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

                                   Form 10-KSB

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

                   For the fiscal year ended December 31, 2000

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

                           Commission File No. 1-14005

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

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

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

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

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

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

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

                                      None
                                (Title of Class)

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

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

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

State issuer's revenues for its most recent fiscal year.      $10,198,500

State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 23, 2001 - 6,975,424.

Based upon the closing price of the registrant's common stock on March 23, 2001,
the aggregate market value of the common stock held by non-affiliates was
approximately $9,037,000. Solely for purposes of this calculation, the shares
held by directors, executive officers and greater than 10% shareholders have
been excluded because such persons may be deemed to be affiliates. The shares
are currently traded on the NASDAQ SmallCap Market under the symbols "FRIZ" for
the Common Stock. The information required by Part III of this Form 10-KSB is
incorporated by reference to the Registrant's definitive proxy statement to be
filed with the Commission within 120 days.


<PAGE>


Part I

Item 1. Description of Business.

General

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

     The Company's products were initially  incorporated in end-use applications
in 1997. By careful  selection of its initial partners and markets,  the Company
has been able to grow its revenues quarter-on-quarter  consistently for the last
ten (10) fiscal quarters.  The Company believes that by continuing to expand the
end-use  applications  into  which its  products  can be  incorporated,  it will
achieve  sales  penetration  into a wide  range of new  product  categories  and
industries  in  addition  to  increasing  sales  penetration  with its  existing
licensees/customers.  The Company's goal is to achieve a high level of growth in
revenues over each of the next several  years and to see a significant  increase
in profit  margins on product sales.  This rapid  expansion will be expedited by
the Company's  continuation of its successful  component branding strategy that,
the Company  believes,  will make its  products  "the product of choice" in most
thermal management applications.

     Based upon its strong growth, the Company has earned a position in the 2000
Deloitte & Touche  Technology  Fast 500, which  recognizes  the  fastest-growing
technology companies in the United States and Canada. The Technology Fast 500 is
selected  based on  five-year  percentage  increase in revenues.  The  Company's
revenue growth rate over this period was 605%.


The Technology

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



Products

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

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

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


<PAGE>


The following chart describes how the Company's products are created and
distributed:


                                    (CHART)


<PAGE>


Foams and Fabric Packages

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

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

     As a service to its  licensees/customers,  the  Company  may,  from time to
time,  create  fabric  packages  for the  licensees/customers  using  one of the
Company's approved  laminators or fabricators,  for which the Company receives a
fee. Alternatively,  the licensees/customers  will have this process done by one
of their own approved  fabricators.  Further, the Company and its suppliers have
developed new fabric  construction  methods that produce the COMFORTEMP(R)  foam
directly on the licensee/customer's selected fabrics to eliminate the lamination
or sewing step.

Leathers

     Working in partnership with  Titleist/FootJoy and Sadesa of Argentina,  one
of FootJoy's preferred shoe leather suppliers, a new patented leather product is
being produced that exhibits  comparable  thermal  performance to  COMFORTEMP(R)
foam.  Titleist/FootJoy and Frisby share ownership of the patent. The use of the
patent   within   the  field  of  golf  is  to  be   exclusively   licensed   to
Titleist/FootJoy.  All other  embodiments of the invention are to be exclusively
licensed to the Company.  This offers significant design flexibility to footwear
designers. COMFORTEMP(R) technology can now be introduced into more areas of the
shoe; for example, the upper portion of the shoe is typically leather,  enabling
even higher levels of  performance  than is possible with just foam. The Company
is currently developing new thermal regulating leathers that are more suited for
gloves,  apparel, and seating surfaces, such as furniture and car seats. The new
DryICE golf glove from  FootJoy is made of this new glove  leather  produced for
FootJoy by Pittards in England, one of the world's premier leather tanneries.

Other Host Materials

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

Finished Products

     The Company owns two small  manufacturers  of finished  products,  Steele &
Associates ("Steele") and Extreme Comfort,  Inc. ("Extreme Comfort").  These two
divisions  enable  the  Company to sell  thermal-related  finished  products  to
certain industrial and consumer markets. For example, the Steele division of the
Company  markets  and  sells a line of  micro-climate  cooling  vests  under the
SteeleVest(R)  name. Extreme Comfort markets and sells a variety of electrically
operated personal heating  products,  including the new,  "Roo(TM)"  handwarmer,
under the Extreme  Comfort(R) brand. In addition,  through the use of outsourced
manufacturing  arrangements,  the Company produces a variety of end-use products
such as gloves and slippers that are  currently  sold through mass market direct
media.  Collectively,  these  products  contributed  approximately  22%  of  the
Company's  revenues  in  fiscal  year  2000 and are  expected  to  contribute  a
comparable amount in 2001.

     The  Company is  employing  innovative  marketing  concepts  not typical of
traditional  `branded-component'  sales and  marketing  approaches to expand its
brand and its markets.

     For example,  NFL  Properties  granted Frisby a NFL license for The Roo(TM)
heated hand warmer from its Extreme  Comfort  subsidiary.  Sixteen  (16) NFL and
eighteen (18) NCAA Division I football teams used "The Roo" during the 2000/2001
season. Three-time league MVP Brett Favre, quarterback for the Green Bay Packers
and an avid outdoorsman,  is the national spokesperson for The Roo. Tiki Barber,
star  running  back  for the NFC  Champion  New  York  Giants,  is the  regional
spokesperson for New York/New England.

Strategic Sourcing

     The Company  currently  outsources all of its production needs for the core
phase change materials,  Thermasorb(R)  additives and  COMFORTEMP(R)  materials.
Currently,   all  of  the   Company's   Thermasorb(R)   additives  are  contract
manufactured to specifications provided by the Company to 3M. The Company and 3M
have  an  arrangement  that  provides  pre-determined  pricing  for  all  of the
Company's anticipated microcapsule production requirements pursuant to which the
Company ensures its continuing access to such production  capacity at acceptable
terms. In the future, the Company may seek geographic  diversity for its sources
of Thermasorb(R).

     The Company currently relies upon four sources of foam: one in the U.S, one
in Europe, and two in the Asia-Pacific region.

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

     The Company  historically  has not had material losses of inventory and has
not  experienced   material   losses  due  to  cost  and  market   fluctuations,
overstocking or technology.  In 2000 the Company  recorded  inventory  valuation
adjustments to reflect the Company's  move to a variety of host materials  other
than foam. The Company maintains certain minimal inventory requirements at every
level of the manufacturing process (e.g. raw materials,  intermediary  materials
and finished  goods).  This  inventory is needed to satisfy  scheduled  customer
orders  as  well  as   underanticipated   requests  and  other  potential  sales
opportunities.


Sales and Marketing

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

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

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

--   Increase penetration with existing licensees/customers

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

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

o Establishing COMFORTEMP(R) as the recognized brand behind new performance
products:

--   Similar to Gore-Tex or Thinsulate Component-Branding Models

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

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

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

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

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

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

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

Licensing

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

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

     First introduced in 1997, the Company now has over 120 worldwide  licensees
for  its  COMFORTEMP(R)   materials.  The  Company's  sales  are  fairly  evenly
distributed among the customers with the largest single customer  accounting for
approximately 17 % of 2000 sales.

Alliances

     Consistent with its strategy as outlined  above,  the Company has completed
negotiations with several firms in an attempt to rapidly globalize the Company's
sales efforts.



Schoeller Textil AG, Switzerland

     The  Company  and  Schoeller  Textil,  AG  ("Schoeller')  have  established
Schoeller  Frisby  Technologies,  GmbH  ("SFT"),  a  majority-owned  Swiss-based
organization with sales and distribution  rights to the Company's  COMFORTEMP(R)
foam and fabric systems.  These rights are exclusive  throughout Europe and also
within the  US-based  fashion  industry.  SFT also has  non-exclusive  sales and
distribution rights within certain countries in Asia. It sells primarily through
Schoeller's existing worldwide network of direct sales personnel and independent
sales  agencies.  Frisby  effectively  controls SFT and  includes its  financial
results in Frisby's  consolidated  results.  A  four-member  Board of  Managers,
consisting of two appointees each from Schoeller and the Company, manages SFT.

     SFT became  effective  January 1, 2000 and contributed  approximately  U.S.
$3,200,000 in revenues. In 2000, SFT secured COMFORTEMP(R) sales to more than 70
licensees in 11 countries including Polo Ralph Lauren, Gucci, Prada, Fila, Puma,
K2, Samsonite,  Reusch, Andrew Marc, BMW and other leading international brands.
The primary benefits to the Company from SFT are:

--   Partnership  with  an  internationally  recognized  leader  in  innovation,
     quality and product supply.

--   Strengthened brand image, particularly in European markets

--   Increased revenue streams and profit from sales of finished fabrics instead
     of Thermasorb(R) additive sales alone.

--   Reduced financial and business risk through the sharing of sales, marketing
     and promotion expenses.

--   Better coordinated and effective development and sales efforts.

