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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
                                  FORM 10-KSB
 
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                            SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934
 
           FOR THE TRANSITION PERIOD FROM             TO
 
                         COMMISSION FILE NUMBER 0-21999
                             ---------------------
                          NHANCEMENT TECHNOLOGIES INC.
                 (Name of Small Business Issuer in its Charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      84-1360852
       (State or other jurisdiction of              (I.R.S. Employer Identification No.)
        incorporation or organization)
</TABLE>
 
                        39420 LIBERTY STREET, SUITE 250
                           FREMONT, CALIFORNIA 94538
                    (Address of principal executive offices)
 
                                 (510) 744-3333
                          (Issuer's telephone number)
 
         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
                                      NONE
 
         SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)
                             ---------------------
 
     Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
 
                                Yes [X]  No [ ]
 
     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 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.  [ ]
 
     For the fiscal year ended December 31, 1997, the issuer's revenues totaled
$9.0 million.
 
     As of March 31, 1998, the aggregate market value of the voting common
equity of NHancement Technologies Inc. held by non-affiliates was approximately
$8,026,000, based upon the closing bid price for such common stock on such date
on The Nasdaq Stock Market SmallCap System, of $2.4375 per share.
 
     As of March 31, 1998, there were 4,437,000 shares of Common Stock
outstanding.
 
     Transitional Small Business Disclosure Format (check one)
 
                                Yes [ ]  No [X]
 
     Documents Incorporated by Reference -- None
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                          NHANCEMENT TECHNOLOGIES INC.
 
                               TABLE OF CONTENTS
 
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                                     PART I
Item 1.     Business....................................................       3
Item 2.     Description of Property.....................................      11
Item 3.     Legal Proceedings...........................................      11
Item 4.     Submission of Matters to Vote of Security Holders...........      11
                                    PART II
Item 5.     Market for Common Equity and Related Stockholder Matters....      12
Item 6.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................      15
Item 7.     Financial Statements........................................      19
Item 8.     Changes In and Disagreements With Accountants On Accounting
              and Financial Disclosure..................................      19
                                    PART III
Item 9.     Directors, Executive Officers, Promoters and Control
              Persons; Compliance with Section 16(a) of the Exchange
              Act.......................................................      20
Item 10.    Executive Compensation......................................      22
Item 11.    Security Ownership of Certain Beneficial Owners and
              Management................................................      25
Item 12.    Certain Relationships and Related Transactions..............      26
Item 13.    Exhibits and Reports on Form 8-K............................      29
</TABLE>
 
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                                     PART I
 
ITEM 1. BUSINESS
 
     The following contains forward-looking statements regarding future events
or the future financial performance of NHancement Technologies Inc. and its
subsidiaries ("NHancement" or the "Company") that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this Item 1 under "Strategy," "Principal
Suppliers," "Marketing" and "Competition," as well as in Item 6 hereof
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this report. This report includes certain
trademarks of NHancement and its subsidiaries.
 
OVERVIEW
 
     NHancement Technologies Inc. is a growing company whose objective is to
become a leading global systems integrator of communications-centric products.
NHancement believes that increased global competition, shorter time to market
trends and the reduced importance of geographical borders make it imperative
that corporations achieve and maintain high productivity and security in
communications operations worldwide. The Company through its two current
operating subsidiaries, Voice Plus, Inc., a California corporation ("VPI" or
"Voice Plus"), and Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"), serves this need by providing multinational corporations and other
businesses with communications products and technological innovations designed
to enhance efficiency.
 
     NHancement's mission is to become the single vendor of choice for the
design and implementation of enterprise-wide communications-centric services for
small and medium-sized organizations with global operations. Services currently
provided by the Company include voice messaging, e-mail, paging and multimedia
systems, network servers, LANs, WANs, routers, transmission systems and network
security systems. In NHancement's view, traditional telecommunications service
providers have not kept pace with the requirements of global business operations
or adequately addressed the global multimedia communications needs of
corporations, thereby affording the Company an opportunity to exploit this
growing market.
 
     The Company was incorporated in October 1996 to pursue a business
combination opportunity with Voice Plus, a company then engaged in the business
of integrating voice processing systems with telecommunications equipment, and
BioFactors, Inc. ("BFI" or "BioFactors"), a development stage company
incorporated in Delaware that offered the FACTOR 1000(R) system, a proprietary
computerized impairment testing system. These two companies were acquired by
NHancement on February 3, 1997 pursuant to two separate merger transactions
whereby each company became a wholly-owned subsidiary of NHancement. Immediately
following these acquisitions, the Company completed the initial public offering
("IPO") of shares of its Common Stock.
 
     Subsequent to the completion of the IPO, management decided to combine the
operations of Voice Plus and BioFactors into a single entity. Effective as of
November 12, 1997, BioFactors was merged with and into Voice Plus in a statutory
merger intended to qualify, for federal income tax purposes, as a reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended. Voice Plus
was the surviving corporation in the merger transaction with BioFactors, and the
separate existence of BioFactors ceased on the effective date of the merger. The
operations of the combined entity include the businesses conducted separately by
VPI and BFI prior to the merger and are currently being conducted under the name
of "Voice Plus(R)." Voice Plus, which is headquartered at the Company's
facilities in Fremont, California, remains a wholly-owned subsidiary of
NHancement and continues to provide organizations with voice processing systems
and other communications equipment. Prior to the merger, BioFactors had
concentrated on developing a market for its FACTOR 1000(R) system, which is used
for detecting worker impairment. The Company has determined that such effort is
no longer justified, given the resources required to develop such a market and
the need to dedicate its financial resources to its other core businesses. As a
result, the Company is attempting to sell FACTOR 1000(R) to a third party and
anticipates exiting that business in 1998.
 
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     On December 15, 1997, NHancement purchased one hundred percent (100%) of
the shares of Advantis Network & System Sdn Bhd ("Advantis"). As a result of the
acquisition, Advantis has become a wholly-owned subsidiary of NHancement.
Advantis is a communications systems integrator formed to address the growing
communications infrastructure needs of Malaysia. The operations of the entity
are being conducted under the name of "Advantis Network & System Sdn Bhd," which
is headquartered in Kuala Lumpur, Malaysia.
 
     On January 16, 1998, the Company entered into a definitive agreement to
acquire all of the issued and outstanding shares of capital stock of Infotel
Technologies Pte Ltd ("Infotel"), a company organized under the laws of
Singapore. The terms of the agreement require a cash payment of about $2.3
million in cash, performance payments based on 1998 and 1999 profitability of
about $2 million and 431,000 shares of NHancement Common stock. Consummation of
the transaction is contingent upon the Company obtaining an extension of the
closing date of April 13, 1998, which has been verbally agreed to by Infotel
shareholders. The Company has recently signed a financing agreement for $3
million the proceeds of which in large part will be used to effect the Infotel
acquisition. Should the Infotel acquisition be consummated, in addition to the
Company's existing portfolio of infrastructure communications equipment
products, it will provide radar system integration, turn key project management
services and test instrumentation, as well as a wider portfolio of
communications equipment.
 
     The Company's principal corporate office is located at 39420 Liberty
Street, Suite 250, Fremont, California 94538, and its telephone number is
510-744-3333.
 
STRATEGY
 
     The Company intends to leverage its position as a provider of voice
processing systems in the United States and its data and infrastructure
capabilities in Asia to become a diversified provider of a full range of
productivity and security enhancement products and services on a global basis.
The specific elements of the Company's strategy to achieve this objective are as
follows:
 
     Capitalize and expand on its existing sales and support infrastructure and
     systems integration capabilities to market its existing products and new
     complementary products.
 
     The Company believes that, by utilizing its sales force and installed base
of over 1,000 client organizations, the Company can position itself to increase
revenues by introducing new complementary products to its existing customers.
The Company has national sales and marketing presence in major markets geared to
sell communications products and services across the United States and Malaysia.
In addition to its offices in the San Francisco Bay Area, Atlanta, Salt Lake,
New York, Phoenix, Dallas, and Kuala Lumpur (Malaysia), the Company intends to
expand into additional major United States, Asia Pacific, and European markets.
 
     Exploit a growing trend towards unified networks by providing various
     solution-based stand-alone and network systems and applications.
 
