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                              MUSI INVESTMENTS S.A.
                            231 VAL DES BONS MALADES
                           L-2121 LUXEMBOURG-KIRCHBERG


                                January 12, 2001


Frisby Technologies, Inc.
3195 Centre Park Boulevard
Winston-Salem, N.C. 27107
Attention: Greg Frisby, Chairman

Dear Greg:

                  Reference is made to that certain Letter of Intent, dated as
of the date hereof, between MUSI Investments S.A. ("MUSI") and Frisby
Technologies, Inc. (the "Company") relating to the proposed issuance of units,
each consisting of one share of common stock and one warrant of the Company to
MUSI and certain other investors, according to the terms outlined on the term
sheet attached to such Letter of Intent (the "Equity LOI"). In connection with
the transactions contemplated by the Equity LOI, each of Greg Frisby, MUSI and
the Company wish to set forth certain agreements regarding the provision by MUSI
of a letter of credit to secure the Company's obligations to Bank of America,
N.A. ("BofA"), under the terms of that certain commercial loan agreement dated
February 20, 2000 (as modified or amended, the "BofA Facility") in the original
amount of $2,000,000.

         1.       Provision of Letter of Credit. Subject to the satisfaction of
                  the conditions set forth in this letter agreement, not later
                  than January 15, 2001, MUSI shall cause Banca Commericale
                  Italiana to issue an irrevocable stand-by letter of credit
                  (the "L/C") in the principal amount of $1,500,000 and naming
                  BofA as the beneficiary thereunder. The L/C will be in form
                  and substance mutually acceptable to both MUSI and BofA, and
                  their respective counsel. The L/C will have an expiration date
                  of not earlier than July 16, 2001.

         2.       Pay Down of BofA Facility. The Company shall provide MUSI with
                  evidence prior to issuance of the L/C that the Company has
                  repaid not less than $500,000 of the principal balance
                  outstanding under the BofA Facility, thereby reducing the
                  principal balance due thereunder to not more than $1,500,000.

         3.       Draw Down on L/C. The provision by MUSI of the L/C shall be
                  deemed a loan made by MUSI to the Company. Accordingly,
                  simultaneously with the execution and delivery of this
                  Agreement, the Company will execute the Convertible Promissory
                  Note (the "Convertible Note") in the form attached hereto as
                  Exhibit A, and deliver the same to _______ (the "Escrow
                  Agent") to be held in escrow. In the event BofA draws downs on
                  the L/C, the Escrow Agent will, upon receipt of evidence of
                  such draw down, release the Convertible Note to MUSI. If the
                  BofA draw certificate is for less than the full $1,500,000,
                  the Convertible Note


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Frisby Technologies, Inc.
January __, 2001
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                  will be reduced without any further action of the parties to
                  an amount equal to the amount set forth in the draw
                  certificate submitted by BofA to the issuing bank under the
                  L/C.

         4.       Incurrence of Indebtedness; No Encumbrances. For so long as
                  the L/C remains in place, without the prior written consent of
                  MUSI, the Company will not (a) amend, modify, or otherwise
                  alter any of the terms of the BofA Facility, including without
                  limitation, increasing the principal balance due thereunder,
                  or change the interest rate or repayment terms of the BofA
                  Facility; (b) incur any indebtedness for borrowed money other
                  than the BofA Facility, or guarantee any such indebtedness or
                  sell any debt securities of the Company or guarantee any
                  obligations or debt securities of any other entity; (c)
                  create, incur or suffer to exist any encumbrance, including
                  any lien or security interest, with respect to any of its
                  property or assets, other than the security interest granted
                  to BofA under the BofA Facility; or (d) issue, grant, deliver,
                  sell, redeem or purchase any shares of the Company's capital
                  stock or any options or warrants with respect to any such
                  shares of the Company's capital stock other than as
                  contemplated by the Equity LOI.

         5.       Maintenance of Guaranty. Greg Frisby, in signing this Letter
                  Agreement, acknowledges and agrees that so long as the BofA
                  Facility remains in place, that he shall continue to provide
                  to BofA the guaranty provided by him pursuant to the terms of
                  the BofA Facility (the "Frisby Guaranty"). Greg Frisby further
                  agrees that in the event of a draw down of the L/C by BofA,
                  MUSI will become subrogated to the rights of BofA with respect
                  to the Frisby Guaranty.

         6.       Expenses. Upon issuance of the L/C, Frisby will reimburse MUSI
                  for all fees and expenses (including, but not limited to,
                  reasonable attorney and accountant fees and expenses relating
                  to the transactions contemplated by this letter agreement)
                  incurred by MUSI in connection with the transaction
                  contemplated by this L/C, up to a maximum of $20,000. In
                  addition to the foregoing, Frisby will reimburse MUSI for all
                  bank fees and expenses the issuing bank (and any confirming
                  bank) charges to MUSI in connection with the issuance of the
                  L/C or any draws under the L/C.

         7.       Governing Law. This Letter Agreement shall be governed by, and
                  construed in accordance with, the laws of the State of New
                  York.

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Frisby Technologies, Inc.
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Page 3


                  If the foregoing accurately describe your understanding with
                  respect to the transaction set forth above, please so indicate
                  your agreement to the foregoing by signing the enclosed copy
                  of the Letter Agreement and returning the same to us.