Bridgestone Corporation, Japan

     In February 2000 the Company and  Bridgestone  (Tokyo,  Japan)  finalized a
joint  development  and test marketing  agreement to establish  Bridgestone as a
licensed  manufacturer  of  COMFORTEMP(R)  foam  with  exclusive  rights to sell
COMFORTEMP(R)  foam to the Japanese  domestic market.  The parties extended this
test  marketing  agreement  until a  final  license  and  supply  agreement,  to
supercede the test marketing  agreement,  is signed. It is anticipated that this
license  agreement  will be finalized  and signed  during the second  quarter of
2001. Bridgestone also has one of the region's largest sales organization,  with
more than 400 salespeople in Japan alone.  Bridgestone  will also use COMFORTEMP
(R) materials in its own products.

     As a result of the test-marketing  program,  the Company's products are now
becoming  increasingly  available  in  Japan  and  Asia.  At the  end  of  2000,
Bridgestone  began sales of a line of bedding products with COMFORTEMP (R) foam.
This  far in 2001,  Bridgestone  has  developed  a new  COMFORTEMP  (R) foam for
footwear and has secured  several new licensees in the Asian market for this new
product.  Also in 2001,  Bridgestone will expand into apparel and other consumer
products.   Bridgestone  is  also  developing   several   potential   industrial
applications for the Company's products including personal care products.

     Another added benefit of this alliance,  if formally  established,  is that
Bridgestone   will  provide  the  Company  with  high  capacity,   high  quality
manufacturing  capability  in  the  Pacific  Rim,  an  element  of  considerable
strategic importance for the Company.

Advanced Material Systems, Australia

     In January 2000 the Company finalized an exclusive  distribution  agreement
with  Advanced  Material  Systems  (AMS) of  Melbourne,  Australia for rights to
distribute COMFORTEMP(R) materials within Australia and New Zealand in primarily
consumer markets.  AMS will also distribute within the Asia-Pacific  region on a
non-exclusive basis.


Communications Strategy

     In  addition  to the  coordinated  efforts  with  licensees/customers,  the
Company  uses a variety  of  communication  tools in order to build  brand  name
recognition of its Thermasorb(R) and COMFORTEMP(R)(TM)  products and trademarks.
These  include  the use of  advertising  in trade  and  consumer  media,  public
relations professionals,  direct mail, in-store displays and the Internet. Total
expenses  related  to  communication  in  2000  and  1999  were  $1,414,000  and
$1,425,000, respectively. The Company has recently updated its Internet sites on
the World Wide Web at  www.frisby.com  and  www.COMFORTEMP.com.  These web sites
provide  information  which  end-users  of the  Company's  products  may  use in
conjunction  with their own web sites.  The  Company  has  recently  created the
multi-lingual www.steele.com web site, the Company's first effort in e-commerce,
where complete cooling garments are offered directly to the industrial consumer.
The Company is also generating  sales with the web site  www.extremecomfort.com.
The sites  promote the Company's  products and brands as well as its  licensees'
products.  The  Company  also  attends  and  exhibits  its  products at numerous
tradeshows during the year.

C(degree) Trademark and Icon

     In January 2001 the Company launched a world wide  communications  campaign
introducing  an  innovative  new  logo,   icon  and  graphic   context  for  the
COMFORTEMP(R)  brand.  The campaign will globalize the symbol of climate control
technology and capture more simply and clearly the benefits of  COMFORTEMP(R) in
products  that reach  consumers in an  increasing  variety of ways.  The Company
believes that people  worldwide  will begin to recognize the symbol of personal,
temperature-balancing comfort through the C(degree) trademark and icon.


Operations Plan: The Path to Profitability

     The Company's management  recognizes that long-term success and shareholder
value lies in the sustained  reduction of cost of goods sold.  Towards that end,
the Company has begun an aggressive push towards profitability.  The cornerstone
of the Company's  "Path to  Profitability"  is focused upon the creation of new,
Asian and  Mexican  supply  sources to  supplement  continual  strong  growth in
combination  with  US-producers  and  achieve   significantly   lower  costs  of
production. Currently, the majority of the Company's products are shipped by sea
to Asia from the U.S.,  increasing the "landed" cost of  COMFORTEMP(R)  foam and
fabrics to its customers. The Company believes that moving the production of the
Company's products closer to the customer base will:

o    lower  production  costs of  COMFORTEMP(R)materials,  improving  the  gross
     profit margin;

o    lower the total cost of  COMFORTEMP(R)to  customers  without  lowering  the
     product's selling price; and

o    increase demand for the Company's products.

     Implementation  of this  strategy was initiated  with  selected  Korean and
Japanese  sources and will continue.  For those  customers that  manufacture end
products  in North  America,  the  Company  will begin  producing  COMFORTEMP(R)
materials in Mexico and Central America in 2001. This supply-source  realignment
process will, the Company believes, lead to significant gross margin improvement
in 2001 and beyond.

Research and Development

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


Patents/Intellectual Property

Patents

     The Company  owns or  otherwise  has  exclusive  rights to more than twenty
United  States and  International  Patents  that protect the  Company's  thermal
management  products.  Another ten patents are pending. The patents covering the
Company's  COMFORTEMP(R)  foams and  fabrics do not begin to expire  until 2011,
affording the Company at least another 10 years of protection.  Patents for many
of the  Company's  newer  COMFORTEMP(R)  materials  are  recently  issued or are
pending,  providing  protection,  in the case of  leather,  until at least 2019.
There  are  three  main  ways  the  Company   acquires  rights  to  patents  and
intellectual property: licensing, acquisition, and invention.

         Licensing of Patents

     Frisby owns an exclusive license from Triangle Research & Development Corp.
(the "TRDC License") for TRDC's patented and proprietary microencapsulated phase
change  material  technology  (the "TRDC  Technology").  The TRDC License grants
Frisby the  exclusive  worldwide  right to develop  and  commercialize  the TRDC
Technology with respect to certain applications (including foam) in exchange for
royalty payments.

     The  rights to the TRDC  Technology  related  to fibers  and  fabrics  with
reversible   enhanced  thermal  storage  properties  were  licensed  to  Outlast
Technologies,  Inc.  ("OTI" or  "Outlast")  prior to Frisby  obtaining  the TRDC
License.  In order to expand its exclusive rights in the field of MicroPCMs,  in
January  1998  Frisby   entered  into  an  exclusive   agreement   with  Outlast
Technologies,  Inc. (the "Outlast License") that grants Frisby certain exclusive
rights to the  combination of Frisby's  COMFORTEMP(R)  foam,  produced under the
TRDC  License,  with fibers and  fabrics.  The  Outlast  License  grants  Frisby
worldwide,  exclusive rights to make foam-based composite fabrics where the foam
layer is thicker than 2 mm. Outlast is limited to produce foamed-based composite
fabrics  where the foam layer is 2 mm and under,  enabling each company to offer
different products with differing levels of thermal performance to the market.

     In September  1998 Frisby entered into an agreement with TRDC that assigned
TRDC's right to its original  license  agreement for MicroPCM Fibers and Fabrics
with  Outlast  (the  "TRDC-OTI  License").  The  TRDC-OTI  License  contained  a
provision  for OTI to pay TRDC 50% of any monies  received  by OTI from  Frisby.
Therefore,  the  assignment  of this  agreement  from TRDC to Frisby  results in
Frisby  receiving  back 50% of its payments to Outlast under the  Frisby-Outlast
agreement,  effectively reducing its royalty rate on foam-fabric by 50%. Also as
part of the  assignment,  Frisby  now  receives  royalties  from OTI on  Outlast
product sales produced and sold under the TRDC-Outlast  agreement.  In addition,
the Company is required to remit to TRDC  certain  percentages  of the  payments
received from Outlast.

         Acquisition of Patents

     The Company acquired  certain patents and intellectual  property as part of
the acquisition of Steele and Extreme Comfort. From time to time, the Company is
presented  opportunities to strengthen its patent portfolio through the purchase
of  additional  patents  or  other  intellectual  property  related  to  thermal
management  and/or  comfort.  The Company may pursue such  opportunities  if the
additional  patents help the company  expand its product  line,  expand into new
markets,  or  otherwise  provide  the  Company  with a  significant  competitive
advantage.

         Inventions

     The Company also seeks patents for its own inventions and discoveries.  For
example, the Company was recently awarded several new US Patents for a series of
inventions  related to improving  the  durability  and flame  resistance  of the
Company's  microcapsules and foams.  Also,  numerous patent  applications are on
file for the Company's gel and rubber products.

     The Company  also  engages in regular  joint  development  efforts with its
licensees/customers  that result in the Company  owning at least joint rights to
any new inventions that may arise. This was recently the case with COMFORTEMP(R)
leather.  Working in partnership with  Titleist/FootJoy and Sadesa of Argentina,
one of FootJoy's  preferred  shoe  leather  suppliers,  a new  patented  leather
product  was  invented  that  exhibits   comparable   thermal   performance   to
COMFORTEMP(R)  foam.  Titleist/FootJoy  and  Frisby  are to share  rights in the
patent.  The use of the  patent  within  the field of golf is to be  exclusively
licensed to  Titleist/FootJoy.  All other embodiments of the invention are to be
exclusively licensed to the Company.