     The Company believes that when implementing any new system or technology,
businesses seek to maximize the use of current resources and facilities. As a
result, previously disparate electronic systems are being integrated to operate
on a unified network. For example, networked electronic security systems that
provide access control and monitoring within a premise or over a wide geographic
area were developed following the demand by corporations that the installation
of new security systems utilize existing communications networks. Further, the
continuing trend towards outsourcing of services in an environment of increased
technological complexities requires vendors to be highly skilled in integrating
telephony technology with LAN and WAN systems. The Company's goal is to provide
integrated productivity and security systems that achieve these goals.
Management believes that VPI's voice processing integration capabilities,
together with the security products and services the Company anticipates
providing, will offer solutions to meet the productivity and security needs of
corporations.
 
     Exploit the need for worldwide system integration capabilities to meet the
     growing demands from business globalization.
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     The Company is devoting resources to address the need for integrated global
security systems and communications systems integration capabilities. With
multiple sites across continents, companies with global operations increasingly
are operating in real time, and security and communications must be conducted in
real time. The Company intends to provide communications and security products
and services on a global basis by exploiting, among other things, management
contacts in Asia Pacific. In this regard, the Company recently completed the
acquisition of Advantis, a Malaysian corporation engaged in the business of
telecommunications systems integration and structured cabling of
telecommunications switches and transmissions systems.
 
     Continue to acquire complementary businesses and products.
 
     The Company seeks to acquire additional businesses that will expand its
geographic coverage or provide complementary products and services. In
particular, the Company intends to expand its product portfolio while maximizing
its organizational strength and expertise in marketing and systems integration.
 
     Acquisitions may involve a number of special risks, including adverse
short-term, and in some instances longer term, effects on the Company's
operating results, diversion of management's attention from the operations of
the Company and its existing subsidiaries, dependence on retention, hiring and
training of key personnel, risks associated with unanticipated problems or legal
liabilities and amortization of acquired intangible assets, some or all of which
could have a material adverse effect on the Company's operations and financial
performance. Successful integration of the operations of additional companies
into those of the Company will require the cooperative efforts of the managers
and employees of the respective business entities, including the integration of
the owners or managers of smaller companies into roles that require them to
report to supervisors. Significant costs and management time may be required to
integrate management control systems. Furthermore, to manage its growth
effectively, the Company must continue to improve its operational, financial and
management controls and information systems, to accurately forecast sales
demand, to control its overhead and to manage its marketing programs. There can
be no assurance of accomplishing these results without encountering substantial
costs, delays or other problems. If management fails to establish necessary
controls and to manage growth effectively, the Company's operating results and
financial condition will be adversely affected.
 
     The Company's global business strategy subjects it to foreign market and
currency risks. In particular, the devaluation of the Malaysian currency
(Ringgit) in relation to the United States Dollar has affected the short and
medium term revenues of its Advantis subsidiary in Malaysia. Although the
Company believes that the long term effects of the currency problems in Malaysia
and the Asian region will be manageable, the short term uncertainty related to
fluctuations in the Ringgit has caused Advantis' customers to postpone the
deployment of communications equipment. The Company believes that such customers
cannot indefinitely delay the purchase of strategic equipment such as
communications equipment and that such purchases will be resumed within the next
few quarters. In the meantime, Advantis has instituted cost constraint measures
while continuing to expand its partnering efforts with its United States
equipment suppliers and local larger contractors. In addition to the short-term
effects of the Ringgit devaluation described above, any prolonged devaluation of
the Ringgit can be expected to materially and adversely affect the operations
and financial condition of Advantis, and may result in a material adverse effect
on the business and financial condition of the Company.
 
     The Company does not intend to submit any proposed acquisition or other
business transaction for the review or approval of its stockholders, except as
required by Delaware law. Even if submitted to a vote of stockholders, the
Company's management owns a substantial portion of the Company's outstanding
voting securities and may be able to control the outcome of any such proposal.
The Company's growth strategy is highly dependent on the Company's ability to
make future acquisitions and to obtain the financing necessary to complete such
acquisitions.
 
THE COMPANY'S PRODUCTS AND SERVICES
 
     The Company's current systems integration businesses include voice
processing, multimedia messaging and infrastructure communications equipment.
 
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  Voice Processing and Multimedia Messaging
 
     NHancement, through its United States subsidiary Voice Plus, offers a broad
range of products that supports a number of enterprise applications such as
voice messaging, text messaging, LAN messaging and interactive voice response or
self-inquiry systems. The Company's product portfolio includes manufacturers
among others, such as NEC, Centigram Communications Corporation, Digital Speech
Systems, Inc., Active Voice Corporation, Voice Technologies Group, and
Interactive Intelligence. VPI is a systems integrator and national distributor
of voice processing equipment from several manufacturers, which equipment
enables users to access and interact with a broad range of information in a
variety of formats (including voice, text, data and facsimile) from a variety of
terminals (including touch-tone telephones and personal computers). VPI offers a
broad range of products that support a number of enterprise applications:
Telephone Answering, Automated Attendant, Voice Messaging, Paging, Facsimile
Messaging, Interactive Voice Response, LAN Integration and Networking, and
Technical Support.
 
  Infrastructure Communications Equipment
 
     The Company, through its Malaysian subsidiary Advantis, has the ability to
offer a wide range of infrastructure communications equipment products that
satisfy demanding communications needs. With over four years of experience in
Malaysia, Advantis has satisfied many customers on a variety of projects ranging
from structured cabling to networking projects. Products supported include
manufacturers such as Nortel, Case Technology, Network Associates, 3Com, and
Hypercom. Advantis focuses on large projects in the government and institutional
sectors as well as in the commercial sector.
 
MARKETING
 
     The Company has an established marketing and distribution infrastructure
for its voice processing and multimedia messaging products, which is expected to
include other new products, such as call centers. The Company has marketing
personnel, technical assistance centers (including customer service
representatives, system engineers and senior level field technicians) and a
network of service/support dealers to provide its customers with personalized
attention, flexibility, responsiveness and accountability within the United
States and Malaysia.
 
     The Company markets its products and services primarily through focused
telemarketing and calls to prospective customers in specific emerging growth
markets (including the paging and cellular operator markets), participation in
trade shows, acquisition of data bases and inclusion of its products and
services on bidders' lists. The Company focuses on pre-sale analysis of its
customers' needs and the rate-of-return potential of specific sales
opportunities to determine whether they justify the investment of time and
effort of the Company's sales and marketing organization. Typically, the Company
focuses on sales opportunities where the value added from its products and
services provides significant benefits for the customer. The Company also
participates in competitive bidding for government agency work. In evaluating a
prospective sales situation, the Company also considers the lead time to
revenue, the complexities of the customer's requirements and its ability to
satisfy the customer and provide it with the necessary support.
 
PRINCIPAL SUPPLIERS
 
     VPI's business is based upon the integration of hardware and software
telecommunications and data processing equipment manufactured by others into
integrated systems designed to meet the needs of its customers. Although VPI has
distributor agreements with a number of equipment manufacturers, substantially
all of its revenue is based upon products manufactured by Centigram
Communications Corporation ("Centigram"). The Company depends upon Centigram to
offer products that are competitive with products offered by other manufacturers
as to technological advancement, reliability and price. If Centigram's
competitors should surpass Centigram in any of these qualities, the Company may
be required to establish alternative strategic relationships. Any such
development would adversely affect the Company's voice processing business for
an indeterminate period of time until new supplier relationships could be
established.
 
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     Pursuant to the Authorized United States Distributor Agreement, which has
been renewed several times over the last nine years, VPI is an independent
distributor of Centigram products in the United States, Puerto Rico and Canada
and may expand this territory into international locations with written
authorization from Centigram. Under the Distributor Agreement, VPI must purchase
a certain number of products each quarter from Centigram. During each of the
nine years that this distributor relationship has existed, VPI has exceeded its
quotas by significant amounts; VPI is expected to satisfy these quotas in 1998.
The Distributor Agreement which last expired on December 31, 1997, is renewable
automatically for successive two-year terms until canceled by either party upon
90 days' notice; effective as of December 31, 1997, the Agreement was
automatically renewed for an additional two years, subject to the termination
provisions described on the Distributor Agreement. The Distributor Agreement may
also be terminated for cause in the event (i) VPI defaults in the payment of any
amount due Centigram, and such default continues un-remedied for a period of 60
days after written notice of default; (ii) VPI breaches certain provisions of
the Distributor Agreement concerning the proprietary rights of Centigram; (iii)
VPI is acquired by a business entity that provides products or services in
direct competition with Centigram's products, and in Centigram's judgment, such
acquisition represents a conflict of interest; (iv) VPI fails to perform any
obligation under the Distributor Agreement and such failure continues for a
period of 20 days after written notice; (v) VPI fails to purchase any Centigram
assigned quota for a period of two consecutive quarters; or (vi) VPI sells a
Centigram product outside VPI's designated territory. In addition, the
Distributor Agreement terminates automatically if VPI becomes insolvent, makes
an assignment for the benefit of its creditors or if bankruptcy proceedings are
commenced by, for or against VPI. Any controversy or claim related to the
Distributor Agreement must be submitted to final and binding arbitration to be
held in San Jose, California, according to the rules of the American Arbitration
Association.
 