                  Very truly yours,

                  MUSI INVESTMENTS S.A.


                  By: /s/ Luca Bassani Antivari
                  Name:

                  Accepted and Agreed:

                  FRISBY TECHNOLOGIES, INC.


                  By:/s/ D.R. Russell
                  Name: D.R. Russell
                  Title: President and Chief Operating Officer



                  /s/ Greg Frisby
                  Greg Frisby, individually


                  [ ESCROW AGENT ]


                  By:______________________
                  Name:
                  Title:


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Frisby Technologies, Inc.
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                                                                       EXHIBIT A

                           CONVERTIBLE PROMISSORY NOTE

                            FRISBY TECHNOLOGIES, INC.


$1,500,000                                                         June __, 2001
                                                                    New York, NY

                  FOR VALUE RECEIVED, FRISBY TECHNOLOGIES, INC., a Delaware
corporation ("Payor"), with offices at 3195 Centre Park Boulevard,
Winston-Salem, NC 27107, hereby promises to pay to MUSI INVESTMENTS S.A., a
Luxemburg societe anonyme ("Payee"), at such address as Payee may designate, in
lawful money of the United States of America in immediately available funds, the
principal sum of One Million Five Hundred Thousand Dollars ($1,500,000).

                  The principal sum shall be payable on demand, together with
all accrued interest thereon. Interest on the unpaid principal amount hereof
shall accrue from the date hereof until the entire principal amount has been
paid at a variable rate of the prime rate as announced from time to time by Bank
of America N.A. plus one hundred and fifty basis points (1.50%), per annum. All
computation of interest hereunder shall be based on the actual number of days
elapsed over a 365-day year.

                  Upon consummation of the purchase and sale of units (the
"Units") (each such Unit representing the right to acquire one share of common
stock and one warrant to purchase one share of common stock) pursuant to the
terms of the Unit Purchase Agreement by and among the Payor, Payee and the other
investors party thereto, Payee shall have the option to elect to have all or a
portion of the outstanding principal amount hereof together with all accrued
interest thereon converted into Units. The number of Units issuable upon the
conversion of this Note shall be determined by dividing the principal amount of
this Note together with all unaccrued interest thereon to be converted by the
price at which each Unit is sold to the investors pursuant to the terms of the
Unit Purchase Agreement.

                  Upon conversion, Payor shall deliver a certificate to Payee
for the number of Units issuable upon such conversion subject to surrender by
Payee of this Note and the furnishing of all appropriate endorsements and
transfer documents reasonably requested by Payor.

                  As security for the prompt payment in full of the principal
balance and accrued interest thereon under this Note and to secure performance
of Payor's obligations hereunder, Payor hereby grants to Payee a first priority
pledge and security interest in all of such Payor's Tangibles and Intangibles,
wherever located, now owned by or hereafter acquired by Payor or its successors
or assigns, or in which Payor or its successors or assigns now or hereafter has
an

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Frisby Technologies, Inc.
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interest and the products, proceeds and accession of the foregoing. For purposes
of this Note, (i) "Intangibles" shall be deemed to mean "accounts",
"instruments", "documents", "chattel paper", "drafts", "checks" and "general
intangibles" and each of them, as the foregoing terms are defined in the Uniform
Commercial Code of New York, as amended (the "UCC") and, without limitation,
shall include not only such thereof as arise out of the sale, lease, or other
disposition at any time and from time to time of inventory or other goods, but
also such thereof as arise out of, for, or in connection with, the furnishing of
services, and (ii) "Tangibles" shall be deemed to mean "inventory" and
"equipment" as defined in the UCC and all goods and tangible personal property
now owned or hereafter acquired by Payor. Payor's Tangibles and Intangibles and
any such substitute or additional collateral is referred to herein as the
"Collateral."

                  This Note creates a continuing security interest in the
Collateral and will (i) remain in full force and effect until payment in full of
the principal balance and accrued interest thereon under this Note; and (ii) be
binding upon Payor, its respective successors and assigns; and (iii) inure,
together with the rights and remedies of Payee hereunder, to the benefit of
Payee, together with its successors and assigns.

                  Payor covenants and agrees that, so long as any portion of the
principal balance and accrued interest thereon under this Note remains unpaid,
Payor will from time to time at its own expense, promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or desirable, or that Payee may reasonably request, in order to
perfect, preserve and protect any security interest granted or purported to be
granted hereby or to enable Payee to exercise and enforce its rights and
remedies hereunder with respect to any Collateral. Without limiting the
generality of the foregoing, Payor agrees to execute and file such financing or
continuation statements, or amendments thereto, and such other instruments or
notices as may be necessary, or as Payee may reasonably request, in order to
perfect and preserve the security interests and other rights granted or
purported to be granted by Payor to Payee hereby.

                  No modification, rescission, waiver, forbearance, release or
amendment of any provision of this Note shall be made, except by a written
agreement duly executed by Payor and Payee.

                  This Note shall be governed by, and construed in accordance
with, the laws of the State of New York.

                  This Note shall bind and benefit the parties hereto and their
respective successors and assigns.

                  IN WITNESS WHEREOF, the undersigned, by its duly authorized
officer, has executed and delivered this Note this __ day of June, 2001.

                                                     FRISBY TECHNOLOGIES, INC.

                                                     By:/s/ Greg Frisby
                                                     Name:
                                                     Title: