive issuances by
the Company. The warrants were assigned a fair value of $581,860. This value was
calculated by computing the relative fair value of the warrants and the related
issued debt. The fair value of the warrants was initially calculated using the
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 2.5%; no dividend yield; volatility factor of the expected market price
of the Company's common stock of 0.60 and an expected life of the warrants of 2
years.

        Effective as of June 3, 2002, the Company entered into separate two-year
revolving credit facilities totaling a maximum of $600,000. The credit
facilities were provided in equal parts by two current stockholders of the
Company based in Luxembourg, MUSI Investments S.A. ("MUSI") and Fin.part
International S.A. ("Fin.part"), a wholly owned subsidiary of Fin.part. SpA.
Each of the credit facilities accrues interest at the prime rate plus 0.75%, is
available to fund certain employee-related expenses, has a maturity date of June
3, 2004 and is secured by a third security interest in certain of the Company's
assets. On July 24, 2002 the MUSI credit facility was amended to increase the
amount available by $50,000 and to provide some additional flexibility for the
use of proceeds, with all other terms and conditions remaining



                                       9
<PAGE>

unchanged. All or any portion of the outstanding principal and accrued interest
on each of these credit facilities is convertible at the option of the lender
into shares of the Company's common stock based on a conversion price equal to
the lesser of the 30-day trailing average closing price of the common stock on
the NASDAQ stock market on the date of conversion and the then-effective
exercise price of certain warrants issued in connection with the Company's
credit facilities with DAMAD and Bluwat described above. MUSI also has the right
to purchase shares of the Company's common stock in an amount equal to $350,000
less the outstanding principal amount converted or convertible under its credit
facility, at a per share price equal to the conversion price, and Fin.part also
has the right to purchase shares of the Company's common stock in an amount
equal to $300,000 less the outstanding principal amount converted or convertible
under its credit facility, at a per share price equal to the conversion price;
provided that the number of shares issuable in connection with the two credit
facilities, together, shall not exceed 1,764,347 in the aggregate. At September
30, 2002, a total of $483,776 was outstanding under these credit facilities. In
addition, the Company has requested a total of $109,937 of additional advances
from Fin.part in accordance with the terms of its loan agreement but, as of
November 14, 2002, has not yet received these funds.

        At September 30, 2002, the Company was not in compliance with certain
covenants required by the credit facilities and has requested a waiver of
compliance from the lenders. Because these waivers have not yet been received,
the indebtedness is classified as a current liability. The Company currently
anticipates that these waivers, should they be granted, would not extend beyond
a twelve-month period. If either lender does not grant a waiver, the
non-granting lender would be entitled to give notice of default to the Company,
in which case the Company would have thirty days to cure the default or, if the
Company has undertaken to cure the default, such longer period as it is
diligently prosecuting such cure to the reasonable satisfaction of the lender.
If the default is not cured prior to the end of the cure period: the entire
unpaid balance owed to the lender would become due and payable; the interest
rate, to the extent permitted by law, could be increased by the lender up to the
maximum rate allowed by law, or if none, a per annum rate of interest equal to
the prime rate plus 3.75%; any accrued and unpaid interest, fees or charges
could be deemed by lender to be a part of the principal balance, with interest
to accrue on a daily compounded basis until the entire outstanding principal and
accrued interest is paid in full; and the lender would have all rights available
to it at law or in equity.


5. Joint Venture

        During the first quarter of 2000, the Company established Schoeller
Frisby Technologies, GmbH ("SFT"), a joint venture with Schoeller Textil AG, to
expand the distribution of the Company's products in Europe and elsewhere
internationally. The Company owns 51% of the outstanding shares of the common
stock of the joint venture and, accordingly, consolidates the joint venture. The
joint venture began operations in January 2000.

        For the nine-month period ended September 30, 2002, the Company recorded
minority interest income of $78,885 compared to $44,689 for the comparable
period in 2001, which reflects the portion of the losses of SFT that are
applicable to Schoeller Textil AG's minority



                                       10
<PAGE>

interest. The minority interest amount shown as a liability on the Company's
Balance Sheet as of September 30, 2002 represents Schoeller Textil AG's share of
the net liabilities of SFT.

        The Company is currently evaluating its involvement in the joint venture
and has informed Schoeller Textil AG that it may not wish to continue the joint
venture after December 31, 2002. The Company currently expects that termination
of the joint venture would result in a reduction in the Company's total revenues
and gross profits, but would likely not have a material adverse effect on
operating profit or loss of the Company based on the historical losses sustained
by the joint venture. The Company's ability to recoup all or part of its
investment in the joint venture has not yet been determined.


6. Goodwill and Other Intangibles

        In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations (Statement
141), and No. 142, Goodwill and Other Intangible Assets (Statement 142). These
Statements change the accounting for business combinations, goodwill and
intangible assets. Under Statement 142, goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives, but with no maximum life. The amortization provisions of
Statement 142 apply to goodwill and intangible assets acquired after June 30,
2001. With respect to goodwill and intangible assets acquired prior to July 1,
2001, companies are required to adopt Statement 142 in their first fiscal year
beginning after December 15, 2001. Because of the different transition dates for
goodwill and intangible assets acquired on or before September 30, 2001 and
those acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption, whereas new goodwill and
indefinite lived intangible assets acquired after September 30, 2001 will not.
The Company was required to and did adopt Statements 141 and 142 in the third
quarter of 2001, except with respect to the provisions of Statement 142 relating
to goodwill and intangibles acquired prior to July 1, 2001, which was adopted in
the first quarter of 2002. At January 1, 2002 the Company had unamortized
goodwill of approximately $810,000 that was subject to the transition provisions
of the Statements.