     Centigram has publicly announced that it has hired a third party firm to
identify potential buyers for its Customer Premise Equipment ("CPE") business.
If Centigram's CPE business is sold to an entity which does not permit third
parties such as the Company to continue to distribute the CPE products, there
would be a significant adverse impact upon the Company's business for an
indeterminate period of time until new supplier relationships could be
established.
 
     VPI has distributor agreements with a number of equipment manufacturers in
addition to Centigram. In accordance with the terms of such distributor
agreements, a manufacturer may discontinue the distributor relationship because
of factors related to a particular distributor or because of a manufacturer's
decision to change its method of distributing its products to all or parts of
its markets. In making such a change, a manufacturer of key products sold by a
distributor may effectively become a direct competitor of its former
distributor. Moreover, a manufacturer may reduce its dealer discounts, eliminate
exclusive distribution rights, reduce the manufacturer's support of a
distributor or otherwise adversely affect the competitive environment in which
the distributor sells the manufacturer's products. Any material change in VPI's
distributor relationships with its key suppliers, or any interruption of the
delivery of equipment to VPI by any of its key suppliers, would have a material
adverse effect upon the Company.
 
CUSTOMERS
 
     The Company currently services approximately 1000 clients. Revenues from
sales and services to two of such customers accounted for approximately 19% and
7% of total net revenues during the year ended December 31, 1997.
 
YEAR 2000 POTENTIAL IMPACT
 
     The Company has begun to conduct a review of its internal computer systems
to identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve any such problems. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Software programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to or
replacement of existing software, the Year 2000 problems will not pose
significant operational problems for the Company's domestic
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computer systems. The Company believes that the costs associated with any such
upgrade or replacement of software will not be material, and that all such
changes will be implemented by the end of calendar year 1998. However, if such
modifications are not made in a timely manner, or are not made properly, the
Company may be unable to implement appropriate Year 2000 solutions, which could
have a material adverse effect on the Company's business, financial condition or
results of operations.
 
     The Company distributes products from third party voice product equipment
manufacturers, some of which are susceptible to Year 2000 problems. During
fiscal year 1997, the Company initiated a review of the products its domestic
subsidiary distributes to determine which, if any, are not capable of
recognizing the year 2000. Communications were initiated with all of the
manufacturers of such products to determine the nature and extent of any Year
2000 problems. Where potential computer problems for the Year 2000 of products
used or distributed by the Company have been identified, these manufacturers
have stated that they have committed resources to resolving such problems prior
to year 2000. However, there can be no assurances that these manufacturers will,
in fact, timely complete the resolution of their Year 2000 problems or, even if
timely completed, that those solutions will be acceptable in the marketplace.
The solution to be provided by some manufacturers will involve a significant
upgrade cost to the end user, which may give rise to disputes and/or litigation
between the end user and the manufacturer, which may also involve the Company.
The costs of such possible disputes or litigation could be significant, thereby
resulting in a material adverse effect on the Company's business, financial
condition and/or results of operation.
 
     The Company acquired Advantis Network & Systems Sdn Bhd, a Malaysian
company, on December 15, 1997 (See: Item 1, Overview). Additionally, the Company
signed a definitive agreement on January 16, 1998, to acquire Infotel
Technologies Pte Ltd ("Infotel"), a company organized under the laws of
Singapore (See: Item 1, Overview). The Company has begun, but has not yet
completed, its review of the internal computer systems of Advantis and Infotel
to identify the systems in each company that are not Year 2000 compliant; thus,
at this time the Company has not been able to determine whether Year 2000
problems (if any) will pose a significant operational problem for the computer
systems of either of those two companies, and whether those operational
problems, if any, would result in a material adverse effect on the Company's
business, financial condition or results of operations. Similarly, the Company
has not yet begun its review of third-party products distributed by Advantis or
Infotel to determine the nature and extent of Year 2000 problems, if any, with
such products. As a result, the Company is currently unable to determine whether
there are any Year 2000 problems associated with such third-party products, and
if so, whether the manufacturers will be able timely to resolve any such
problems. The Company has also not been able to determine whether the legal
systems of Malaysia and Singapore would result in more or less litigation
exposure to the Company and its subsidiaries if there are disputes between the
end user of a product installed by either Advantis or Infotel, and the
manufacturer.
 
INTELLECTUAL PROPERTY
 
     The Company currently has pending federal trademark and service mark
applications covering various classes of Voice Plus' goods and services;
currently has two federally registered trademarks related to Voice Plus(R) and
currently has two federally registered trademarks related to the FACTOR 1000(R)
system. In addition, VPI, as the successor in interest to BFI, holds an
exclusive worldwide license to market the FACTOR 1000(R) system until 2008. The
FACTOR 1000(R) system is an impairment testing system that measures human
sensory motor performance. It is based upon the Critical Tracking Task/Test
("CTT") technology, a product of research conducted by Systems Technology, Inc.
("STI") for the United States military in the late 1950's on pilot control of
unstable aircraft.
 
     The Company has decided to exit from the business related to the FACTOR
1000(R) product and plans to sell all technology and related assets of this
business. Under the terms of the CTT technology license agreement with STI,
Voice Plus (as the successor in interest to BFI) is required to make quarterly
royalty payments to STI of 8.5% of revenues directly related to CTT-based
impairment testing of employees. In addition to end-user licensing, the CTT
license permits BFI to sublicense the CTT technology; provided that the
sublicense agreement requires an initial payment to BFI of at least $250,000 and
an on-going royalty payment of 8.5% of revenues. VPI must make payments to STI
on such sublicensing arrangements as follows:
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(i) a royalty payment of 8.5% on $250,000 of the initial sublicense fee plus 50%
of any initial fee in excess of $250,000; and (ii) a royalty payment of 50% of
the sublicense royalties received, which amount must be at least 4.25% of the
gross contract revenue. The agreement also includes a minimum aggregate payment
to STI of $150,000 over each three-year period (which amount may include fees
paid to STI for consulting services), beginning with the three-year period
commencing on January 1, 1997. The Company has granted an exclusive license of
sports-related and sports entertainment applications of the FACTOR 1000(R)
system (and sublicense of the CTT technology) to SportsTrac for the term of the
CTT license. The Company collected a $1,000,000 initial fee from SportsTrac and
in 1996 paid to STI a royalty of $42,500 on the $500,000 portion of the initial
fee subject to the STI royalty. To date, SportsTrac has sold only one system. As
a result, the Company has collected only $850 (in the first quarter of 1997) in
on-going royalties from SportsTrac, and the Company has not projected
significant revenue from any such on-going royalties in the future.
 
GOVERNMENTAL REGULATION
 
     The Telecommunications Act of 1996 eliminated government mandated barriers
between local and long distance calling, cable television, broadcasting and
wireless service. Consequently, local telephone companies, the traditional long
distance carriers and cable television companies may now enter any of these
markets to provide both local telephone and long distance service, as well as
television programming. Such increased competition likely will change the
infrastructure for implementing communications applications, such as voice and
electronic messaging.
 
     The acquisition of Advantis required the approval of the Foreign Investment
Committee of the Malaysian government which approval was obtained subject to the
Company agreeing to apply for certification as a Multimedia Super Corridor
("MSC") company in Malaysia, although no time limit was specified for obtaining
such certification. The MSC is an economic development zone established by the
Malaysian government to stimulate the indigenous development of information
technology. To encourage the participation of businesses in the zone, MSC status
provides certain corporate benefits including access to government grants,
preferred vendor status within the MSC, and tax-free status for ten years. MSC
status is dependent on an applicant's contribution to the betterment of the
Malaysian people through the application of certain technology of which
communications technology is a prime determinant. The Company has undertaken
certain efforts to obtain MSC certification including the hiring of a consultant
knowledgeable in such processes. The Company believes that it has the necessary
merits for certification.
 