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

                                                                                        Patent Expiration
Date of Patent    Patent Number      Description                       Industry                  (year)
--------------    -------------      -----------                       ---------                 ------
<S>               <C>               <C>                                <C>                       <C>
2/28/89           4,807,696         Thermal Energy Storage             Automotive,               2006
                                    Apparatus Using Encapsulated       Aerospace,
                                    PCMs.                              Electronics

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

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

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

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

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

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

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

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

11/22/94          5,366,801         Coated Fabric With Reversible      Protective Apparel        2011
                                    Enhanced Properties

5/16/95           5,415,222         Microclimate Cooling Garments      Protective Apparel        2012

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

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

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

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

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

8/8/00            6,099,894         Gel-Coated Microcapsules           All Industries            2018

1/9/01            6,171,647         Gel-Coated Microcapsules           All Industries            2018
                                    (Method Patent)

1/30/01           6,179,879         Leather Impregnated with           All Industries            2019
                                    Temperature-Stabilized Materials

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

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

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

Trademarks

     The Company has many trademarks that it uses to uniquely identify and brand
it's  products  in the global  marketplace.  The  Company  typically  seeks full
registration  of these  marks in the parts of the world where the  products  are
made, used or consumed.  These include the US, Canada,  Europe,  Mexico,  Japan,
China,  Korea and other select  countries.  The primary  trademarks owned by the
company are COMFORTEMP(R),  Thermasorb(R), DCC(TM), C(degree)(TM),  (degree)(TM)
(the degree symbol), and THE ULTIMATE DEGREE OF COMFORT(TM).


Proprietary Information and Know-how

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

Competition


     Within consumer  markets,  the Company competes on three different  levels,
with:

(i)  suppliers of traditional  insulation materials like Thinsulate(TM)  thermal
     insulation from 3M and  Primaloft(R)  synthetic down insulation from Albany
     International;

(ii) suppliers  of  unencapsulated  phase  change  materials  like Phase  Change
     Laboratories,  supplier of materials used in the Domino's Pizza "Heat Wave"
     pizza delivery bag and R.G. Barry  Corporation,  maker of the  Microcore(R)
     line of specialty  consumer  products  that include  microwaveable  gloves,
     slippers and scarves;

(iii)another  encapsulated  phase change material  fabric  supplier  licensed by
     TRDC, Outlast Technologies, that markets a series of certain fibers, coated
     fabrics and coated foams under the Outlast(R) brand.

     The Company believes its products compete favorably with the above products
because:

(i)  independent  tests have  shown the  dynamic  climate  control  provided  by
     COMFORTEMP(R) fabrics are up to twice as effective as the leading brands of
     "passive" insulation and no other traditional insulation can provide active
     cooling to the wearer like COMFORTEMP(R);

(ii) unencapsulated  phase  change  materials  are  prone  to  leaking  when the
     material  converts from solid to liquid and require  specially sealed bags,
     whereas the phase change material in  COMFORTEMP(R) is contained within the
     Thermasorb(R) capsule. The need for bags also greatly decreases the options
     designers can use to incorporate this feature into products; and

(iii)COMFORTEMP(R)  foams and  other  materials  developed  by the  company  are
     inherently  better able to contain  greater  amounts of active phase change
     material than the relatively thin coatings of phase change material used to
     make certain Outlast(R)  fabrics.  Therefore,  the increased thermal effect
     due to the phase  change is much  greater in  COMFORTEMP(R)  materials.  On
     tests of two similarly  thin samples of  COMFORTEMP(R)  foam and Outlast(R)
     coated foam,  the  COMFORTEMP(R)  sample was measured to have more than 50%
     greater heat storage capacity than the Outlast(R) material.

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


Employees

     As of December 31, 1999, the Company  employed  approximately  32 full-time
employees of whom 5 were management personnel,  15 were sales personnel,  5 were
product  development  personnel,  4 were  administrative  personnel,  and 3 were
operations personnel. As of December 31, 2000, the Company employed 24 full-time
and 4 part-time  employees of whom 4 were  management  personnel,  10 were sales
personnel, 3 were product development personnel, 6 were administrative personnel
and 5 were  operations  personnel.  The headcount  reduction and realignment was
reflective of the Company's  shift towards more efficient  sourcing of materials
and  services,  the  need to  streamline  the  organizational  structure  and an
increased emphasis on external product development and sales agencies.

Management

Directors and Executive Officers

     The directors,  executive  officers and other significant  employees of the
Company and their ages are as follows:
<TABLE>
<CAPTION>

        Name                        Age                        Position
        ----                        ---                        --------

<S>              <C>                <C>     <C>
Gregory S. Frisby1                  41      Chairman of the Board of Directors;
                                            Chief Executive Officer

Duncan R. Russell                   51       Director;
                                             President and Chief Operating Officer

Jeffry D. Frisby1                   45       Director

Pietro A. Motta                     63       Director

Domenico DeSole                     57       Director

Robert C. Grayson                   56       Director

Douglas J. McCrosson                38       Vice President Business Development;
                                             Secretary

John L. Ruggiero                    51       Chief Financial Officer;
                                             Treasurer
<FN>

1)       Gregory S. Frisby and Jeffry D. Frisby are brothers
</FN>
</TABLE>


     Gregory S. Frisby has been the Chairman of the Board of Directors and Chief
Executive Officer of the Company since its inception in 1989. From 1991 to 1997,
Mr. Frisby was also the Chief Executive Officer of Frisby Aerospace. During this
time, he has also served on various  boards,  advisory panels and task forces on
technology,  capital, growth and privatization issues at the regional, state and
federal  levels.  He  received  his  Bachelor  of  Science  degree  in  Business
Administration from Wake Forest University in 1981. Frisby has received numerous
business and industry honors including the Entrepreneur of the Year Award in two
States and has recently been named as one of Sports Trend  magazines'  `ST25', a
list of the sporting goods industry leaders likely to have a significant  impact
in 2001. The Company  maintains "key man" insurance on the life of Mr. Frisby in
the amount of $7,500,000.

     Duncan R. Russell  became the President and Chief  Operating  Officer and a
member of the  Company's  Board of Directors in June 2000.  He had served as the
Vice  President of Sales and  Marketing of the Company from  December 1999 until
June 2000 and as the Director of Global Brand  Strategy since December 1998. Mr.
Russell,  who  had  been  at 3M  since  1973,  helped  lead a  doubling  of 3M's
Thinsulate(TM) brand sales since 1991.  Thinsulate(TM) is the world's number one
brand of thermal  insulation for apparel,  accessories  and footwear.  He served
most  recently  as  Marketing  Operations  and  International   Manager  of  the
Insulation  Products  Division  at 3M.  He is also the  holder  of two U.S.  and
international  patents for  insulating  products.  He received  his  Bachelor of
Science degree in Business  Administration from Northeastern  University in 1972
and MBA from Hofstra University in 1980.

     Jeffry D. Frisby is a director of the  Company.  From 1986 to the  present,
Jeffry D. Frisby has been the  President of Frisby  Aerospace,  A Triumph  Group
Company.  Jeffry D. Frisby also serves on the Board of Visitors of the  Calloway
School of Business  and  Accountancy  at Wake Forest  University,  and is a past
member of the Industrial  Advisory  Board of the American  Society of Mechanical
Engineers. He received his Bachelor of Science degree in Business Administration
from Wake Forest University in 1977.

     Pietro A. Motta is a director of the Company.  Since 1984,  he has provided
independent legal and financial advisory services for corporate  transactions to
private  financial,  industrial and real estate groups. He is also a director of
SMEF,  the  investment-banking  unit of  Compagnie  Monegasque  de  Banque,  and
recently retired as an international  advisor to HSBC Investment Banking of Hong
Kong & Shanghai Bank. Mr. Motta received his Bachelors  degree from Collegio San
Carlo & Liceo Manzoni in 1956 and his Juris Doctor degree from Universita  degli
Studi di Milano in 1960.

     Domenico  DeSole is a director of the Company.  Since 1995, he has been the
president and chief  executive  officer of Gucci Group NV. Mr.  DeSole  formerly
held the position of chief operating  officer of Gucci from 1994 to 1995 and was
president and chief executive  officer of Gucci America,  the company's  largest
retail  subsidiary,  from 1984 to 1994.  Mr.  DeSole also serves on the board of
directors of Bausch & Lomb. Mr. DeSole received an undergraduate degree from the
University of Rome and a law degree from The Harvard Law School.

     Robert  C.  Grayson  is a  director  of the  Company.  Mr.  Grayson  is the
president of GGC, Inc., a Connecticut  based management  consulting firm, and is
also a partner in Leslie Berglass Associates,  a New York based executive search
firm.  Mr.  Grayson  has  also  served  as a  Vice-Chairman  of  Tommy  Hilfiger
Corporation from 1992 to 1996 and held several senior  executive  positions with
The Limited Stores from 1970 to 1992. Mr. Grayson currently serves on the boards
of directors of Ann Taylor, Sunglass Hut, and Kenneth Cole. Mr. Grayson received
an undergraduate degree from Indiana University.

     Douglas J. McCrosson has been the Vice President - Business Development and
Secretary of the Company since 1997. Mr.  McCrosson became the Vice President of
Technical  Operations  of the Company in 1997 and from 1992 through 1997, he was
the  Group  Director  responsible  for  all of  the  Company's  thermal  product
development  programs.  He serves on the Board of Managers of  Schoeller  Frisby
Technologies  GmbH, and he is on the Board of Directors of LIFT and ADDAPT,  two
not-for-profit  organizations  engaged in providing  technology-based  companies
with engineering and business development  services.  Mr. McCrosson received his
Bachelor of Science degree in Mechanical  Engineering  from the State University
of New York at Buffalo  and his  Masters of Science  degree in  Management  from
Polytechnic University.