        The Company, with the assistance of an outside consultant, completed the
transitional impairment review of goodwill during the third quarter of fiscal
2002 and recorded a non-cash charge of $400,000. The charge was recorded as a
cumulative effect of a change in accounting principle retroactive to the first
day of fiscal 2002, which increased the previously reported net loss per share
for the first quarter of fiscal 2002 from $0.15 to $0.19.

        For purposes of the transitional impairment test, the fair value of each
reporting unit was determined by using a combined discounted cash flow and
market approach. The resulting impairment is primarily attributable to
differences between the fair value approach required under Statement 142 and the
undiscounted cash flow approach that was used to evaluate goodwill under
previous accounting guidance.



                                       11
<PAGE>

        Operating profits and cash flows for one of the Company's reporting
units were lower than expected in the first nine months of fiscal year 2002.
Based on that trend, the Company revised its internal earnings forecast for the
next five fiscal years and, as such, in September 2002, impairment losses of
$305,072 related to goodwill and $16,224 related to patents and trademarks were
recognized. The fair value of the reporting unit was estimated using the
expected present value of future cash flows.

        At September 30, 2002, the Company had unamortized goodwill of
approximately $104,600.

        At September 30, 2002, the Company's intangible assets subject to
amortization consisted of patents and trademarks of $75,807, net of accumulated
amortization of $29,543, and a license agreement of $422,670, net of accumulated
amortization of $281,780. For the nine-month periods ended September 30, 2002
and 2001, the Company recognized amortization expense of $71,609 and $61,738,
respectively. The Company estimates the aggregate amortization expense for each
of the next five fiscal years to be approximately $90,000.

        The following table presents the impact of SFAS 142 on net loss and net
loss per share for the three- and nine-month periods ended September 30, 2002
and 2001:

<TABLE>
<CAPTION>
                                                          Three-Month Period Ended       Nine-Month Period Ended
                                                                September 30,                 September 30,
                                                         ---------------------------    ---------------------------
                                                             2002            2001           2002           2001
                                                         ------------    -----------    ------------    -----------
<S>                                                      <C>             <C>            <C>             <C>
Reported net loss                                        $ (1,645,953)   $  (792,034)   $ (3,995,408)   $(2,910,940)
Adjustments:
  Amortization of goodwill                                         --         26,186              --         78,557
                                                         ------------    -----------    ------------    -----------

Adjusted net loss                                        $ (1,645,953)   $  (765,848)   $ (3,995,408)   $(2,832,383)
                                                         ============    ===========    ============    ===========

Reported net loss per common share - basic and diluted   $      (0.19)   $     (0.11)   $      (0.45)   $     (0.41)
                                                         ============    ===========    ============    ===========

Adjusted net loss per common share - basic and diluted   $      (0.19)   $     (0.11)   $      (0.45)   $     (0.40)
                                                         ============    ===========    ============    ===========
</TABLE>


7. Recent Accounting Pronouncements

        In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (Statement 144), which is effective
for fiscal years beginning after December 15, 2001. This Statement supersedes
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
portions of Accounting Principles Board Opinion No. 30, Reporting Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business.
Statement 144 provides a single accounting model for long-lived assets to be
disposed of and changes the criteria that would have to be met in order to
classify an asset as held for sale. The provisions of Statement 144 generally
are to be applied prospectively. The Company adopted Statement 144 effective
January 1, 2002. The



                                       12
<PAGE>

adoption of Statement 144 did not have an effect on the consolidated results of
operations or financial position of the Company.


8. Commitments and Contingencies

        On September 25, 2001, Outlast Technologies, Inc. ("Outlast") filed a
lawsuit against the Company in United States District Court, District of
Colorado, alleging that the Company's COMFORTEMP(R) nonwovens infringe at least
one claim of a patent exclusively licensed to Outlast, US Patent 5,366,801. In
its answer to the lawsuit, in addition to denying infringement, the Company has
counterclaimed against Outlast for tortious interference with existing and
prospective business relations and/or contracts and also for trade libel.
Currently, the Company is confident that its COMFORTEMP(R) nonwovens do not
infringe any claim of the referenced patent. All dispositive motions have been
briefed and await the court's call for oral argument, which the Company expects
within the next several months.

        On March 28, 2002, Triangle Research and Development Corporation of
Raleigh, North Carolina ("TRDC") and certain of its employees and owners filed a
civil suit in Wake County Superior Court in Raleigh, North Carolina against the
Company and certain of its executive officers alleging breach of contract by the
Company for failure to pay royalties required under its license agreement with
TRDC and seeking damages. The suit also alleges that the Company and the named
executive officers violated federal and state securities laws and engaged in
unfair and deceptive trade practices with regard to the elimination of a put
agreement entered into in connection with a stock option granted to TRDC
pursuant to a September 1998 agreement between the Company and TRDC. On May 29,
2002 the Company and its executive officers submitted their response. In its
Answer and Counterclaims, in addition to denying any wrongdoing by the Company
and the executive officers named in the suit, the Company filed counterclaims
against TRDC and certain of its executive officers alleging breach of contract,
negligence, fraud, and unfair and deceptive trade practices. In August 2002, the
Company and its named executive officers filed a motion to dismiss the unfair
and deceptive trade practices claim as well as the securities laws claims. In
October 2002, the court heard arguments related to the motion to dismiss and has
requested a further hearing, which the Company currently expects to be held in
late November. Currently, the Company believes that the allegations against it
and its individually named executive officers are without merit and intends to
vigorously defend against this lawsuit. An unfavorable outcome in this lawsuit
would, however, likely have a material adverse affect on the Company's business
and financial condition.