INSURANCE
 
     The Company currently maintains director and officer liability insurance of
$5,000,000 per occurrence, $5,000,000 in the aggregate; general liability
insurance, including products liability insurance, of $2,000,000 per occurrence,
$2,000,000 in the aggregate; a general liability umbrella policy with limits of
$5,000,000 per occurrence, $5,000,000 in the aggregate; and products liability
insurance of $2,000,000 per occurrence, $2,000,000 in the aggregate. While there
can be no assurance that the Company will be able to maintain such coverage, or
secure increased coverage if needed, the Company believes that it will be able
to do so. There can be no assurance that any insurance policy will provide
adequate protection against successful claims. A successful claim brought
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company.
 
     The Company maintains key man insurance policies on several of its senior
executive officers, including $1 million on the life of Esmond T. Goei, the
Company's Chairman, President and Chief Executive Officer. All policies name the
Company as the sole beneficiary. The loss of the services of any of the
Company's key employees would have a material adverse effect on the Company.
 
EMPLOYEES
 
     As of March 15, 1998, the Company employed a total of 69 employees, of whom
31 were employed by the Company's Malaysian subsidiary, Advantis. The Company
has never had a work stoppage and no
 
                                        9
<PAGE>   10
 
employee is covered by a collective bargaining agreement. The Company believes
that its relations with its employees are good.
 
COMPETITION
 
  Voice Processing
 
     The voice processing market, one of the fastest growing segments of the
telecommunications industry, is highly competitive. The Company believes that
competition within this industry will intensify with the introduction of new
product enhancements and new competitors. VPI competes with a number of larger
integrated companies that provide competitive voice processing products and
services as subsets of larger product offerings, including all the former
regional Bell companies and major PBX equipment manufacturers, such as Fujitsu
Limited and Lucent Technologies Inc. ("Lucent"), formerly a division of AT&T.
These integrated public company competitors are substantially larger than the
Company and have substantially larger revenues than the Company. Additionally,
in the customer premise equipment markets, VPI competes with two types of
equipment companies: (i) interconnects (PBX providers), including Lucent,
Northern Telecom Limited, Fujitsu Limited and NEC Corporation, and (ii)
independent voice processing manufacturers, such as Octel Communications
Corporation, Digital Sound Corporation, Active Voice Corporation, Applied Voice
Technology, Inc., Glenayre Technologies, Inc. and Comverse Technology, Inc.
Glenayre Technologies, Inc. and Comverse Technology, Inc., among others, also
compete with the Company in the service provider market. A substantial majority
of competitors in the voice processing field have better name recognition in the
market, a larger installed base of customers and greater financial, marketing
and technical resources than the Company.
 
     VPI believes that its attention to customer service, as well as to the
customer's technical requirements, has resulted in success in competing and
winning sales bids against its much larger competitors. VPI provides detailed
information and support to its customers beginning at the point of sale and
continuing through the implementation period as well as ongoing service.
Depending on the terms of the maintenance contract purchased, the Company
provides assistance for its customers up to 24 hours per day, 365 days a year.
The Company provides extensive training for its employees in products,
installation, system design and support in order to assist customers in
selecting the right equipment and to provide the quality of service that is
demanded. VPI's technical capabilities and expertise are enhanced by its
experienced technical personnel. VPI's junior field technicians generally have
at least two years of field experience with the particular equipment being
installed, and senior technicians have about eight years of field experience.
This level of experience can often be a deciding factor in a customer's purchase
decision. VPI believes it has a very loyal customer base founded on satisfaction
with its service capabilities and active account management.
 
  Customer Premise Equipment (CPE)
 
     In the customer premise equipment markets, VPI competes with two types of
equipment companies: (i) interconnects (PBX providers), including Lucent,
Northern Telecom Limited, Fujitsu Limited and NEC Corporation, and (ii) voice
processing manufacturers, such as Octel Communications Corporation, Glenayre
Technologies, Inc., Digital Sound Corporation, Active Voice Corporation, Applied
Voice Technology, Inc. and Comverse Technology, Inc.
 
     PBX providers sell voice processing equipment as an integrated solution
with their own PBXs. These providers may have a competitive advantage with
customers purchasing a voice processing system at the same time they are
purchasing a new PBX, and, in many situations, the Company is competing with an
organization offering the same product platform. The Company believes its
competitive strengths are its development and delivery of customer applications,
its implementation process and its service and support performance. The Company
also believes its ability to deliver enhanced applications, such as integration
with computer networks, facsimile and voice response systems applications,
differentiates its products and services.
 
     VPI is the only national distributor that focuses solely on voice
processing systems integration. Other distributors that focus solely on voice
processing do not have a national organization. While manufacturers of voice
processing equipment could be viewed as national competitors, such manufacturers
are concerned
 
                                       10
<PAGE>   11
 
primarily with the sale of their own equipment and generally do not promote
other manufacturers' equipment that may better satisfy the needs of their
customers.
 
     The Company expects that new or enhanced products will be offered by its
principal existing competitors and new competitors. In addition, the Company
believes that computer software vendors, such as Novell, Inc., Lotus Development
Corporation and Microsoft Corporation, will continue to develop enhanced
messaging and networking software with voice and data information processing
applications.
 
  Service Providers
 
     The Company provides products to various service providers, including
cellular communications operators and long-distance re-sellers. Competitors
include several voice processing manufacturers such as Boston Technology Inc.,
Octel Communications Corporation, Centigram, Comverse Technology, Inc., Digital
Sound Corp. and Glenayre Technologies, Inc. The further deregulation of the
telecommunications industry resulting from the Telecommunications Act of 1996
has provided opportunities for increased competition in the local telephone
market. The Company believes that this market will require extensive integration
of equipment supplied by various vendors and, as such, can benefit from the
Company's independence and integration skills.
 
  Infrastructure Communications Equipment
 
     The infrastructure communications market in Malaysia is largely driven by
the growth of the country's manufacturing and industrial sectors as well as the
growth in government services as necessitated by population growth and
urbanization. Consequently much of the market opportunity is controlled by
either the government or the general construction contractors. Both market
sectors are addressed by Advantis, the Company's Malaysian subsidiary as well as
several larger local companies. However, given the infancy of Malaysia's
telecommunications industry, almost all equipment sold in the country is
imported. As a result, competitive advantage is often derived simply by a
vendor's ability to offer an exclusive portfolio of products, and to provide the
necessary technical support for such products. Advantis therefore competes by
aligning itself with several popular manufacturers of telecommunications
equipment such as Nortel, Inc., 3COM Corporation, Case Technology, Network
Associates, Inc., Intel Corporation, Hypercom Limited, and BICC BrandRex.
Advantis also aligns itself as a sub-contractor with various large local general
contractors to provide telecommunications equipment and services. Frequently,
Advantis also partners with local systems integrators that do not carry the line
of products that Advantis provides. One such systems integrator is Infocom (M)
Sdn Bhd which has a common shareholder with the Company, although such
shareholder holds less than 5% of the Company's Common Stock. Infocom is not
currently a competitor as it focuses largely on the banking sector, whereas
Advantis focuses on the manufacturing and government sectors. As to other large
systems integrators in the market, Advantis currently does not compete directly
with them but acts as a sub-contractor to another larger systems integrators
with whom it has aligned itself. However, the Company expects that Advantis will
face such competitors directly in the future when it has better established its
installed base. Further, continued growth of Malaysia's manufacturing and
industrial sectors will likely fuel competition in the country's infrastructure
communications market.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
     The Company consolidated its offices and moved its principal corporate
office to Fremont, California from Golden, Colorado in August 1997. The
Company's corporate offices occupy approximately 7,600 square feet of office
space in premises shared with, and leased by, VPI. This facility is leased
pursuant to a lease agreement expiring August 31, 2000. The lease provides for
an approximately 3% escalation in rents during each year of the lease. Rental
payments average $11,911 per month over the term of the lease. The Company was
able to cancel its Golden, Colorado lease with little or no cost to the Company.
 
     The Company leases office space at several other locations in the United
States under leases which expire in the year 2000. Aggregate space leased at
these facilities totals approximately 5,700 square feet, and total monthly
office rental expense is approximately $9,750. In addition, the Company's
Malaysian subsidiary, Advantis, leases approximately 7,000 square feet of office
space at a monthly office rental expense of
 
                                       11
<PAGE>   12
 
approximately US $2,500 per month under a lease which can be extended to
November 1999. The Company believes that leased office space at market rates is
readily available at all such locations.
 