     John L. Ruggiero has been the Chief Financial  Officer and Treasurer of the
Company since November 2000 and also serves as the Treasurer of Schoeller Frisby
Technologies GmbH. He has been a senior financial  executive for publicly traded
and private  companies in the direct  marketing,  publishing,  distribution  and
manufacturing industries. From 1998 to 2000, Ruggiero was the Vice President and
Chief  Financial  Officer  for g. Neil  Companies,  a catalog  marketer of human
resource-related tools and materials.  Prior to g. Neil Companies,  he was Chief
Financial and Administrative Officer of McKenzie Sports Products Inc., a leading
manufacturer  and marketer of foam products for the sporting goods industry.  He
also worked for 17 years at Grolier Inc., a global publisher and direct marketer
of children's books, reference materials and interactive products, finishing his
career there as the Vice President of Finance and  Administration  of its Direct
Marketing Group.


Item 2. Description of Properties

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

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

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

Item 3. Legal Proceedings.

     On January 21, 2000, one of the Company's licensors,  Outlast Technologies,
Inc.  (Outlast),  issued a notice of  default  to the  Company  pursuant  to the
Outlast License  Agreement dated January 1998. The Company has denied  breaching
the agreement and on April 25, 2000,  in accordance  with its License  Agreement
terms,  the Company  filed a demand for  arbitration  against  Outlast  with the
American  Arbitration  Association  (AAA) seeking legal redress from Outlast for
wrongful attempts to terminate the License, breach of contract and other claims.

     On May 31, 2000  Outlast  initiated a lawsuit in District  Court for patent
infringement against the Company based upon the same matters that were presented
to the AAA. On July 10, 2000, Frisby filed a motion in District Court to dismiss
the lawsuit,  or  alternatively,  to stay the suit pending the conclusion of the
arbitration proceeding. On August 28, 2000 the Court approved the motion to stay
pending arbitration.

     The  arbitration  panel has been  selected.  A hearing  has been  scheduled
during August 2001. The Company believes that the outcome of the dispute will be
resolved in a manner that is satisfactory to the Company.



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

     All matters  submitted to a vote of security  holders were contained in the
Company's 2000 proxy statement.


Part II

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

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

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

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


                                                             High         Low
2000
Fourth Quarter........................................       $4.38        $3.00
Third Quarter.........................................       $5.00        $3.63
Second Quarter ......................................        $7.84        $4.50
First Quarter.........................................       $7.63        $4.53

1999
Fourth Quarter........................................       $5.81        $4.00
Third Quarter.........................................       $6.75        $4.25
Second Quarter........................................       $4.86        $3.25
First Quarter.........................................       $5.13        $3.63

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


<PAGE>


Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

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

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

General

     The following  discussion  should be read in conjunction with the Company's
audited consolidated  financial statements for the years ended December 31, 2000
and 1999, appearing elsewhere in this Form 10-KSB.

     The following tables set forth certain  operating and balance sheet data in
dollars for the years indicated:

Operating Data:


                                                        2000            1999
                                                        ----            ----
Net revenues ...................................   $ 10,198,000    $  6,238,000
Costs of sales .................................      7,630,000       5,197,000
                                                   ------------    ------------
Gross profit ...................................      2,568,000       1,041,000
Sales and marketing expense ....................      4,471,000       4,503,000
General and administrative expense .............      2,875,000       2,345,000
                                                   ------------    ------------
Loss from operations ...........................     (4,778,000)     (5,807,000)
Interest income (expense) ......................       (136,000)        179,000
Minority interest income (expense) .............         93,000            --
                                                   ------------    ------------
Loss before income taxes .......................     (4,821,000)     (5,628,000)
Provision for income taxes                                 --              --
                                                   ------------    ------------
Net loss .......................................   ($ 4,821,000)   $ (5,628,000)
                                                   ============    ============
Net loss per common  share - basic and  diluted   $      (0.77)   $      (1.01)
                                                   ============    ============


Balance Sheet Data:

                                                   December 31,     December 31,
                                                      2000              1999
                                                   -----------------------------

Working capital                                    $2,003,000         $1,957,000
Total assets                                       $7,637,000         $8,420,000
Long-term liabilities                              $  341,000         $1,420,000
Total liabilities                                  $3,496,000         $4,141,000
Total shareholders' equity                         $4,086,000         $4,278,000

Results of Operations
Years ended December 31, 2000 and 1999

     Revenues.  The Company 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.  Revenue is also generated from license fees and
royalties  from  the  use  of  Thermasorb(R)  and  COMFORTEMP(R)  trademarks  by
licensees/customers  in  end-use  products,  as well as  other  fees  earned  in
connection with its agreements with licensees/customers.  Total revenues for the
year ended December 31, 2000 increased by $3,960,000,  or 63.5%,  to $10,198,000
from $6,238,000 for the year ended December 31, 1999. Product sales for the year
ended December 31, 2000 increased by $4,271,000,  or 77.3%,  to $9,799,000  from
$5,528,000 for the year ended December 31, 1999.

These increases represent continued acceptance of the Company's products and
expanding operations, particularly in the international arena. A significant
portion of the Company's revenue increase was generated by its majority-owned
European affiliate, Schoeller Frisby Technologies, GmbH ("SFT"), based in
Switzerland.

     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)  the  amortization  expense  associated  with  the  transaction  with  the
principal  inventor  to lower the  royalty  rates  (described  in Note 12 to the
consolidated  financial  statements).  Total  cost of sales  for the year  ended
December 31, 2000 increased by $2,433,000 to $7,630,000  from $5,197,000 for the
year ended  December 31, 1999.  The majority of this  increase was  generated by
increased product sales. Additionally, to reflect the Company's development of a
variety of new host materials other than foam, an inventory valuation adjustment
of  approximately  $270,000  was  recorded.   This  unfavorable  adjustment  was
partially  offset  by  a  one-time   adjustment  of  $168,000  relating  to  the
elimination of an earlier put agreement.

Gross margin on product sales  increased in 2000 over 1999 due to lower material
acquisition costs from new sourcing agreements and improved processes as well as
increased  sales of certain high margin end-use  products.  The Company  expects
these improvements will continue to benefit future periods.


     Sales and  marketing  expense.  Sales and  marketing  expenses for the year
ended December 31, 2000 decreased by $32,000 to $4,471,000  from  $4,503,000 for
the year ended December 31, 1999.  This decrease is  attributable to (i) reduced
research and  development  costs;  (ii) lower  personnel costs and (iii) reduced
spending on travel and trade  shows.  These cost  reductions  were offset by (a)
increased  provisions  for certain  uncollectible  accounts  and (b)  commission
expenses related to SFT and direct end-user product sales.

     General and administrative expense. General and administrative expenses for
the year ended  December  31, 2000  increased  by $530,000  to  $2,875,000  from
$2,345,000  for the year ended  December  31, 1999.  The  increase  reflects (i)
higher legal fees resulting from litigation related to the Company's  protection
of its  intellectual  property;  (ii)  increased  rent  expense and (iii) higher
depreciation  and  amortization  expense.  Partially  offsetting these increased
costs were reductions in personnel related and investor relations expenses.  The
Company  does not  anticipate  general and  administrative  expenses to increase
significantly in the near-term under the current business model.

     Net interest expense.  Net interest expense for the year ended December 31,
2000 was $136,000 compared to net interest income of $179,000 for the year ended
December 31, 1999.  This change  reflects  the interest  expense  related to the
Company's  line of credit  (described  in Note 6 to the  consolidated  financial
statements), partially offset by interest earned on amounts on deposit.

     Minority interest income.  The Company recorded minority interest income of
$93,000 for the year ended  December 31, 2000 which  reflects the portion of the
losses of the joint  venture that are  applicable  to  Schoeller  Textil AG, the
Company's joint venture partner.

     Net loss.  As a result of the  foregoing,  the net loss for the year  ended
December 31, 2000  decreased to $4,821,000  from  $5,628,000  for the year ended
December 31, 1999.

Liquidity and Capital Resources

     From its  inception  through  December  31, 2000 the  Company has  incurred
cumulative  losses of  approximately  $15,437,000.  The Company has financed its
operations to date through research and development contracts relating to United
States  government  programs,  bank  borrowings  and the  issuance of common and
convertible preferred stock.

     At  December  31,  2000 the  Company  had  working  capital of  $2,003,000,
including cash of $1,025,000, accounts receivable of $1,843,000 and inventory of
$2,146,000,  offset  by  accounts  payable  of  $804,000,  a line of  credit  of
$1,453,000 and accrued expenses and other current liabilities of $724,000.