                                       13
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS IN THIS SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON
FORM 10-QSB ARE FORWARD-LOOKING IN NATURE AND RELATE TO THE COMPANY'S PLANS,
OBJECTIVES, ESTIMATES AND GOALS. WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "PLANS," "PROJECTS," "FORECASTS," "BELIEVES," AND "ESTIMATES," AND
VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS, IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND SPEAK ONLY AS OF THE
DATE OF THIS REPORT. THE STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ARE
INHERENTLY UNCERTAIN, ARE SUBJECT TO RISKS AND UNCERTAINTIES AND SHOULD BE
VIEWED WITH CAUTION. ACTUAL RESULTS AND EXPERIENCE MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH IN THIS SECTION UNDER
"ADDITIONAL BUSINESS RISKS" AND UNDER "RISK FACTORS" IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-3/A FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MAY 30, 2002 AND, IN ADDITION, THE LEVEL OF ACCEPTANCE OF THE
COMPANY'S THERMAL MANAGEMENT PRODUCTS BY CONSUMERS AND INDUSTRIAL PARTNERS BOTH
DOMESTICALLY AND INTERNATIONALLY AND THE COMPANY'S ABILITY TO IDENTIFY, DEVELOP
AND MARKET NEW PRODUCTS, TO DEVELOP, MAINTAIN OR EXPAND RELATIONSHIPS WITH
CAPABLE SUPPLIERS, TO PROTECT ITS INTELLECTUAL PROPERTY ADEQUATELY AND TO SECURE
CAPITAL AS AND WHEN NEEDED. THE COMPANY MAKES NO COMMITMENT TO UPDATE ANY
FORWARD-LOOKING STATEMENT OR TO DISCLOSE ANY FACTS, EVENTS, OR CIRCUMSTANCES
AFTER THE DATE HEREOF THAT MAY AFFECT THE ACCURACY OF ANY FORWARD-LOOKING
STATEMENT.

OVERVIEW

        The Company develops and markets innovative branded thermal management
products for use in a broad range of consumer and industrial products. The
Company's patented, branded products - COMFORTEMP(R) and Thermasorb(R) thermal
additives - provide thermal balancing benefits in both hot and cold
environments. The Company's current products are used in end-products such as
gloves, boots, athletic footwear, intimate apparel, fashion apparel, performance
outerwear, bedding, medical bracing, protective apparel and food service
delivery products. The Company currently generates revenue primarily from two
sources: (i) sales of its Thermasorb(R) and COMFORTEMP(R) products for use as
component products in its licensees'/customers' finished products and (ii) the
direct sale of selective end-use products containing COMFORTEMP(R) materials.
Revenue is also currently generated from license fees and royalties from the use
of Thermasorb(R) and COMFORTEMP(R) trademarks by licensees/customers in end-use
products. The Company is considering various alternatives which may result in a
shift in focus to one or more of these sources of revenue, which may impact the
Company's cost of sales, gross profit margins, operating expenses and profit or
loss from operations.



                                       14
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
2002 COMPARED WITH THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001.

        REVENUES. Total revenues for the three months ended September 30, 2002
decreased by $1,188,639 to $1,505,715 from $2,694,354 for the three months ended
September 30, 2001. Total revenues for the nine-month period ended September 30,
2002 decreased $1,057,059 to $5,065,260 from $6,122,319 for the nine-month
period ended September 30, 2001.

        Approximate revenue generated by source was as follows:

<TABLE>
<CAPTION>
                                                   Three-month period ended
                                 --------------------------------------------------------
                                 Sept 30, 2002          Sept 30, 2001            Change
                                 -------------          -------------          ----------
<S>                              <C>                    <C>                    <C>
Component products                  1,176,200             1,590,500              (414,300)
End-use products                      312,600             1,103,900              (791,300)
Other                                  16,900                    --                16,900
                                   ----------            ----------            ----------
          Total revenue             1,505,700             2,694,400            (1,188,700)
                                   ==========            ==========            ==========
</TABLE>



<TABLE>
<CAPTION>
                                                  Nine-month period ended
                                  -------------------------------------------------------
                                  Sept 30, 2002         Sept 30, 2001            Change
                                  -------------         -------------          ----------
<S>                               <C>                   <C>                    <C>
Component products                  4,285,700             4,620,600              (334,900)
End-use products                      698,000             1,418,100              (720,100)
Other                                  81,600                83,600                (2,000)
                                   ----------            ----------            ----------
          Total revenue             5,065,300             6,122,300            (1,057,000)
                                   ==========            ==========            ==========
</TABLE>


        The decrease for the quarter in the component products area can be
attributed to lower sales of approximately $300,000 in the apparel, home
furnishings and footwear market segments coupled with reduced revenues by the
Company's majority-owned European affiliate, Schoeller Frisby Technologies, GmbH
("SFT"), based in Switzerland, whose component product sales decreased
approximately $126,000 for the three months ended September 30, 2002 as compared
to the comparable prior year quarter. This decrease in SFT component product
sales is attributable to reduced sales in the apparel and sporting goods
markets, partially offset by increased sales in the bedding market. The decrease
in end-use product sales for this period relates to the timing of orders from a
significant customer, which are expected to ship during the fourth quarter of
2002 whereas the corresponding orders in the prior year were shipped during the
third quarter of 2001. The Company is currently evaluating its involvement in
SFT and has informed Schoeller Textil AG that it may not wish to continue the
joint venture after December 31, 2002.