ITEM 3. LEGAL PROCEEDINGS
 
     From time to time, the Company is a party to certain legal proceedings
arising in the ordinary course of its business. Management presently believes
that liability, if any, resulting from such ordinary course of business
litigation, individually or in the aggregate, will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
 
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF
        COMMON STOCK
 
     The Company's Common Stock has traded on the over-the-counter market and
has been quoted on The Nasdaq Stock Market SmallCap System under the symbol
"NHAN" since the Company's February 4, 1997 initial public offering. As of March
31, 1998, there were approximately 827 shareholders of record. The following
table sets forth for the periods indicated the high and low closing prices for
the Company's Common Stock as reported by Nasdaq.
 
<TABLE>
<CAPTION>
FISCAL YEAR 1997                                               HIGH       LOW
----------------                                              -------    ------
<S>                                                           <C>        <C>
First quarter (February 4, 1997 to March 31, 1997)..........  $4.3125    $3.750
Second quarter..............................................  $4.0625    $3.375
Third quarter...............................................  $4.0625    $3.250
Fourth quarter..............................................  $3.4375    $2.125
</TABLE>
 
DIVIDEND POLICY
 
     The Company has not paid dividends on its Common Stock since its inception,
nor did its predecessor, BFI. VPI, prior to its acquisition by the Company, made
distributions to its sole stockholder. The Company currently intends to retain
earnings for use in the business. Accordingly, the Company does not anticipate
paying any dividends to its stockholders in the foreseeable future.
 
RECENT SALES OF UNREGISTERED SECURITIES
 
<TABLE>
<CAPTION>
                                                                                              AGGREGATE
                                   DATE OF                                         NUMBER     PURCHASE       FORM OF
CLASS OF PURCHASERS(1)               SALE      TITLE OF NHANCEMENT SECURITIES     OF SHARES     PRICE     CONSIDERATION
----------------------             --------    ------------------------------     ---------   ---------   -------------
<S>                                <C>        <C>                                 <C>         <C>         <C>
Ninety-one Holders of Capital
  Stock of BioFactors(2)           02-03-97   Shares of Common Stock               612,800        2             2
James S. Gillespie(3)              02-03-97   Shares of Common Stock              1,312,500       3             3
Stock Options granted to three                Stock options to purchase shares
  optionees(4)                     02-03-97     of Common Stock                    100,000        4             4
Ten Holders of options to acquire             Stock options to purchase shares
  BioFactors Common Stock(5)       02-04-97     of Common Stock                    534,375        5             5
Fifty-three Holders of Warrants
  to acquire BioFactors Common                Warrants to purchase shares of
  Stock(6)                         02-04-97     Common Stock                       110,000        6             6
Sixteen Holders of Promissory
  Notes payable by BioFactors(7)   02-04-97   Shares of Common Stock               258,200        7             7
Sixteen Officers, Directors and               Warrants to purchase shares of
  Third Party Lenders(8)           02-04-97     Common Stock                       500,000        8             8
</TABLE>
 
                                       12
<PAGE>   13
 
<TABLE>
<CAPTION>
                                                                                              AGGREGATE
                                   DATE OF                                         NUMBER     PURCHASE       FORM OF
CLASS OF PURCHASERS(1)               SALE      TITLE OF NHANCEMENT SECURITIES     OF SHARES     PRICE     CONSIDERATION
----------------------             --------    ------------------------------     ---------   ---------   -------------
<S>                                <C>        <C>                                 <C>         <C>         <C>
Stock Options granted to two                  Stock options to purchase shares
  optionees(9)                     02-04-97     of Common Stock                     33,750        9             9
Nine Holders of Warrants to
  acquire NHancement Common                   Warrants to purchase shares of
  Stock(10)                        02-04-97     Common Stock                       230,000       10            10
Stock options granted to four                 Stock options to purchase shares
  optionees(11)                    03-18-97     of Common Stock                    223,125       11            11
Stock options granted to five                 Stock options to purchase shares
  optionees(12)                    03-26-97     of Common Stock                    130,000       12            12
Stock options granted to three                Stock options to purchase shares
  optionees(13)                    07-07-97     of Common Stock                     26,250       13            13
Stock options granted to one                  Stock options to purchase shares
  optionee(14)                     08-19-97     of Common Stock                     20,000       14            14
Stock options granted to thirty               Stock options to purchase shares
  optionees(15)                    12-08-97     of Common Stock                    276,250       15            15
Six Holders of Capital Stock of
  Advantis(16)                     12-15-97   Shares of Common Stock               208,546       16            16
</TABLE>
 
---------------
 
 (1) The sales of securities to, and the exchanges of securities with, the
     individuals identified in the table above were made in reliance on Section
     4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and/or
     Regulation D promulgated thereunder.
 
 (2) On February 3, 1997, prior to the February 4, 1997 consummation of the
     initial public offering ("IPO") of NHancement, BioFactors merged with a
     subsidiary of NHancement and became a wholly-owned subsidiary of
     NHancement. In connection with this merger transaction, the issued and
     outstanding shares of the capital stock of BioFactors were exchanged for
     restricted shares of the Common Stock of NHancement.
 
 (3) On February 3, 1997, prior to the February 4, 1997 consummation of the IPO,
     Voice Plus was acquired by NHancement pursuant to a merger with a
     subsidiary of NHancement, whereupon Voice Plus became a wholly-owned
     subsidiary of NHancement. In connection with this acquisition transaction,
     1,312,500 shares of the Common Stock of NHancement were issued to Mr.
     Gillespie (the sole stockholder of Voice Plus), 600,000 of which were
     registered and sold in the IPO and the balance of which (712,500 shares)
     are restricted shares.
 
 (4) The options were granted to employees of NHancement under the Company's
     Equity Incentive Plan. The options generally expire ten (10) years from the
     date of grant and become exercisable for 50% of the shares on August 4,
     1998, with the balance vesting on February 4, 1999. The exercise price on
     the date of grant was equal to or greater than 100% of the fair market
     value as determined by the Board of Directors of NHancement on the date of
     grant.
 
 (5) On February 4, 1997, the outstanding options to acquire shares of the
     Common Stock of BioFactors were assumed by NHancement and re-granted by
     NHancement, subject to and in accordance with NHancement's Equity Incentive
     Plan. Pursuant to the option assumption, the terms and vesting schedules of
     the options remained the same (with full vesting of options generally
     occurring by November 2, 1998 at an exercise price of $3.20 per share.
 
 (6) On February 4, 1997, the outstanding warrants to acquire shares of the
     common stock of BioFactors were assumed by NHancement, subject to and in
     accordance with the terms governing the exercise of such warrants. The
     exercise price for each warrant was set at $4.80 per share, with the term
     for exercise expiring on February 4, 2001; provided, however, that no
     warrants were exercisable until February 4, 1998.
 
 (7) Upon the February 4, 1997 consummation of the IPO, all accrued interest
     payable by BioFactors, under the terms of the then-existing promissory
     notes, was converted into restricted shares of the Common Stock of
     NHancement, based on a per share price of $4.00.
 
                                       13
<PAGE>   14
 
 (8) Upon the February 4, 1997 consummation of the IPO, NHancement issued
     warrants to purchase shares of the Common Stock of NHancement. The warrants
     are presently exercisable at a price per share of $4.80 and will expire on
     February 4, 2001.
 
 (9) The options were granted to members of the Board of Directors of NHancement
     under the Company's Equity Incentive Plan. The options generally expire ten
     (10) years from the date of grant and become exercisable for 50% of the
     shares on February 4, 1998, with the balance vesting on February 4, 1999.
     One of the optionees, a former director of the Company, resigned his
     position in August 19, 1997; all options granted to such director were
     canceled. The exercise price on the date of grant was equal to or greater
     than 100% of the fair market value as determined by the Board of Directors
     of NHancement on the date of grant.
 
(10) Upon the February 4, 1997 consummation of the IPO, NHancement issued
     warrants to the underwriter to purchase shares of the Common Stock of
     Nhancement which were subsequently assigned to nine (9) of the underwriter
     employees. The warrants are presently exercisable at a price per share of
     $4.80 and will expire on February 4, 2001.
 