     Cash  used  by  operating   activities   was   $5,341,000   and  $5,778,000
respectively,  for the years ended  December  31, 2000 and 1999.  The  principal
factor contributing to the cash used in operating  activities for the year ended
December 31, 2000 and 1999 was the net loss for each of the respective  periods.
Cash used in investing  activities  was $324,000 for the year ended December 31,
2000. The principal investing activity for 2000 was the purchase of property and
equipment  and  intangible  assets.  Cash provided by investing  activities  was
$481,000 for the year ended  December 31, 1999,  principally  resulting from the
sale of marketable  securities offset in part by: (i) an installment  payment to
TRDC for the agreement signed in September 1998; (ii) the purchase of the assets
of Steele;  (iii) the  acquisition  of Extreme  Comfort and (iv) the purchase of
equipment for the thermal testing  facility in North Carolina.  Cash provided by
financing  activities  was  $5,518,000 for the year ended December 31, 2000. The
principal  financing  activities for 2000 were (a) net proceeds from the line of
credit of $903,000  and (b) net  proceeds  from the private  placement of Common
Stock  (described  in  Note  9 to  the  consolidated  financial  statements)  of
$4,416.000.

As of December 31, 2000, the Company had a $2,000,000 line of credit with a bank
(see Note 6 to the consolidated financial statements).  The line of credit bears
interest at the bank's prime rate plus 200 basis points. The outstanding balance
under the line at December 31, 2000 was  $1,453,000.  Subsequent to December 31,
2000 the Company  further  negotiated  an  extension  of the line until June 30,
2001.  Amended  terms  related to the  extension  include a  borrowing  limit of
$1,500,000 and interest at the bank's prime rate plus 25 basis points.  On March
27, 2001 the Company received a Letter of Intent from a significant  shareholder
proposing to take over the existing  $1,500,000  Line of Credit,  with terms and
conditions similar to those with the bank. This proposed  financing  arrangement
would  extend the  maturity  date of the Line of Credit to January 2, 2002.  The
proposed financing arrangement may also include conversion rights and privileges
similar to those being offered  under the private  placement  memorandum.  As of
this date, formal negotiations are still being held and the final terms have not
been agreed upon.  The Company  anticipates  that it will formalize and finalize
this arrangement before April 15, 2001. In addition,  the Company has received a
commitment   letter  from  a  different   significant   shareholder  to  provide
appropriate funding for 2001 should the aforementioned financing arrangement not
be consummated.

     The  Company  has  incurred  cumulative  losses  since its  inception  and,
therefore,  has not been subject to significant  federal  income taxes.  Through
December 31, 2000 the Company has generated net operating loss  carryforwards in
excess of $14,500,000 that may be available to reduce future  available  taxable
income and future tax liabilities.  These carryforwards  expire in years through
2020. The Tax Reform Act of 1986 provides for an annual limitation on the use of
net operating loss  carryforwards  (following  certain  ownership  changes) that
could significantly limit the Company's ability to utilize these  carryforwards.
As a result of the IPO,  the  Company's  ability to utilize  the  aforementioned
carryforwards  as  of  the  IPO  date  will  be  limited  on  an  annual  basis.
Additionally,  because the United  States tax laws limit the time  during  which
these  carryforwards may be applied against future taxes, the Company may not be
able to take full advantage of these attributes for federal tax purposes.

     As of March 27, 2001 the Company had received firm commitment  letters from
several  investors  for an equity  investment  of up to  $550,000.  The proposed
transaction  includes both the Company's  common stock and warrants and has been
approved by the Company's Board of Directors.  The Company anticipates that this
transaction will close on or before April 30, 2001. The Company is continuing to
meet with other interested investors to complete the balance of the fundraising.

     Based on the Company's  current  operating plan, the Company  believes that
the cash available as a result of the financing  activity  mentioned above, cash
flow from  operations  and the  available  line of credit will be  sufficient to
satisfy its operational  and capital  requirements  through  December 2001. Such
belief is based upon certain  assumptions,  and there can be no  assurance  that
such assumptions are correct.  In the event that the Company's plans change,  or
its available  cash,  cash flow from operations and available line of credit are
insufficient to fund operations due to unanticipated delays, problems,  expenses
or otherwise,  the Company would be required to seek additional financing sooner
than anticipated.  Further, depending on the Company's progress in marketing its
product line, gaining  acceptance of its thermal  management  technology and its
other products and services among the business  community or the  identification
of strategic acquisition or licensing  opportunities,  the Company may determine
that it is advisable to raise additional capital sooner than was anticipated.



Inflation

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

Item 7. Financial Statements.

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

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

     None

Part III

     The information required by Part III of this Form 10-KSB, excluding item 13
which is included  herein,  is  incorporated  by reference  to the  Registrant's
definitive proxy statement to be filed with the Commission within 120 days.

Item 13. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>

<S>     <C>
(a)  Exhibits

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

3.2      By-Laws

4.1      Form of Common Stock Certificate

4.2      Form of Representative's Option

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

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

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

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

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

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

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

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

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

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

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

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

10.7.1.1 Amendment to License Agreement between the Company and TRDC

(iii)    The following exhibits are incorporated by reference from the
         corresponding exhibits filed with the Company's Form 10-KSB for the
         fiscal year ended December 31, 1999:

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

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

(iv)     The following  exhibits are  incorporated  by reference  from the  corresponding  exhibits filed with the Company's
         Form S-3/A under Registration No. 333-47010:

3.1.2    Second Amended and Restated Certificate of Incorporation

10.1.1    Second Amended and Restated  Stockholder's  Agreement dated as of May 30, 2000, by and among the Company,
          Jeffrey D. Frisby, Gregory S. Frisby and MUSI

10.3.1    Amendment to the Employment Agreement dated as of June 1, 2000, between the Company and Gregory S. Frisby

10.29     Purchase  Agreement dated May 30, 2000 by and among the Company and MUSI, Ms. Jean S. Moore,  AllFirst Company
          Custodian for Hogan & Hartson Partners Retirement Plan for the Benefit of Ms. Jean S. Moore, and Schoeller Textil AG

10.30     Registration  Rights  Agreement  dated May 30, 2000 by and among the Company and MUSI, Ms. Jean S. Moore,  AllFirst
          Company Custodian for Hogan & Hartson Partners Retirement Plan for the Benefit of Ms. Jean S. Moore,
          and Schoeller Textil AG

10.31     Warrant  Agreement dated May 30, 2000 by and among the Company and MUSI, Ms. Jean S. Moore,  AllFirst  Company
          Custodian for Hogan & Hartson Partners Retirement Plan for the Benefit of Ms. Jean S. Moore, and Schoeller Textil AG

10.32     Stock Purchase Agreement dated October 14, 1999 by and between the Company and Extreme Comfort, Inc.

10.33     Endorsement and Representation Agreement dated July 18, 2000 by and between the Company and Favre Enterprises, Inc.

10.34     Endorsement  and  Representation  Agreement  dated July 27, 2000 by and between  the Company and Maximum  Marketing,
          Inc. on behalf of Tiki Barber

10.35     Form of  Non-Qualified  Stock  Option  Agreement by and between the Company and Favre  Enterprises,  Inc. and the
          Company and Maximum Marketing, Inc.

(v)       The following exhibits are incorporated by reference from the
          corresponding exhibits filed with the Company's Form S-8 under
          Registration No. 333-50850

4.1       Frisby Technologies, Inc. - 2000 Employee Stock Purchase Plan

(vi)      Exhibits

10.36     Amended and Restated Stock Option Plan

10.37     Warrant Agreement dated as of May 30, 2000, by and between the Company and Janney Montgomery Scott, LLC

10.38     Amendment to Loan Agreement dated September 29, 2000 by and between the Company and the Bank of America, N.A.

10.39     Second Amendment to Loan Agreement dated January 15, 2001 by and between the Company and the Bank of America, N.A.

10.40     Letter Agreement dated May 16, 2000 between the Company and 3M (Confidential)

23.1      Consent of Independent Auditors

(b)       Reports on Form 8-K

          None.

</TABLE>

<PAGE>



                                   Signatures

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

                            Frisby Technologies, Inc.

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

Dated:  March 30, 2001

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

      Signature                                     Title                                Date

<S>                                 <C>                                                <C>
/s/ Gregory S. Frisby               Chairman of the Board of Directors; CEO            March 30, 2001
---------------------------
Gregory S. Frisby

/s/ Duncan R. Russell               President and COO; Director                        March 30, 2001
---------------------------
Duncan R. Russell

/s/ John L. Ruggiero                Chief Financial Officer and Treasurer              March 30, 2001
---------------------------
John L. Ruggiero

/s/ Jeffry D. Frisby                Director                                           March 30, 2001
---------------------------
Jeffry D. Frisby

/s/ Pietro A. Motta                 Director                                           March 30, 2001
---------------------------
Pietro A. Motta

/s/ Domenico DeSole                 Director                                           March 30, 2001
---------------------------
Domenico DeSole

/s/ Robert C. Grayson               Director                                           March 30, 2001
---------------------------
Robert C. Grayson
</TABLE>



Item 7. Financial Statements.

                            Frisby Technologies, Inc.

                   Index to Consolidated Financial Statements


<TABLE>
<CAPTION>

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

Consolidated Balance Sheet as of December 31, 2000.................................................    F-3

Consolidated Statements of Operations for the Years Ended December 31,
   2000 and 1999...................................................................................    F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the Years
   Ended December 31, 2000 and 1999................................................................    F-5

Consolidated Statements of Cash Flows for the Years Ended December 31,
   2000 and 1999 ..................................................................................    F-6

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


<PAGE>


                         Report of Independent Auditors


The Stockholders
Frisby Technologies, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheet of Frisby
Technologies,  Inc.  as of  December  31,  2000,  and the  related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
two years in the period ended December 31, 2000. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in  all  material  respects,  the  consolidated  financial  position  of  Frisby
Technologies,  Inc. as of December 31, 2000, and the consolidated results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 2000, in conformity with accounting  principles  generally accepted
in the United States.

