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

                                   Form 10-KSB

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

                   For the fiscal year ended December 31, 1999

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

                           Commission File No. 1-14005

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

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

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

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

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

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

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

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

                                      None
                                (Title of Class)

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

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

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

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

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

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


<PAGE>

Part I

Item 1. Description of Business.

General

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

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

Products

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

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

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

Foams and Fabric Packages

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

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

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

         Other Host Materials

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

         Finished Products

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

Purchasing

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

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

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

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

Sales and Marketing

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

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

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

     --   Increase penetration with existing licensee/customers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Advertising

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

Research and Development

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

Patents/Intellectual Property

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

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

<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

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

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

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

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

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

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

Competition

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

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

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

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

Employees

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

Item 2. Description of Properties

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

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

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

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

Item 3. Legal Proceedings.

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

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

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

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

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

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

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

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

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

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


<PAGE>


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

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

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

General

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

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

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


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

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

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

Years ended December 31, 1999 and 1998

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

     On April 14, 2000 the  Company  received a firm  commitment  letter from an
investor group for $4 million of a potential aggregate equity transaction in the
Company  of up to $7.5  million.  The  proposed  transaction  includes  both the
Company's common stock and warrants and has been approved by the Company's Board
of Directors.  The Company  anticipates  that this  transaction will close on or
before May 15, 2000.

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

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

Inflation

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

Year 2000

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

Item 7. Financial Statements.

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

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

         None

Part III

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

                                     PART IV

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

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

3.2 By-Laws

4.1 Form of Common Stock Certificate

4.2 Form of Representative's Option

10.2 Stock Option Plan

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

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

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

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

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

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

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

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

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

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

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

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

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

3.1      Amended and Restated Certificate of Incorporation

10.1     Amended MUSI Stockholder Agreement

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

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

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

10.7.1.1 Amendment to License Agreement between the Company and TRDC

(e)      Exhibits

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

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

23.1 Consent of Independent Auditors

27.1 Financial data schedule

(f)      Reports on Form 8-K

         None.

<PAGE>


Signatures

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

                                            Frisby Technologies, Inc.

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

Dated:  April 14, 2000

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

            Signature                                     Title                                Date

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

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

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

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

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

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

<PAGE>

Item 7. Financial Statements.

                            Frisby Technologies, Inc.

                   Index to Consolidated Financial Statements


<TABLE>
<CAPTION>

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

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

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

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

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

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

                                      F-1
<PAGE>


                         Report of Independent Auditors


The Stockholders
Frisby Technologies, Inc.

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

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

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

                                /s/ Ernst & Young LLP



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

                                      F-2
<PAGE>


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

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

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

Commitments and contingencies

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

</TABLE>
                             See accompanying notes.

                                      F-3
<PAGE>

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

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


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

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

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

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

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

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

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

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

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


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

</TABLE>

                             See accompanying notes.

                                      F-4
<PAGE>

                            Frisby Technologies, Inc.
            Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

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

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

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

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

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


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

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

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

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

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





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

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

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

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

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



<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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



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

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

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

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

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

                             See accompanying notes
</TABLE>
                                      F-5

<PAGE>


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

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

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


                             See accompanying notes


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




1.       Summary of Significant Accounting Policies

Organization and Business

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

Basis of Consolidation

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

Use of Estimates

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

Revenue Recognition

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


                                      F-7
<PAGE>
Cash and Cash Equivalents

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

Marketable Securities

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

Depreciation and Amortization

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

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

Net Loss Per Share

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

Fair Value of Financial Instruments

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

Inventories

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

                                      F-8
<PAGE>
Advertising and Promotional Expense

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

Long-Lived Assets

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

Stock Based Compensation

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

Recent Accounting Pronouncements

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

Reclassifications

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

                                      F-9
<PAGE>
2.       Significant Concentrations

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

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

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

3.       Property and Equipment

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


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

4.       Line of Credit

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

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

                                      F-10
<PAGE>
5.       Stockholders' Equity

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

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

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

6.       Stock Based Compensation Plan

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

                                      F-11
<PAGE>



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

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

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



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

</TABLE>

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

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

<S>                  <C>                          <C>                     <C>                      <C>
                     $3.00                        5,000                   1,250                    3.90
                     $3.19                        2,500                     625                    3.75
                     $3.56                       16,500                   4,125                    3.90
                     $3.63                      108,700                  27,425                    9.50
                     $3.69                       10,000                  10,000                     .25
                     $4.38                       15,000                      --                    4.15
                     $4.88                        7,500                      --                    4.08
                     $4.50                       22,500                   2,500                    6.50
                     $5.19                          250                      --                    9.75
                     $5.25                       10,000                      --                    9.75
                     $5.44                       10,000                      --                    4.60
                     $5.50                       10,000                  10,000                     .25
                     $7.00                       97,500                  97,500                    3.25
                     $7.25                       35,000                  35,000                    3.25
                                          ---------------------    -------------------
                                                350,450                 188,425
                                          =====================    ===================
</TABLE>

                                  F-12

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

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

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

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

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

7.       Income Taxes

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

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

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

                                      F-13
<PAGE>

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

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

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

8.       Related Party Transactions

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

9.       Acquisitions

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

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

                                      F-14
<PAGE>

10.      License Arrangements and Other Commitments

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

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

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

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

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

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

                                      F-15

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

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

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

11.      Retirement Plan

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

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

12.       Subsequent Events

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

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

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

                                      F-16