(11) The options were granted to employees and members of the Board of Directors
     of NHancement under the Company's Equity Incentive Plan. The options
     generally expire ten (10) years from the date of grant and, in the case of
     options granted to employees, become exercisable for 1/36 per month from
     the date of grant; an option granted to a former director of the Company
     became exercisable for 50% of the shares on the date of grant of the
     option, with the balance vesting on March 18, 1997. Such director resigned
     his position on April 9, 1997; all options granted to such director were
     canceled. The exercise price on the date of grant was equal to or greater
     than 100% of the fair market value as determined by the Board of Directors
     of NHancement on the date of grant.
 
(12) The options were granted to employees of, and consultants to, NHancement
     under the Company's Equity Incentive Plan. The options generally expire ten
     (10) years from the date of grant and, in the case of options granted to
     employees, become exercisable for 25% of the shares on the first year
     anniversary of the date of grant, with the balance vesting 1/36 per month
     thereafter; an option granted to a consultant vests 1/3 on April 1, 1998,
     1/3 on April 1, 1999 and 1/3 on April 1, 2000. The exercise price on the
     date of grant was equal to or greater than 100% of the fair market value as
     determined by the Board of Directors of NHancement on the date of grant.
 
(13) The options were granted to members of the Board of Directors of NHancement
     under the Company's Equity Incentive Plan. The options generally expire ten
     (10) years from the date of grant and, in the case of one director, become
     exercisable for 25% of the shares on the first year anniversary of the date
     of grant and 25% annually thereafter; in the case of the other directors,
     the options become exercisable for 50% of the shares on February 4, 1998,
     with the balance vesting on February 4, 1999. One such director resigned
     his position on August 19, 1997; all options granted to such director were
     canceled. The exercise price on the date of grant was equal to or greater
     than 100% of the fair market value as determined by the Board of Directors
     of NHancement on the date of grant.
 
(14) The options were granted to a member of the Board of Directors of
     NHancement under the Company's Equity Incentive Plan. The options generally
     expire ten (10) years from the date of grant and become exercisable for 25%
     of the shares on the first year anniversary of the date of grant and 25%
     annually thereafter. The exercise price on the date of grant was equal to
     or greater than 100% of the fair market value as determined by the Board of
     Directors of NHancement on the date of grant.
 
(15) The options were granted to employees of, and consultants to, NHancement
     under the Company's Equity Incentive Plan. The options generally expire ten
     (10) years from the date of grant and become exercisable for 25% of the
     shares on the first year anniversary of the date of grant, with the balance
     vesting 1/36 per month thereafter. The exercise price on the date of grant
     was equal to or greater than 100% of the fair market value as determined by
     the Board of Directors of NHancement on the date of grant.
 
(16) On December 15, 1997, in connection with the acquisition by NHancement of
     all of the issued and outstanding shares of the capital stock of Advantis,
     NHancement issued 300,000 shares of its Common Stock in exchange for all of
     the issued and outstanding shares of the capital stock of Advantis. Of
     these
                                       14
<PAGE>   15
 
     shares, 208,546 have been transferred to the former stockholders of
     Advantis, and the remaining 91,454 are being held in escrow, and may or may
     not be transferred to the former stockholders of Advantis upon termination
     of the escrow depending on whether certain accounts receivable goals are
     attained, in which case the shares would be retired. Further, depending
     upon Advantis meeting certain profit targets over the following two years,
     the company could be obligated to issue up to an additional 230,000 shares
     of its Common Stock to former Advantis stockholders.
 
CHANGES IN SECURITIES AND USE OF PROCEEDS
 
     On February 4, 1997, the Company and Chatfield Dean & Company, its
underwriter, completed an initial public offering of 2,300,000 shares of $0.01
par value Common Stock, of which 1,700,000 shares were sold by the Company and
600,000 shares, representing a portion of the consideration for the outstanding
shares of VPI, were sold by a stockholder of the Company (Commission file number
333-15563). On February 11, 1997, the underwriters exercised an option to
purchase from the Company an additional 345,000 shares of Common Stock to cover
over-allotments. The use of proceeds by the Company through December 31, 1997
was as follows (amounts are actual unless indicated as estimates):
 
<TABLE>
<S>                                                           <C>
Gross Proceeds to the Company...............................  $8,180,000
Underwriters Discounts and Commissions......................     572,600
Underwriters Non-accountable Expenses.......................     245,400
Other Expenses..............................................     831,700
                                                              ----------
Total Expenses..............................................   1,649,700
                                                              ----------
Net Offering Proceeds to the Company........................  $6,530,300
                                                              ==========
Use of Net Offering Proceeds:
Purchase and installation of equipment......................  $  199,000
Repayment of Indebtedness...................................   2,485,400
Repayment of Indebtedness to Affiliates.....................     391,100
Bonuses to Officers.........................................     250,000
Secured Loans ($60,000 to Officer)..........................     360,000
Working Capital (estimated).................................   1,490,000
Cash in Banks...............................................   1,354,800
                                                              ----------
                                                              $6,530,300
</TABLE>
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The following contains forward-looking statements regarding future events
or the future financial performance of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this Item 6, as well as in Item 1 hereof and
elsewhere in this report.
 
GENERAL
 
     NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company and successor
to the business of BioFactors, Inc. ("BFI" or "BioFactors"), a Delaware
corporation. On February 3, 1997, prior to the February 4, 1997 consummation of
the initial public offering ("IPO") of the Company's Common Stock, BFI merged
with a subsidiary of NHancement whereupon BFI, as the surviving corporation,
became a wholly-owned subsidiary of NHancement. The BFI merger was accounted for
in a manner similar to a pooling-of-interests. Also, on February 3, 1997, the
Company acquired Voice Plus, Inc. ("VPI" or "Voice Plus"), a California
corporation, and a systems integrator and national distributor of voice
processing equipment, pursuant to a transaction by which VPI merged with a
subsidiary of NHancement, whereupon VPI, as the surviving corporation, became a
wholly-owned subsidiary of NHancement. The VPI acquisition was accounted for as
a purchase, and, accordingly, the results of VPI's operations were included in
the Company's financial statements commencing February 3, 1997.
 
                                       15
<PAGE>   16
 
     For financial accounting purposes, BFI was deemed to be the acquiror of
VPI. However, NHancement is considered to be the successor in interest of BFI
and references herein to the Company signify BFI and its successor NHancement.
 
     Effective as of November 12, 1997, BioFactors, Inc., a Delaware corporation
and a wholly-owned subsidiary of NHancement, was merged with and into Voice
Plus, Inc., a California corporation and a wholly-owned subsidiary of
NHancement, in a statutory merger intended to qualify, for federal income tax
purposes, as a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended. Voice Plus was the surviving corporation in the merger
transaction with BioFactors, and the separate existence of BioFactors ceased on
the effective date of the merger. The operations of the combined entity are
being conducted under the name of "Voice Plus(R)," which is headquartered in
Fremont, California. Voice Plus remains a wholly-owned subsidiary of NHancement.
 
     On December 15, 1997, NHancement purchased one hundred percent (100%) of
the shares of Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"). As a result of the acquisition, Advantis became a wholly-owned
subsidiary of NHancement. Advantis is a telecommunications systems integrator
located in Malaysia. The operations of the entity are being conducted under the
name of "Advantis Network & System Sdn Bhd," which is headquartered in Kuala
Lampur, Malaysia. The acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the Company's
financial statements commencing December 15, 1997.
 
     The business of NHancement will be conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. For the
year ended December 31, 1996, the historical financial statement information
includes the separate accounts of BFI without giving effect to the business
combinations of BFI and VPI occurring immediately prior to the IPO, or to the
IPO. For the year ended December 31, 1997, the historical financial statement
information gives effect to the business combinations of BFI and VPI occurring
immediately prior to the IPO, the IPO and the acquisition of Advantis. The
historical financial statement information presented for 1997 includes twelve
months of BFI operations, approximately eleven months of VPI operations and
sixteen days of Advantis operations and gives effect to the business
combinations and the IPO.
 
RESULTS OF OPERATIONS
 
                          NHANCEMENT TECHNOLOGIES INC.
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED
                                                                DECEMBER 31
                                                              ---------------
                                                               1996     1997
                                                              ------    -----
<S>                                                           <C>       <C>
Net revenues................................................   100.0%   100.0%
Cost of goods sold..........................................    16.2%    57.3%
Gross margin................................................    83.8%    42.7%
Research, selling and administration expenses...............   240.0%    94.2%
          Operating loss....................................  (156.2)%  (51.5)%
Other income (expense)......................................   (73.3)%    0.4%
Loss before income taxes....................................  (229.5)%  (51.1)%
Income taxes................................................     0.0%     0.0%
Net loss....................................................  (229.5)%  (51.1)%
</TABLE>
 
     In 1996, the Company's resources were devoted to development of BFI's
employee impairment testing systems and pursuing the acquisition of VPI, which
became a wholly-owned subsidiary of the Company in February 1997. BFI's net
revenues in 1997 were negligible ($23,000) compared to $796,000 in 1996. The
revenues in 1996 were primarily due to the recording of the $700,000 final
payment from SportsTrac on a $1 million one-time fee recorded in connection with
a sublicensing agreement signed in 1995 for BFI's technology for sports-related
applications. The Company has decided to pursue a buyer for its FACTOR 1000(R)
technology and products, as no significant FACTOR 1000(R) revenue is anticipated
for 1998.
 
     The Company's primary focus in 1997 was as an integrator and distributor of
voice processing and telecommunications systems for businesses, which operations
were conducted through the Company's VPI
 
                                       16
<PAGE>   17
 
subsidiary. Only eleven months of VPI's revenues were recorded in the Company's
financial statements during 1997, for a total of $8.8 million. VPI's net
revenues, as a stand-alone business and on an annualized basis, increased 9.1%
from $8.8 million for the year ended December 31, 1996 to $9.6 million for the
year ended December 31, 1997. The increase in VPI net revenues between 1996 and
1997 was due primarily to the sale of larger voice processing systems, multiple
installations and reduction of its order backlog. The order backlog eroded
during 1997 and at year-end was less than $1 million. VPI revenues in the fourth
quarter of 1997 were about $500,000 below the 1997 run rate, and management
expects sales levels to continue to be well below 1997 run rates in the first
and second quarter of 1998. The projections for the first quarter are estimated
at less than 50% of recent historical levels and is an indication of why the
impairment loss was taken on the VPI acquisition. Additionally, the Company's
revenues are almost exclusively derived from the sale of Centigram products and
any termination or adverse change in the Company's distributor relationship with
Centigram would have a material adverse impact upon the Company's voice
processing business. Centigram has publicly announced that it has hired a third
party firm to identify potential buyers for its CPE business. If Centigram's CPE
business is sold to an entity which does not permit third parties such as the
Company to continue to distribute the CPE products, there would be a significant
adverse impact upon the Company's business for an indeterminate period of time
until new supplier relationships could be established.
 
     The Company's Advantis subsidiary, a telecommunications systems integrator
located in Malaysia, was acquired on December 15, 1997 and added less than one
month, or $245,000, to the Company's net revenues during 1997. Advantis net
revenues, as a stand alone business on a preacquisition and annualized basis,
increased 170.6% from $1.7 million in the fiscal year ended March 31, 1996 to
$4.6 million in the fiscal year ended March 31, 1997, due mainly to the sale of
larger systems and projects. The Malaysian currency weakened substantially in
1997 and future softening of the Ringgit could have a material adverse effect on
Advantis' business.
 
     Gross margins in 1997 decreased to 42.7% from 83.8% in 1996. Gross margins
in 1996 related only to FACTOR 1000(R) sublicensing revenues which were
extremely high as a result of the receipt of a $700,000 sublicense payment with
minimal related expense. No significant revenues from the commercial release of
the FACTOR 1000(R) system were recorded in 1997. The gross margin in 1997 is
associated almost exclusively with the Company's VPI subsidiary whose gross
margin, as a stand-alone business, increased slightly to 44.0% in 1997 compared
to 41.4% in 1996 due to larger system sales. Advantis contributed only about
$63,000 to the Company's gross margin. As a stand alone business, Advantis'
gross margin fell 4.5% as a percent of sales from 1996 to 1997, but increased in
dollar amount from $345,700 in 1996 to $749,100 in 1997, due mainly to ramp up
costs associated with the sale of larger systems and projects. Due to the recent
substantial change in the value of the Malaysian Ringgit the Company is
considering hedging currencies in 1998 to protect its gross margins. The
Company, to date, has little experience with currency hedging transactions and
this inexperience may result in an adverse effect on the Company's business.
 
     Company-wide research, selling and administrative ("RS&A") expenses as a
percentage of net revenues were abnormally high during 1996 as compared to 1997
for the following reasons: (i) during most of 1996, BFI continued development of
the FACTOR 1000(R) system, working closely with a few beta customers; (ii) most
of the operating costs in 1996 were expended on the efforts to find
complementary businesses to acquire that would provide a viable marketing
channel for the FACTOR 1000(R) system; and (iii) during 1996 significant
expenditures were made in connection with unconsummated mergers and indirect
expenditures were made in connection with the impending VPI merger and to
prepare for the IPO. The majority of RS&A expenses in 1997 were associated with
the Company's VPI subsidiary. For VPI, as a stand-alone business, RS&A in 1997
increased 55.7% as a percent of revenues to 86.3% compared to 30.6% in 1996 due
to (i) an impairment loss of $4.1 million which reduced the carrying value of
the excess of cost over net assets acquired relating to the VPI acquisition ,
(ii) the recording of eleven months of amortization of the excess of cost over
net assets acquired totaling $565,000 relating to the VPI acquisition and (iii)
additional expenses associated with being a public reporting company. The
Company recorded only insignificant RS&A expenses (approximately $36,000) for
its newly acquired Advantis subsidiary during 1997. Advantis' RS&A, as a stand
alone business, increased 4.2% as a percent of revenues year over year, due
mainly to ramp up costs associated with increased revenue and accelerated
revenue growth.
 
                                       17
<PAGE>   18
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Although the acquisition of complementary businesses and products is an
element of the Company's business strategy, none of the proceeds of the IPO were
reserved specifically for the funding of future acquisitions. If a cash payment
in excess of available working capital is required to make an acquisition, the
Company will need to obtain additional debt or equity financing. Debt financing
may require the Company to pay significant amounts of interest and principal
payments, thus reducing the resources available to expand its existing
businesses. Equity financing may dilute the Company's existing stockholders'
interest in the assets or earnings of the Company. There can be no assurance
that the Company will be able to obtain either debt or equity financing if and
when it is needed for acquisitions or general working capital purposes or that,
if available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing will likely
have a material adverse effect on the Company's growth and acquisition strategy.
The Company currently negotiated an equity financing for $3.0 million of which
$750,000 has been received, with the remainder to be received subject to certain
terms as follows: $500,000 with the filing of an S-3 registration statement,
$500,000 60 days thereafter, $500,000 30 days thereafter and $750,000 30 days
thereafter, with a large portion of the proceeds to be used for the acquisition
of Infotel.
 
     During 1997, net cash used in operating activities was $2.9 million,
consisting primarily of cash used to pay accounts payable and accrued
liabilities. Net cash provided by investing and financing activities totaled
$4.2 million. Net proceeds from the IPO were $6.5 million, and cash acquired
from the VPI and Advantis acquisitions was $0.8 million, of which a portion of
these funds were utilized to repay approximately $2.0 million of outstanding
nonconvertible debt and interest accrued at rates between 10% and 12% per annum,
and $1.3 million of debt incurred in connection with the VPI acquisition. At
December 31, 1997, the Company's working capital was $1.1 million and cash and
cash equivalents totaled $1.4 million. The current ratio increased from 0.13 to
1 at December 31, 1996 to 1.3 to 1 at December 31, 1997, primarily due to funds
received by the Company in its IPO and net assets associated with the Company's
acquisitions. The reduced level of revenues projected for VPI and the
corresponding reduction of income in the first quarters of 1998 will result in a
net use of cash from operations and a reduction of current ratio.
 
     As of December 31, 1997, the Company had outstanding debt of approximately
$0.5 million inclusive of associated accrued interest. The Company has been
offered a $2 million accounts receivable credit line with a U.S. major bank with
an advance rate of 80% of eligible receivables but has chosen not to finalize
the agreement at this time.
 
     The company's management estimates that it will incur about $500,000 in
capital expenditures during the next 12 months, about $300,000 represents
company-wide business systems software. It is anticipated that all major capital
expenditures will be financed through equipment leases and will not require
significant direct outlays of cash.
 
     Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources, together with the remaining net
proceeds of the IPO, are adequate to meet the working capital cash needs of the
Company and to meet anticipated capital needs during the next 12 months.
Although the Company intends to issue shares of Common Stock as its primary
method of financing acquisitions, it anticipates that additional funds will be
required to successfully implement its acquisition program, and it will use
various methods to finance acquisitions, including the payment of cash, for this
purpose.
 