                                                /s/ Ernst & Young LLP



Winston-Salem, NC
February 28, 2001, except for Note 6 and
   Note 9 as to which the date is March 27, 2001


<PAGE>


                            Frisby Technologies, Inc.
                           Consolidated Balance Sheet

                                                                    December 31,
                                                                       2000
                                                                    ------------
Assets
Current assets:
     Cash and cash equivalents                                      $  1,024,636
     Accounts receivable, less allowances                              1,843,124
     Inventory                                                         2,146,447
     Prepaid expenses and other current assets                           144,139
                                                                    ------------
            Total current assets                                       5,158,346
Property and equipment, net                                              741,645
Intangible assets, net                                                 1,526,470
Other assets                                                             210,136
                                                                    ------------
             Total assets                                           $  7,636,597
                                                                    ============

Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable                                               $    804,071
     Line of credit                                                    1,453,469
     Accrued expenses and other current liabilities                      724,412
     License fees payable                                                173,049
                                                                    ------------
            Total current liabilities                                  3,155,001
Other liabilities                                                        341,026

Minority interest                                                         54,782

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;
          6,972,158 shares issued and outstanding                          6,972
     Additional paid-in capital                                       19,444,913
     Common stock warrants outstanding                                   205,000
     Unearned stock compensation                                       (134,378)
     Accumulated deficit                                            (15,436,719)
                                                                    ------------
      Total stockholders' equity                                       4,085,788
                                                                    ------------
            Total liabilities and stockholders' equity              $  7,636,597
                                                                    ============

See accompanying notes.

<PAGE>


                            Frisby Technologies, Inc.
                      Consolidated Statements of Operations

                                                         Year ended
                                                        December 31,
                                                ----------------------------
                                                     2000           1999
                                                ------------    ------------

Net revenues                                    $ 10,198,466    $  6,237,900
Cost of sales                                      7,629,963       5,196,990
                                                ------------    ------------
Gross profit                                       2,568,503       1,040,910

Operating expenses:
       Sales and marketing                         4,470,813       4,503,072
       General and administrative                  2,875,403       2,344,823
                                                ------------    ------------
                                                   7,346,216       6,847,895
                                                ------------    ------------

Loss from operations                              (4,777,713)     (5,806,985)
Interest income (expense), net                      (136,118)        178,679
Minority interest                                     92,543            --
                                                ------------    ------------
Loss before provision for income taxes            (4,821,288)     (5,628,306)
Provision for income taxes
                                                        --              --
                                                ------------    ------------
Net loss                                        $ (4,821,288)   $ (5,628,306)
                                                ============    ============

Net loss per common share - basic and diluted
                                                $      (0.77)   $      (1.01)
                                                ============    ============

Shares used in the calculation of  basic and
    diluted net loss per common share              6,245,039       5,570,005
                                                ============    ============

See accompanying notes.


<PAGE>


                            Frisby Technologies, Inc.
            Consolidated Statements of Stockholders' Equity (Deficit)


                                 Preferred Stock              Common Stock
                                 ---------------              ------------
                               Shares       Amount       Shares        Amount


Balance at January 1, 1999     587,500   $ 2,479,000    5,120,613  $     5,121

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


Net Loss                          --            --           --           --
Sale of Marketable
   Securities                     --            --           --           --

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

Issuance of Common Stock
Pursuant to acquisition of
Extreme Comfort                   --           --         40,000            40
                              --------   -----------   ----------  -----------
Balance at December 31,
1999                              --            --      5,748,113        5,748

Net Loss                          --            --           --           --

Issuance of Common Stock and
Common Stock Warrants in
Private Placement                 --            --      1,175,000        1,175

Issuance of Common Stock
Options and Warrants for
services                          --            --           --           --

Amortization of unearned
stock compensation                --            --           --           --

Exercise of Stock Options         --            --         42,125           42
Issuance of Common Stock -
Employee Stock Purchase Plan      --            --          6,920            7
                              --------   -----------   ----------  -----------

Balance at December 31, 2000      --            --      6,972,158  $     6,972
                              ========   ===========   ==========  ===========
<TABLE>
<CAPTION>

                                             Accumulated
                               Additional        Other       Common Stock
                                 Paid-In     Comprehensive     Warrants    Unearned Stock   Accumulated
                                 Capital        Income        Outstanding   Compensation      Deficit           Total
                                 -------        ------        -----------   ------------      -------           -----
<S>                           <C>            <C>                  <C>            <C>       <C>            <C>
Balance at January 1, 1999    $ 12,199,828   $  21,000            --             --        $ (4,987,125)  $ 9,717,824

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

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

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

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

Issuance of Common Stock
Pursuant to acquisition of
Extreme Comfort                    209,960        --              --             --                --         210,000
                              ------------   ---------       ---------   ------------      ------------   -----------

Balance at December 31, 1999    14,888,201        --              --             --         (10,615,431)    4,278,518

Net Loss                              --          --              --             --          (4,821,288)   (4,821,288)

Issuance of Common Stock and
Common Stock Warrants in
Private Placement                4,415,227        --              --             --                --       4,416,402

Issuance of Common Stock
Options and Warrants for
services                           (56,980)       --           205,000   $   (148,020)             --            --

Amortization of unearned
stock compensation                    --          --              --           13,642              --          13,642

Exercise of Stock Options          170,529        --              --             --                --         170,571

Issuance of Common Stock -
Employee Stock Purchase Plan       27,936        --              --             --                --          27,943
                              ------------   ---------       ---------   ------------      ------------   -----------

Balance at December 31, 2000  $ 19,444,913        --         $ 205,000   $   (134,378)     $(15,436,719)  $ 4,085,788
                              ============   =========       =========   ============      =============  ===========
</TABLE>

See Accompanying Notes


<PAGE>


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

                                                                                 Year ended
                                                                                 December 31,
                                                                         --------------------------
                                                                              2000          1999
                                                                              ----          ----
Operating activities:
<S>                                                                      <C>           <C>
Net loss                                                                 $(4,821,288)  $(5,628,306)
Adjustments to reconcile net loss to net cash used in operating
    activities:
     Depreciation and amortization                                           421,927       410,749
     Non cash consulting and other expenses                                   14,752        70,000
     Provision for doubtful accounts and returns                             375,831         5,000
     Changes in assets and liabilities, prior to effect of acquisition:
          Accounts receivable                                               (369,519)     (785,105)
          Inventories                                                     (1,049,398)     (308,202)
          Other current assets                                               415,681        50,308
          Other non-current assets                                          (134,043)       93,653
          Accounts payable                                                  (818,209)      471,369
          Accrued expenses and other current liabilities                     732,607      (250,529)
          License fees payable                                              (109,516)       92,838
                                                                         -----------   -----------
Net cash used in operating activities                                     (5,341,175)   (5,778,225)
                                                                         -----------   -----------

Investing activities:
Purchases of property and equipment                                         (155,359)     (472,845)
Proceeds from sale of short-term investments                                    --       1,534,684
Purchase of intangible assets                                                (47,919)     (400,000)
Purchase of business, net of cash acquired                                      --        (180,801)
Elimination of put agreement - net                                          (120,894)         --
                                                                         -----------   -----------
Net cash provided by (used in) investing activities                         (324,172)      481,038
                                                                         -----------   -----------

Financing activities:
Net proceeds from line of credit                                             903,488          --
Proceeds from exercise of stock options                                      170,571          --
Proceeds from employee stock purchases                                        27,943          --
Proceeds from private placement - net                                      4,416,402          --
Payment of transaction costs                                                    --         (47,372)
                                                                         -----------   -----------
Net cash (used in) provided by financing activities                        5,518,404       (47,372)
                                                                         -----------   -----------

Net decrease in cash and cash equivalents                                   (146,943)   (5,344,559)
Cash and cash equivalents - beginning of period                            1,171,579     6,516,138
                                                                         -----------   -----------
Cash and cash equivalents - end of period                                $ 1,024,636   $ 1,171,579
                                                                         ===========   ===========
</TABLE>


See accompanying notes
<PAGE>


                            Frisby Technologies, Inc.
                   Notes to Consolidated Financial Statements
                                December 31, 2000




1.  Description of Business

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

2.  Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated  financial  statements include the accounts of the Company, its
wholly-owned  subsidiary,  and of Schoeller  Frisby  Technologies  GmbH, a joint
venture  controlled by the Company.  All significant  intercompany  balances and
transactions have been eliminated in consolidation.

Revenue Recognition

Revenues from sales of products are recognized  when title passes based upon the
terms of the sale,  which are  generally  upon  shipment.  License  revenues are
recorded ratably over the license period, which generally ranges between two and
three years. Royalty revenues are recorded when the Company's strategic partners
report sales of products  containing  Thermasorb(R)  and  COMFORTEMP(R) to their
customers.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the
weighted-average method.

Property and Equipment

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

The Company  reviews the carrying  value of its property and equipment and other
long-lived   assets  in  determining  the  ultimate   recoverability   of  their
unamortized  values using future  undiscounted  cash flow  analyses if there are
indicators of impairment.  To the extent such undiscounted cash flow projections
indicate  that an impairment  exists,  the assets are written down to discounted
cash flows.