        The decrease in component product sales for the nine-month period ended
September 30, 2002 compared to 2001 is the result of reduced demand for the
Company's COMFORTEMP(R) materials in consumer market segments including the
apparel and sporting goods markets partially offset by increased component
product sales of SFT in the bedding and medical brace



                                       15
<PAGE>

markets. The decrease in end-use product sales for the nine-month period ended
September 30, 2002 compared to 2001 is primarily attributable to the timing of
orders as outlined above.


        COST OF SALES. The Company's cost of sales consists primarily of: (i)
direct and indirect costs incurred in connection with product sales; (ii)
royalty payments required to be made in accordance with license agreements; and
(iii) amortization expense related to fees paid by the Company in September 1998
to reduce its royalty payment obligation under a technology license. Total cost
of sales for the three months ended September 30, 2002 decreased by $213,046 to
$1,577,044 from $1,790,090 for the three months ended September 30, 2001. Total
cost of sales for the nine-month period ended September 30, 2002 increased by
$309,325 to $4,517,879 from $4,208,554 for the nine-month period ended September
30, 2001.

The components of cost of sales are approximately as follows:

<TABLE>
<CAPTION>
                                                        Three-month period ended
                                           -----------------------------------------------------
                                           Sept 30, 2002        Sept 30, 2001           Change
                                           -------------        -------------          ---------
<S>                                        <C>                  <C>                    <C>
Component & end-use products                 1,527,700            1,753,500             (225,800)
Royalties & other                               20,300               18,800                1,500
Amortization                                    29,000               17,800               11,200
                                             ---------            ---------            ---------
              Total cost of sales            1,577,000            1,790,100             (213,100)
                                             =========            =========            =========
</TABLE>


<TABLE>
<CAPTION>
                                                         Nine-month period ended
                                           -----------------------------------------------------
                                           Sept 30, 2002        Sept 30, 2001           Change
                                           -------------        -------------          ---------
<S>                                        <C>                  <C>                    <C>
Component & end-use products                 4,388,000            4,065,200              322,800
Royalties & other                               65,700               90,400              (24,700)
Amortization                                    64,200               53,000               11,200
                                             ---------            ---------            ---------
              Total cost of sales            4,517,900            4,208,600              309,300
                                             =========            =========            =========
</TABLE>

        The decreased cost of sales related to component and end-use products
for the three-month period compared to the comparable prior year quarter can be
attributed to the decreased sales levels previously discussed, partially offset
by (i) a higher mix of lower margin SFT and Thermasorb(R) additive sales and
(ii) inventory markdowns to market value totaling approximately $356,000. These
markdowns were based on evaluations made during the third quarter of 2002
respecting the realizable market value of end-use products including gloves and
slippers and component products previously earmarked for use in bedding and
other domestics applications.

        The increase in cost of sales for the nine-month period as compared with
the comparable prior year period can be attributed to the inventory markdowns
and higher mix of lower margin



                                       16
<PAGE>

SFT and Thermasorb(R) additive sales, partially offset by lower costs associated
with lower overall revenue levels.

        As a result of the foregoing and coupled with the introduction of early
payment discounts afforded to customers to improve cash flow for the Company,
gross profit for the three months ended September 30, 2002 was ($71,329)
compared to $904,264 for the three months ended September 30, 2001. For the
nine-month period ended September 30, 2002 gross profit decreased by $1,366,384
to $547,381, or 10.8% of net revenues, compared to $1,913,765, or 31.3% of net
revenues, for the nine-month period ended September 30, 2001.

        SELLING AND MARKETING EXPENSE. Selling and marketing expenses for the
three months ended September 30, 2002 decreased by $383,453 to $457,902 from
$841,355 for the three months ended September 30, 2001. The majority of this
decrease is the result of: continued reductions in advertising and promotion
resulting in expense reductions totaling approximately $161,000; reductions in
the areas of product development and outside consulting fees of approximately
$70,000; reduced sales-related commissions of approximately $84,000; decreased
travel expenses of approximately $21,000; and reduced employee related costs
totaling approximately $46,000 resulting from staff reductions and modifications
to employee benefit programs. For the nine-month period ended September 30, 2002
sales and marketing expenses decreased $660,139 to $1,817,356 compared to
$2,477,495 for the nine-month period ended September 30, 2001. This decrease can
be attributed to essentially the same areas of cost reduction as outlined for
the quarter: advertising and promotion reductions of approximately $405,000;
product development cost reductions of approximately $131,000; and employee
related cost reductions of approximately $133,000.

        GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
for the three months ended September 30, 2002 increased by $10,464 to $762,516
from $752,052 for the three months ended September 30, 2001. This increase can
be attributed to increased patent fees of approximately $146,000 resulting from
the expensing of previously deferred costs associated with abandoned patent
searches and applications, partially offset by: reduced professional fees of
approximately $39,000; the elimination of goodwill amortization in accordance
with SFAS Statement 142 and other reductions in depreciation of approximately
$27,000; lower rents resulting from the elimination of certain equipment leases
of $14,000; reduced provisions for bad debt of $20,000; and reduced employee
related costs totaling approximately $17,000 resulting from staff reductions and
modifications to employee benefit programs. For the nine-month period ended
September 30, 2002 general and administrative expenses decreased $263,206 to
$1,895,316 compared to $2,158,522 for the nine-month period ended September 30,
2001, the majority of which is attributable to the same cost reduction efforts
outlined above for the quarter: reduced depreciation and amortization expenses
of approximately $96,000; lower rent and utility costs of approximately $77,000;
reduced professional fees of approximately $34,000; lower taxes and license fees
of approximately $35,000; reduced provisions for bad debt of approximately
$35,000; decreased travel costs of $29,000; and reduced employee related costs
of approximately $59,000. These cost reductions were partially offset by higher
patent-related costs of $121,000 as explained above.



                                       17
<PAGE>

        OTHER -- GOODWILL AND LONG-LIVED ASSET IMPAIRMENT. During the
three-month period ended September 30, 2002 the Company recorded expenses of
approximately $321,000 to reflect the impairment of goodwill and other
long-lived assets including unamortized goodwill and certain patents and
trademarks acquired in 1999 when the Company purchased Extreme Comfort, Inc. No
such expenses were recorded during the comparable prior year period.

        INTEREST INCOME. Interest income for the three months ended September
30, 2002 was $534 compared to $2,329 for the three months ended September 30,
2001. For the nine-month period ended September 30, 2002 interest income
decreased $20,861 to $2,675 compared to $23,536 for the nine-month period ended
September 30, 2001. Both the quarter and nine month decreases reflect lower
average cash balances during 2002 compared to the same periods in 2001 and lower
overall interest rates.

        INTEREST EXPENSE. Interest expense for the three months ended September
30, 2002 was $71,263 compared to $133,883 for the comparable period in 2001 due
to lower interest rates and lower amortization of debt discount during the third
quarter of 2002 compared to the comparable period in 2001. The debt discount
reflected in the third quarter of 2002 relates to the Company's outstanding
three-year revolving credit facilities, while the debt discount reflected in the
third quarter of 2001 related to the Company's prior credit facility with MUSI
Investments S.A., which has since been converted into equity.

        For the nine-month period ended September 30, 2002 interest expense
decreased $69,059 to $191,639 compared to $260,698 for the nine-month period
ended September 30, 2001, due to lower average outstanding indebtedness
balances, lower interest rates and lower amortization of debt discount during
the nine months ended September 30, 2002 compared to the comparable prior year
period. Debt discount for the nine-month period ended September 30, 2002 was
approximately $140,053 compared to $158,823 for the comparable prior year
period.

        MINORITY INTEREST. Minority interest represents Schoeller Textil AG's
49% interest in the net income or loss of SFT. For the three-month period ended
September 30, 2002, the Company recorded minority interest income of $37,597
compared to $25,996 for the comparable period in 2001. For the nine-month period
ended September 30, 2002 the Company recorded minority interest income of
$78,885 compared to $44,689 for the comparable period in 2001. The income
reflects Schoeller Textil AG's share of the losses of SFT during the third
quarter and first nine months of 2002 and 2001.

        CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE. In July 2001, the Financial
Accounting Standards board issued statement of financial accounting standard no.
142, Goodwill and Other Intangible Assets (statement 142). The Company has
assessed the financial impact of statement 142 and has identified indicators of
impairment of goodwill associated with its purchase of Extreme Comfort, Inc.
and, as a result, has recorded an impairment loss of $400,000 as a cumulative
effect of a change in accounting principle.

        NET LOSS. As a result of the foregoing, the net loss for the three
months ended September 30, 2002 increased $853,919 to $1,645,953 from $792,034
for the three months ended September



                                       18
<PAGE>

30, 2001. For the nine-month period ended September 30, 2002 the net loss
increased $1,084,468 to $3,995,408 from $2,910,940 for the comparable 2001
period.


LIQUIDITY AND CAPITAL RESOURCES

        From its inception through September 30, 2002, the Company has incurred
cumulative losses of approximately $24,617,000. The Company has financed its
operations to date through borrowings, the issuance of common stock and
convertible preferred stock and research and development contracts relating to
United States government programs.

        At September 30, 2002, the Company had working capital of ($819,133),
including cash of $95,650, accounts receivable of $1,283,146, inventory of
$1,410,378 and other current assets of $253,012, offset by accounts payable of
$1,397,798, accrued expenses and other current liabilities of $1,059,237,
license fees payable of $112,315, revolving credit facilities net of debt
discount of $808,193 and convertible debt of $483,776. At September 30, 2002,
the Company was not in compliance with certain covenants required by the credit
facilities and the convertible debt and has requested waivers from its four
lenders. The Company currently anticipates that these waivers, should they be
granted, would not extend beyond a twelve-month period, therefore requiring that
the indebtedness be classified as a current liability. The maturity date on the
revolving credit facilities is January 10, 2005. The maturity date on the
convertible debt is June 3, 2004.

        Cash used by operating activities was $1,700,279 for the nine months
ended September 30, 2002, the principal contributing factors being the net loss
for the period adjusted for non-cash expenses such as depreciation,
amortization, non-cash consulting and other expenses, cumulative effect of an
accounting change and losses on impairment of goodwill and other long-lived
assets, partly offset by a reduction in accounts receivable and inventory
balances. Cash used by operating activities was $2,563,049 for the nine months
ended September 30, 2001, the principal contributing factor being the net loss
for the period adjusted for non-cash expenses such as depreciation, amortization
and non-cash consulting and other expenses. Cash used by investing activities
was $16,409 for the nine months ended September 30, 2002 compared to $48,916 for
the nine months ended September 30, 2001, both amounts consisting of
expenditures related to purchases of equipment and expenditures related to
patent development and other intellectual property. Cash provided by financing
activities was $1,438,124 for the nine months ended September 30, 2002 resulting
primarily from proceeds from the credit facilities, partially offset by the
extinguishment of unsecured debt. Cash provided by financing activities was
$1,609,873 for the nine months ended September 30, 2001 primarily representing
net proceeds from private placements of common stock and unsecured debt.

        The Company has incurred cumulative losses since its inception and,
therefore, has not been subject to federal income taxes. Through September 30,
2002, the Company has generated estimated net operating loss carryforwards in
excess of $22,000,000 that may be available to reduce future taxable income and
future tax liabilities. These carryforwards expire incrementally in years
through 2023. The Tax Reform Act of 1986 provides for an annual limitation on
the use



                                       19
<PAGE>

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 Company's 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.

        On October 25, 2001, the Company executed an unsecured promissory note
evidencing a $250,000 loan made to the Company by Southern Spear, Inc., a
stockholder, the proceeds of which were used for general working capital
purposes. The note bore interest at a rate of 8% and was payable on the earlier
of 60 days from the date of the note or 5 business days after receipt by the
Company of payment of certain outstanding accounts receivable. The maturity date
of the note was subsequently amended to January 31, 2002, at which time the note
was repaid in full.

        Effective as of January 10, 2002, the Company entered into separate
three-year revolving credit facilities totaling $1,250,000 with two lenders,
DAMAD Holding AG ("DAMAD") and Bluwat AG ("Bluwat"), both of Switzerland. DAMAD
is the parent company of Southern Spear, Inc., a stockholder of the Company.
Both credit facilities provide interest at the prime rate plus 75 basis points,
payable quarterly, and are secured by substantially all of the Company's assets
and a limited guaranty by Gregory S. Frisby, the Company's Chairman and Chief
Executive Officer, of one-third of the outstanding loan balance. In connection
with the credit facilities, DAMAD became entitled to designate one nominee to
the Company's Board of Directors, but did not designate a nominee for election
at the Company's 2002 annual meeting of stockholders. The lenders received
five-year warrants to purchase an aggregate of 868,055 shares of the Company's
common stock at an exercise price of $1.44 per share, subject to adjustment in
the event of certain dilutive issuances by the Company.

        At September 30, 2002, a total of $1,250,000 was outstanding under these
credit facilities and the Company was not in compliance with certain covenants
and has requested a waiver of compliance from the lenders. If either lender does
not grant a waiver, the Company currently expects that such non-granting lender
would give notice of default to the Company, in which case the Company would
have thirty days to cure the default or, if the Company has undertaken to cure
the default, such longer period as it is diligently prosecuting such cure to the
reasonable satisfaction of the lender. If the default is not cured prior to the
end of the cure period: the entire unpaid balance owed to the lender would
become due and payable; the interest rate, to the extent permitted by law, could
be increased by the lender up to the maximum rate allowed by law, or if none, a
per annum rate of interest equal to the prime rate plus 3.75%; any accrued and
unpaid interest, fees or charges could be deemed by lender to be a part of the
principal balance, with interest to accrue on a daily compounded basis until the
entire outstanding principal and accrued interest is paid in full; and the
lender would have all rights available to it at law or in equity.

        Effective as of June 3, 2002, the Company entered into separate two-year
revolving credit facilities totaling a maximum of $600,000. The credit
facilities were provided in equal parts by two current stockholders of the
Company based in Luxembourg, MUSI Investments S.A. ("MUSI") and Finpart
International S.A. ("Finpart"), a wholly owned subsidiary of Fin. part.



                                       20
<PAGE>

SpA. Each of the credit facilities accrues interest at the prime rate plus
0.75%, is available to fund certain employee-related expenses, has a maturity
date of June 3, 2004 and is secured by a third security interest in certain of
the Company's assets. On July 24, 2002 the credit facility with MUSI was amended
to increase the amount available under that credit facility by $50,000 and to
provide some additional flexibility for the use of proceeds, with all other
terms and conditions remaining unchanged. All or any portion of the outstanding
principal and accrued interest on each of these credit facilities is convertible
at the option of the lender into shares of the Company's common stock based on a
conversion price equal to the lesser of the 30-day trailing average closing
price of the common stock on the NASDAQ stock market on the date of conversion
and the then-effective exercise price of certain warrants issued in connection
with the Company's credit facilities with DAMAD and Bluwat described above. MUSI
also has the right to purchase shares of the Company's common stock in an amount
equal to $350,000 less the outstanding principal amount converted or convertible
under its credit facility, at a per share price equal to the conversion price,
and Fin.part also has the right to purchase shares of the Company's common stock
in an amount equal to $300,000 less the outstanding principal amount converted
or convertible under its credit facility, at a per share price equal to the
conversion price; provided that the number of shares issuable in connection with
the two credit facilities, together, shall not exceed 1,764,347 in the
aggregate.