Intangible Assets, Net

Excess  cost  over  fair  value  of  assets  acquired  is  amortized  using  the
straight-line  method over ten years.  Patents and trademarks are amortized over
their estimated useful lives ranging from 5 to 20 years. License agreement costs
are amortized over their related license term. The Company  periodically reviews
the  carrying  values and  estimated  useful lives of the  intangible  assets to
determine whether current events and  circumstances  warrant  adjustments.  This
valuation  is  performed  using the  expected  future  undiscounted  cash  flows
associated  with  the  intangible  assets  compared  to the  carrying  value  to
determine if a write-down is required.  To the extent such projection  indicates
that the undiscounted cash flow is not adequate to recover the carrying amounts,
the assets are written down to discounted cash flows.

Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable,
short-term  and  long-term  debt.  The  Company   considers  all  highly  liquid
investments  with an original  maturity  of three  months or less at the date of
purchase to be cash  equivalents.  The Company  estimates  the fair value of its
financial  instruments  using a discounted  cash flow analysis based on interest
rates for  similar  types of  instruments  available  in the  market  place.  At
December 31, 2000 the carrying  amounts of the Company's  financial  instruments
approximated their fair values.

Advertising and Promotion

Advertising and promotion costs are expensed the first time the advertisement is
run.  Media print  placement  costs are  expensed  in the month the  advertising
appears.  Accounting for endorsement  contracts is based upon specific  contract
provisions.   Total  advertising  and  promotion   expenses  were  approximately
$1,414,000  and  $1,425,000  for the years  ended  December  31,  2000 and 1999,
respectively.

Research and Development

Research and development costs are expensed as incurred.

Stock Based Compensation

Stock based compensation expense for the Company's employee stock option plan is
recognized  under the provisions of Accounting  Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current  market price of the  underlying  stock  exceeded  the  exercise  price.
Statement on  Financial  Accounting  Standard  (SFAS No.  123),  Accounting  for
Stock-Based  Compensation,  established  accounting and disclosure  requirements
using  a  fair  value-based  method  of  accounting  for  stock-based   employee
compensation  plans.  As allowed by SFAS No.  123,  the  Company  has elected to
continue to apply the intrinsic value-based method of accounting described above
related to employees,  and has adopted the disclosure  requirements  of SFAS No.
123.

Net Loss Per Share

The denominator  used in the computation of basic and diluted net loss per share
for the years ended  December  31, 2000 and 1999 was  6,245,039  and  5,570,005,
respectively;  the weighted-average  shares. The calculation of diluted net loss
per share  excludes  shares of common stock  issuable upon the exercise of stock
options  and  warrants  (Note  10),  as the  effect of such  exercises  would be
antidilutive.

Translation of Foreign Currency Financial Statements

Assets and liabilities of foreign  operations  where the functional  currency is
other than the U.S.  dollar are translated at fiscal year-end rates of exchange,
and the related  revenue and expense amounts are translated at the average rates
of exchange during the fiscal year.  Gains or losses  resulting from translating
foreign currency  financial  statements  resulted in an immaterial impact to the
financial  statements  for the  year  ended  December  31,  2000  and  were  not
applicable in 1999.

Use of Estimates

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

Recent Accounting Pronouncements

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


Reclassifications

Certain amounts in prior year's financial statements have been reclassified to
conform with current year classifications.

3.  Financial Risks

The  Company  currently  outsources  the  manufacture  of all  of its  products,
including Thermasorb(R) and COMFORTEMP(R), to a limited number of manufacturers.

The  Company  does a  significant  amount of business  with a limited  number of
licensee/customers.  Total revenues from the top two licensees/customers  during
each period comprised approximately 28% (17% and 11%) and approximately 27% (15%
and 12%) of the Company's  total  revenues for the years ended December 31, 2000
and 1999, respectively.

At December 31, 2000, two  licensee/customers  accounted for  approximately  60%
(46% and 14%) of the Company's accounts receivable.  The Company performs credit
evaluations of its strategic  partners'  financial condition and payment history
prior to extending credit.  Consistent with industry standards,  receivables are
payable in accordance with the terms of the underlying  contracts and collateral
is not required.

The Company's sales are to customers worldwide, with approximately 41% generated
in Europe, 36% in North America and 18% in the Asia-Pacific region.


4.  Property and Equipment

     Property and equipment consist of the following as of December 31, 2000:

Leasehold  improvements        $   72,167
Furniture                         278,131
Equipment                       1,114,389
                               ----------
                               ----------
                                1,464,687
Less accumulated depreciation     723,042
                               ----------
                               $  741,645
                               ==========

5.  Intangible Assets

     Intangible assets consist of the following as of December 31, 2000:

Goodwill                       $1,074,740
Patents and trademarks             47,920
License agreement                 704,450
                               ----------
                                1,827,110
Less accumulated amortization     300,640
                               ----------
                               $1,526,470
                               ==========


<PAGE>

6.  Line of Credit

In February  2000, the Company  entered into a $2,000,000  line of credit with a
bank (the "Line"). The Line is maintained for working capital purposes. The Line
was originally  scheduled to mature on July 31, 2000; however, the maturity date
was extended to September 30, 2000 and further extended to December 31, 2000. As
a condition of the later extension,  the Company's Chief executive Officer and a
related member of the Board of Directors personally guaranteed repayment in full
of the  obligation.  The  line is a  committed  facility,  which is  secured  by
substantially  all of the  Company's  assets,  and bears  interest at the bank's
prime rate plus 200 basis points.  The credit agreement  requires the Company to
meet a minimum tangible net worth covenant.

Subsequent to December 31, 2000, the Company further  negotiated an extension of
the Line until June 20, 2001.  Amended terms related to the extension  include a
borrowing  limit of  $1,500,000  and  interest at the bank's  prime rate plus 25
points.  The guarantees of the Company's Chief  Executive  Officer and a related
member of the Board of Directors  remain in effect.  In connection with the last
extension,  a  significant  shareholder  of the  Company  issued an  irrevocable
stand-by  letter of credit in the  principal  amount of  $1,500,000  naming  the
leading bank as the  beneficiary.  The shareholder has the right to convert this
letter of credit to equity as part of the Company's  private placement (see Note
9). At December 31, 2000, $1,453,469 was outstanding under the Line.

On March  27,  2001  the  Company  received  a Letter  of  Intent  from the same
significant  shareholder  proposing to take over the existing $1,500,000 Line of
Credit,  with terms and conditions similar to those with the bank. This proposed
financing  arrangement  would extend the maturity  date of the Line of Credit to
January 2, 2002. The proposed financing  arrangement may also include conversion
rights and privileges similar to those being offered under the private placement
memorandum.  As of this date,  formal  negotiations are still being held and the
final terms have not been agreed  upon.  The  Company  anticipates  that it will
formalize and finalize this arrangement before April 15, 2001.

7.  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 European distribution of the Company's products. The Company owns 51% of the
outstanding shares of the common stock and has control of the joint venture and,
accordingly,  consolidates the joint venture. The joint venture began operations
in January 2000.

The Company recorded minority interest income, which reflects the portion of the
losses of SFT that are  applicable to Schoeller  Textil AG's minority  interest.
The minority  interest  amount on the Balance Sheet  represents the share of the
net assets of SFT  associated  with the  minority  partner's  interest  in those
operations.

8.  Acquisitions

During 1999, the Company acquired selected assets of Steele and Associates, Inc.
and acquired  100% of the  outstanding  shares of Extreme  Comfort,  Inc.  These
acquisitions have been accounted for as purchase transactions and consist of the
purchase of assets with an estimated  fair value of $200,800 and the  assumption
of liabilities of $643,774.

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


9.  Stockholders' Equity

Preferred Stock

Under  the  terms  of the  Company's  Article  of  Incorporation,  the  Board of
Directors  may  determine  the rights,  preferences,  and terms of the Company's
authorized but unissued shares of preferred stock.

Common Stock

In September 2000, the  shareholders of the Company  approved an increase to the
authorized number of shares of common stock from 10,000,000 to 30,000,000.

Private Placement

In February  2000,  the Board of Directors  authorized the Company to complete a
private equity  financing of up to $7,500,000  consisting of units  comprised of
one share of the Company's common stock and one warrant to purchase one share of
common  stock.  In May 2000,  the Company  completed a portion of the  financing
totaling  $4,000,000,  consisting of 800,000 shares of common stock at $5.00 per
share and 800,000 attached  five-year  warrants with an exercise price of $7.00.
In December 2000, the Company  completed an additional  portion of the financing
totaling  $700,000,  consisting  of 175,000  shares of common stock at $4.00 per
share and 175,000 attached  five-year  warrants with an exercise price of $6.00.
Concurrently,  the Company  issued an additional  200,000 shares of common stock
and 200,000 warrants to the investment  group that  participated in the May 2000
placement,  effectively  repricing  the shares and  warrants to $4.00 and $6.00,
respectively.  Additionally, as of March 27, 2001, the Company has received firm
commitment  letters from several  investors  for an equity  investment  of up to
$550,000  and a  commitment  letter from a  significant  shareholder  to provide
additional  funding  for 2001,  if  required,  until the Company  completes  the
private  equity  financing.  The  proceeds  of the  offering  have been used for
working capital and other general corporate purposes.