        At September 30, 2002, a total of $483,776 was outstanding under these
credit facilities and the Company was not in compliance with certain covenants
and has requested a waiver of compliance from the lenders. If either lender does
not grant a waiver, the non-granting lender would be entitled to give notice of
default to the Company, in which case the Company would have thirty days to cure
the default or, if the Company has undertaken to cure the default, such longer
period as it is diligently prosecuting such cure to the reasonable satisfaction
of the lender. If the default is not cured prior to the end of the cure period:
the entire unpaid balance owed to the lender would become due and payable; the
interest rate, to the extent permitted by law, could be increased by the lender
up to the maximum rate allowed by law, or if none, a per annum rate of interest
equal to the prime rate plus 3.75%; any accrued and unpaid interest, fees or
charges could be deemed by lender to be a part of the principal balance, with
interest to accrue on a daily compounded basis until the entire outstanding
principal and accrued interest is paid in full; and the lender would have all
rights available to it at law or in equity.

        The Company is urgently attempting to secure financing and has taken
steps to minimize operating expenses. In addition, the Company is currently
considering the possibility of a merger and/or the potential sale of some or all
of its assets. No assurance can be given that the Company will be able to
identify a buyer or an acceptable merger partner or will be able to complete
such a transaction on acceptable terms, in a timely manner or at all. In the
event the Company is unable to complete any of the aforementioned transactions
or to secure sufficient financing on acceptable terms or in a timely manner, it
would be unable to continue its operating plan through December 2002 and beyond
and may voluntarily seek protection from its creditors under federal bankruptcy
laws, which would have a material adverse effect on the Company's business,
financial condition and prospects.



                                       21
<PAGE>

SEASONALITY

        The Company has historically experienced higher revenues in its third
and fourth fiscal quarters, which include the months in which the demand for its
cold weather products is highest.


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.


ADDITIONAL BUSINESS RISKS

        The Company is experiencing losses and urgently requires additional
financing to continue its operating plan that it may not be able to obtain.

        For the year ended December 31, 2001 and the nine months ended September
30, 2002, we had net losses of $5,184,900 and $3,995,408, respectively. At
September 30, 2002, we had working capital of ($819,133) and an accumulated
deficit of $24,617,027. As of the date of this report, the Company has not been
able to secure the additional capital required to continue its operating plan
through December 2002 and beyond. Even if the Company is able to secure the
necessary financing, it would likely be required to make significant revisions
to its operating plan and organizational structure, which will likely include
workforce related reductions. The Company is also currently considering the
possibility of a merger and/or the potential sale of some or all of its assets.
The Company may not be able to identify a buyer or an acceptable merger partner
or to complete such a transaction on acceptable terms, in a timely manner or at
all. In the event the Company is unable to complete any of the aforementioned
transactions or otherwise secure sufficient financing on acceptable terms or in
a timely manner, the Company may voluntarily seek protection from its creditors
under federal bankruptcy laws, which would have a material adverse effect on the
Company's business, financial condition and prospects.


The Company's common stock will likely be delisted from The NASDAQ SmallCap
Market.

        As of the date of this report, the Company is not in compliance with the
listing maintenance requirements of The NASDAQ SmallCap Market, which subjects
its common stock to delisting. Among other things, NASDAQ's requirements
currently require stockholders' equity of at least $2.5 million. As of September
30, 2002, the Company's stockholders' equity was ($18,506). On September 30,
2002, the Company received a letter from the Nasdaq Listing Qualifications Staff
indicating that the Company does not comply with the minimum stockholders'
equity requirements for continued listing set forth in Marketplace Rule
4310(c)(2)(B) and that its common stock would be delisted from the Nasdaq
SmallCap Market at the opening of business on October 8, 2002. NASDAQ has also
previously notified the Company that it is not in compliance with the
requirement that it maintain a minimum bid price



                                       22
<PAGE>

for the Company's common stock of $1.00 and that it must demonstrate a closing
bid price of at least $1.00 per share for a minimum of ten consecutive trading
days before February 3, 2003 or it may be delisted. The Company has an oral
hearing before a Nasdaq Listings Qualifications Panel to appeal the Staff's
determination scheduled for November 14, 2002.

        The Company will likely not be successful in its efforts to maintain
continued listing on The Nasdaq SmallCap Market. If the Company's common stock
is delisted, trading of the common stock, if any, would thereafter be conducted
on the Boston Stock Exchange, in the over-the-counter market, in the so-called
"pink sheets" or on the National Association of Securities Dealers, Inc.
"electronic bulletin board," which could cause investors to find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the common stock. Moreover, trading in the common stock could also become
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock." The additional burdens imposed upon broker-dealers by such
requirements could discourage broker-dealers from effecting transactions in the
common stock, which could severely limit the market liquidity of the common
stock and the ability of investors to trade the common stock. These consequences
of delisting would likely materially impair the Company's ability to raise
capital, which would have a material adverse effect on the Company's business,
financial condition and results of operations.


Item 3. Controls and Procedures

        Within 90 days prior to the date of this report, the Company's Chief
Executive Officer and the Chief Financial Officer evaluated the effectiveness of
the Company's disclosure controls and procedures in accordance with Rule 13a-14
under the Securities Exchange Act of 1934, as amended. Based on their
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures enable the
Company to record, process, summarize and report in a timely manner the
information that the Company is required to disclose in its Exchange Act
reports.

        There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referred to above.



                                       23
<PAGE>

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

        On September 25, 2001, Outlast Technologies, Inc. ("Outlast") filed a
lawsuit against the Company in United States District Court, District of
Colorado, alleging that Frisby's COMFORTEMP(R) nonwovens infringe at least one
claim of a patent exclusively licensed to Outlast, US Patent 5,366,801. In its
answer to the lawsuit, in addition to denying infringement, Frisby has
counterclaimed against Outlast for tortious interference with existing and
prospective business relations and/or contracts and also for trade libel. The
Company is confident that its COMFORTEMP(R) nonwovens do not infringe any claim
of the referenced patent. All dispositive motions have been briefed and await
the court's call for oral argument, which the Company expects within the next
several months.

        On March 28, 2002, Triangle Research and Development Corporation of
Raleigh, North Carolina ("TRDC") and certain of its employees and owners filed a
civil suit in Wake County Superior Court in Raleigh, North Carolina against the
Company and certain of its executive officers alleging breach of contract by
Frisby for failure to pay royalties required under its license agreement with
TRDC and seeking damages. The suit also alleges that the Company and its named
executive officers violated federal and state securities laws and engaged in
unfair and deceptive trade practices with regard to the elimination of a put
agreement entered into in connection with a stock option granted to TRDC
pursuant to a September 1998 agreement between the Company and TRDC. In its
Answer and Counterclaims, in addition to denying any wrongdoing by the Company
and the executive officers named in the suit, the Company filed counterclaims
against TRDC and certain of its executive officers alleging breach of contract,
negligence, fraud, and unfair and deceptive trade practices. In August 2002, the
Company and the named executive officers filed a motion to dismiss the unfair
and deceptive trade practices claim and the securities laws claims. In October
2002, the court heard arguments related to the Company's motion to dismiss and
has requested a further hearing, which the Company currently expects to be held
in late November.


Item 2. Changes in Securities and Use of Proceeds

        On July 3, 2002, the Company issued 9,284 shares of its common stock in
accordance with its 2000 Employee Stock Purchase Plan.

        On October 16, 2002, the Company issued 21,427 shares of its common
stock to a law firm in consideration for legal services rendered. The Company
issued these shares in reliance on the exemption from registration provided in
Section 4(2) of the Securities Act of 1933, as amended, based on the recipient's
sophistication in financial matters, access to material information and status
as an accredited investor.



                                       24
<PAGE>

        Based on an agreement entered into during 2001, the Company issued
warrants to acquire, for no additional consideration, 2,808 shares of its common
stock to a creative services firm for advertising and creative services
rendered. The Company issued these warrants in reliance on the exemption from
registration provided in Section 4(2) of the Securities Act based on the number
of offerees and their sophistication in financial matters and access to material
information.


Item 5. Other Information

        On October 29, 2002, both Robert E. Gregory and Robert C. Grayson
resigned from the Company's Board of Directors. Mr. Gregory served as chairman
of the Company's Audit Committee. Mr. Grayson served as chairman of the
Company's Compensation Committee. As a result of these resignations, the Board
consists of five members at least three of whom, Gregory S. Frisby, the Chairman
and Chief Executive Officer of the Company, Duncan R. Russell, the President and
Chief Operating Officer of the Company and Jeffry D. Frisby, brother of Gregory
S. Frisby, may not be considered independent under applicable law.


Item 6. Exhibits and Reports on Form 8-K

        (a)     Exhibits


                10.1    Agreement dated September 19, 2002 between the Company
                        and QVC, Inc.*


                99.1    Certification of the Chief Executive Officer Pursuant to
                        18 U.S.C. Section 1350, As Adopted Pursuant To Section
                        906 Of The Sarbanes-Oxley Act of 2002.

                99.2    Certification of the Chief Financial Officer Pursuant to
                        18 U.S.C. Section 1350, As Adopted Pursuant To Section
                        906 Of The Sarbanes-Oxley Act of 2002.


        (b)     Reports on Form 8-K

        During the quarter ended September 30, 2002, the Company filed no
reports on Form 8-K.


-------------------------------------
* Confidential treatment has been requested with respect to specified portions
of this exhibit.



                                       25
<PAGE>

Signatures


        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

        Dated:  November 14, 2002


                                    FRISBY TECHNOLOGIES, INC.



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



                                    By:     /s/  John L. Ruggiero
                                            ------------------------------------
                                            John L. Ruggiero
                                            Chief Financial Officer & Treasurer


                                       26
<PAGE>

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER


I, Gregory S. Frisby, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Frisby Technologies,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and



                                       27
<PAGE>

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002


[Signature]  /s/ Gregory S. Frisby
[Title] Chairman  & Chief Executive Officer



                                       28
<PAGE>

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER


I, John L. Ruggiero, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Frisby Technologies,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and



                                       29
<PAGE>

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002


[Signature]  /s/ John L. Ruggiero
[Title] Chief Financial Officer& Treasurer



                                       30