Issuance of Stock Options and Warrants for Service

During 2000, the Company  entered into product  endorsement  agreements with two
well-known athletes. These product endorsement agreements provide for a total of
176,000  options to purchase  the  Company's  common  stock at  exercise  prices
ranging from $4.13 per to $4.50 per share.  The  agreements  provide that 28,000
options are immediately vested and expire in 2005. The remaining 148,000 options
will be awarded based upon performance of the individuals under the contract and
the Company attaining  certain revenue levels for the particular  products being
endorsed.   Accordingly,  the  aggregate  fair  value  of  the  vested  options,
calculated under the  Black-Scholes  method,  of $48,020,  is being amortized to
expense over the product endorsement period.

The Company  entered into an investor  relations  agreement  during 2000,  which
provides for  services to the Company  through  2001.  As  compensation  for the
agreement,  the  Company  issued  warrants  to  purchase  100,000  shares of the
Company's  common  stock at an  exercise  price of $6.50 per share,  expiring in
2005. The aggregate fair value of these warrants of $100,000 is being changed to
expense over the respective service period.

Additionally,  the  Company  has options  and  warrants  outstanding  to acquire
370,000 shares of its common stock with exercise  prices ranging from $3.1875 to
$11.55 expiring in 2003.

In connection  with the private equity  placement,  the Company  entered into an
agreement with an  investment-banking  firm. In addition to an up-front payment,
the Company issued 80,000 five-year Agent warrants, priced at $0.01 per warrant,
entitling the investment-banking firm to purchase 80,000 shares of the Company's
common stock at a price of $6.00 per share.  Each of these shares would carry an
attached  five-year  warrant to purchase an  additional  share of the  Company's
common stock at a purchase price of $7.00 per share.

10.  Employee Benefit Plans

Employee Stock Purchase Plan

The Company  established a qualified  Employee  Stock Purchase Plan during 2000,
the terms of which allow for qualified  employees (as defined) to participate in
the purchase of designated shares of the Company's common stock at a price equal
to the  lower  of 85% of the  closing  price  at the  beginning  or end of  each
semi-annual  stock  purchase  period.  The Company issued 6,920 shares of common
stock during fiscal 2000 pursuant to this plan at a price per share of $4.04.

Employee Retirement Plan

Substantially all employees meeting certain service requirements are eligible to
participate in a 401(k) Profit Sharing Plan.  Under the Plan,  participants  are
permitted to contribute from their  compensation  any amount up to the lesser of
12% of their  annual  gross  salary or the maximum  deferral  allowed  under the
Internal Revenue Code. The Company currently matches 50% of the employee's first
6% pre-tax contribution.  The Company matching contribution and any related plan
fees were  approximately  $43,300 and $43,100 for the years ended  December  31,
2000 and 1999, respectively.

The Company is entitled to also make optional  profit sharing  contributions  at
its  discretion.  During the years ended December 31, 2000 and 1999, the Company
did not make any profit sharing contributions to the Plan.

Employee Stock Option Plan

The Company has a Stock Option Plan  ("Plan")  under which  1,250,000  shares of
common stock are reserved for issuance to employees,  directors and  consultants
of the Company.  Options granted under the Plan may be either  "incentive  stock
options"  as  defined  in  Section  422  of  the  Internal   Revenue   Code,  or
non-statutory  stock  options as  determined  by the Board of  Directors  of the
Committee.  Options granted  pursuant to the Plan have exercise periods of up to
ten years and vest over a period of four years.

The following table summarizes activity in stock options:

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

Balance at December 31, 1998   176,500   $   6.37

Grants                         174,950   $   4.02
Forfeitures                     (1,000)  $   3.63
                               -------

Balance at December 31, 1999   350,450   $   5.20

Grants                         535,050   $   4.73
Forfeitures                   (101,575)  $   5.16
Exercised                      (42,125)  $   4.05
                               -------

Balance at December 31, 2000   741,800   $   4.93
                               =======

Weighted average fair value of options
issued in 2000 using the Black-Scholes
option pricing model                     $   2.61



<PAGE>



The following table summarizes information about the stock option outstanding as
of December 31, 2000:

<TABLE>
<CAPTION>

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

<S>      <C>                            <C>                      <C>                  <C>
         $3.19                          2,500                    2,500                2.75
         $3.63                         93,225                   56,375                7.92
         $3.81                          1,000                        -                9.96
         $3.88                         60,000                   15,000                9.88
         $4.38                         12,500                    5,625                8.16
         $4.50                         40,625                    3,125                7.87
         $4.53                          2,500                        -                3.04
         $4.59                          2,500                    2,500                3.13
         $4.75                        141,450                   31,650                9.02
         $4.88                          7,500                    1,875                3.04
         $4.94                        250,000                        -                9.50
         $5.25                         10,000                    2,500                8.79
         $5.50                         10,250                       63                9.28
         $5.44                            250                        -                9.25
         $7.00                         72,500                   72,500                2.27
         $7.25                         35,000                   35,000                2.29
                              ---------------------    -------------------
                                      741,800                 228,713
                              =====================    ===================

</TABLE>

At December 31, 2000, the Company has reserved 2,756,000 shares of common stock
for issuance of all options and warrants outstanding.

Pro forma  information  regarding net loss and net loss per share is required by
Statement  123, and has been  determined as if the Company had accounted for its
stock options under the fair value of that  statement.  The fair value for these
options  was  estimated  at the date of grant  using  the  Black-Scholes  option
pricing model with the following weighted-average assumptions for the year ended
December  31,  2000:  risk-free  interest  rate  of  6.0%;  no  dividend  yield;
volatility  factor of the expected market price of the Company's Common Stock of
0.75 and a weighted-average expected life of the options of four years.

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

Pro forma net loss                                            ($ 5,160,782)
                                                              =============
Pro forma basic and diluted loss per share                         ($ 0.83)
                                                              =============

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


<PAGE>


11.  Income Taxes

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

                                                 2000
                                          ------------------
Current:
   Returns and allowances                    $    36,000
   Accounts receivable reserve                    37,000
                                             -----------
                                             -----------
Total current deferred                            73,000

Non-current:
   License agreement                              97,000
   Net operating loss carryforward             3,665,000
                                             -----------
Total non-current deferred                     3,762,000
Total deferred tax assets                      3,835,000
Valuation allowance for deferred tax assets   (3,835,000)
                                             -----------
   Net deferred tax assets                   $      --
                                             ===========

As a result of losses from operations through December 31, 2000, the Company has
available a net operating loss carryforward ("NOL") of approximately $14,500,000
for Federal income tax purposes that expires in years through 2020.  Utilization
of the NOL is subject to an annual  limitation  under Section 382 due to certain
ownership changes the Company underwent in 1998.

In assessing  the  realizability  of deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation  of future  taxable  income during the period in
which the NOL can be utilized and the temporary  differences  become deductible.
Since the  Company has  incurred  losses in  previous  years and it  anticipates
additional losses in 2001, the Company has established a valuation allowance for
deferred tax assets at December 31, 2000.


<PAGE>



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

                                                                               Year ended December 31
                                                                                2000              1999
                                                                       ------------------------------------

<S>                                                                         <C>              <C>
Benefit for Federal income taxes at the statutory rate                      $(1,639,238)     $(1,913,624)
State income taxes, net of Federal income tax benefit                          (219,562)        (249,741)
Permanent differences                                                            55,527            9,279
Other                                                                           (22,727)          (6,563)
Change in valuation allowance                                                 1,826,000        2,160,649
                                                                       ------------------------------------
                                                                            $    -           $    -
                                                                       ====================================
</TABLE>

12.      License Arrangements

The Company has various licensing agreements that give the Company the exclusive
worldwide  rights  to  develop  and  commercialize   proprietary  technology  in
microencapsulation  and thermal  management.  Under these agreements the Company
pays royalties on product sales,  license fees and royalty revenues ranging from
1% to 12.5%.  These agreements contain aggregate minimum payments of $626,000 in
2001 and $750,000 in 2002 and $150,000 each year thereafter until the agreements
expire.

The Company expensed $473,000 and $323,000 under these agreements for the years
ended December 31, 2000 and 1999, respectively.

13.      Commitments and Contingencies

     The Company has an operating lease agreement for its corporate headquarters
and thermal testing  facility in North  Carolina.  The lease agreement is for 12
years and includes  scheduled rent escalations  throughout the lease term, which
are being expensed on a straight-line  basis.  The Company has also entered into
several operating leases for computer equipment. Rent expense from all operating
leases was approximately  $329,000 and $207,000 for the years ended December 31,
2000 and 1999,  respectively.  Future minimum payments under these leases are as
follows:

         2001                $   178,000
         2002                    153,000
         2003                    183,000
         2004                    183,000
         2005                    183,000
      Thereafter               1,176,000
                         ----------------------
                              $2,056,000
                         =======================

The Company is involved in various legal proceedings and claims that have arisen
in the ordinary course of business that have not been finally adjudicated. These
actions,  when  finally  concluded  and  determined  will not, in the opinion of
management,  have a material  adverse  effect  upon the  financial  position  or
results of operations of the Company.
<PAGE>