ACCOUNTING STANDARDS
 
     The Company was not affected by its adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which established a
different method of calculating earnings per share than was previously used in
accordance with Accounting Principal Board No. 15, "Earnings per Share," and
provides for the calculation of basic and diluted earnings per share. This
statement was effective for the Company's year ending December 31, 1997 and
required that all prior earnings be restated to reflect its retroactive
application.
 
                                       18
<PAGE>   19
 
     During 1997, the Financial Accounting Standards Board released its
Statement of financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. SFAS No. 130, which is effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in the entity's financial
statements. The objective of SFAS No. 130 is to report a measure of all changes
in the equity of an enterprise that result from transactions and other economic
events of the period. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS No. 130 does not address issues of
recognition or measurement for comprehensive income and its components, and
therefore, it will not have an impact on the financial condition or results of
operations of the Company upon adoption.
 
     The Financial Accounting Standards Board also recently released SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
Statement, which is also effective for fiscal years beginning after December 15,
1997, requires reporting of financial and descriptive information about
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Because of the recent issuance
of this standard, management has been unable to fully evaluate the impact, if
any, it may have on future financial statement disclosure. Results of operations
and financial position, however, will be unaffected by implementations of this
standard.
 
     In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits
("SFAS No. 132"). SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when previous related
accounting standards were issued. SFAS No. 132 is effective for financial
statements for the period beginning after December 15, 1997 and requires
comparative information for earlier years to be restated unless the information
is not readily available, in which case the notes to the financial statements
should include all available information and a description of the information
not available. Management believes that the Company's current financial
statement disclosures will not need to be modified based upon current
operations. Results of operations and financial position will be unaffected by
implementation of this standard.
 
SEASONALITY AND INFLATION
 
     The Company's net sales typically show no significant seasonal variations,
although net sales may be affected in the future by overall hiring trends and
the concentration of vacations of key employees of client companies during the
summer months or during holiday periods, which can delay product installations
resulting in the postponement of the recognition of revenues.
 
YEAR 2000 DISCLOSURE
 
     The Company has begun to conduct a review of its internal computer systems
to identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve any such problems. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Software programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to or
replacement of existing software, the Year 2000 problems will not pose
significant operational problems for the Company's domestic computer systems.
The Company believes that the costs associated with any such upgrade or
replacement of software will not be material, and that all such changes will be
implemented by the end of calendar year 1998. However, if such modifications are
not made in a timely manner, or are not made properly, the Company may be unable
to implement appropriate Year 2000 solutions, which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
 
                                       19
<PAGE>   20
 
     The Company distributes products from third party voice product equipment
manufacturers, some of which are susceptible to Year 2000 problems. During
fiscal year 1997, the Company initiated a review of the products its domestic
subsidiary distributes to determine which, if any, are not capable of
recognizing the year 2000. Communications were initiated with all of the
manufacturers of such products to determine the nature and extent of any Year
2000 problems. Where potential computer problems for the Year 2000 of products
used or distributed by the Company have been identified, these manufacturers
have stated that they have committed resources to resolving such problems prior
to year 2000. However, there can be no assurances that these manufacturers will,
in fact, timely complete the resolution of their Year 2000 problems or, even if
timely completed, that those solutions will be acceptable in the marketplace.
The solution to be provided by some manufacturers will involve a significant
upgrade cost to the end user, which may give rise to disputes and/or litigation
between the end user and the manufacturer, which may also involve the Company.
The costs of such possible disputes or litigation could be significant, thereby
resulting in a material adverse effect on the Company's business, financial
condition and/or results of operation.
 
     The Company acquired Advantis Network & Systems Sdn Bhd, a Malaysian
company, on December 14, 1997 (See: Item 1, Overview). Additionally, the Company
signed a definitive agreement on January 16, 1998, to acquire Infotel
Technologies Pte Ltd ("Infotel"), a company organized under the laws of
Singapore (See: Item 1, Overview). The Company has begun, but has not yet
completed, its review of the internal computer systems of Advantis and Infotel
to identify the systems in each company that are not Year 2000 compliant; thus,
at this time the Company has not been able to determine whether Year 2000
problems (if any) will pose a significant operational problem for the computer
systems of either of those two companies, and whether those operational
problems, if any, would result in a material adverse effect on the Company's
business, financial condition or results of operations. Similarly, the Company
has not yet begun its review of third-party products distributed by Advantis or
Infotel to determine the nature and extent of Year 2000 problems, if any, with
such products. As a result, the Company is currently unable to determine whether
there are any Year 2000 problems associated with such third-party products, and
if so, whether the manufacturers will be able timely to complete resolution of
them. The Company has also not been able to determine whether the legal systems
of Malaysia and Singapore would result in more or less litigation exposure to
the Company and its subsidiaries if there are disputes between the end user of a
product installed by either Advantis or Infotel, and the manufacturer.
 
ITEM 7. FINANCIAL STATEMENTS
 
     The financial statements required by this Item begin at page F-1 of this
report on Form 10-KSB.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                       20
<PAGE>   21
 
                                    PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT
 
     The following table sets forth certain information with respect to each of
the directors, executive officers and significant employees of the Company and
its subsidiaries as of March 31, 1998.
 
<TABLE>
<CAPTION>
NAME                             AGE                          POSITION
----                             ---                          --------
<S>                              <C>   <C>
Esmond T. Goei.................  47    Chairman, Chief Executive Officer, President and
                                       Director
Douglas S. Zorn................  49    Executive Vice President, Chief Financial Officer,
                                       Treasurer, Secretary and Director
Stephan Jan Meyers.............  50    Vice President, General Counsel and Assistant
                                       Secretary
James S. Gillespie.............  45    Vice President Sales and Director; President of Voice
                                         Plus, Inc.
Gary L. Nemetz.................  45    Director
James H. Boyle.................  43    Director
Santanu Das....................  43    Director
Kim Siang Goh..................  32    General Manager, Advantis Network & Systems Sdn Bhd
Diane E. Nowak.................  36    Vice President of Sales, Western Region, of Voice
                                       Plus, Inc.
</TABLE>
 
     Esmond T. Goei. Mr. Goei has served as Chairman of the Board, President and
Chief Executive Officer of the Company since its incorporation in October 1996.
Mr. Goei served as Chairman of the Board, President and Chief Executive Officer
of BFI from December 1993 until the merger of BFI into VPI in November 1997.
From October 1992 to March 1997, Mr. Goei was a general partner of Transition
Ventures I, L.P., a venture capital fund which he co-founded. Mr. Goei also was
the co-founder of Transtech Venture Management Pte. Ltd., an international
venture capital management firm established in 1986, and co-founder of Transpac
Capital Management Pte. Ltd., a venture capital management firm established in
1989, of which he was Chief Executive Officer for North American operations
until 1992. Mr. Goei currently serves as a director of YES! Entertainment
Corporation, an electronics toy company of which he was a co-founding investor
in 1992 and which is listed on The Nasdaq National Market System ("Nasdaq NMS").
From 1988 to 1995, Mr. Goei was a director of CliniCom, Inc., a patient care
information systems company listed on Nasdaq NMS, which was sold in 1995 to HBO
& Company. From 1987 to March 1995, Mr. Goei was a director of Centigram
Communications Corporation, a voice messaging equipment company listed on Nasdaq
NMS and VPI's largest supplier of voice processing equipment, and from 1988 to
1994, he served as Chairman of the Board. From 1988 to 1994, Mr. Goei also was a
director of TranSwitch Corporation, a telecommunications semiconductor systems
company listed on the Nasdaq NMS.
 
     Douglas S. Zorn. Mr. Zorn has served as Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and a director of the Company since its
incorporation in October 1996. Mr. Zorn also held the title of Chief Operating
Officer of the Company since its incorporation, but resigned from this position
in October 1997. Mr. Zorn served as Executive Vice President, Secretary and
Treasurer and Chief Financial and Operating Officer of BFI from December 1993
until the merger of BFI into VPI in November 1997. From 1991 until he joined
BFI, Mr. Zorn was Chief Financial Officer of Monterey Telecommunications
Corporation, an OEM wireless switch manufacturer for Motorola, Inc. From 1983 to
1991, he was employed by Centigram Communications Corporation where he last
served as Vice President of Finance and Administration. Prior to joining
Centigram, Mr. Zorn held various positions with Gould, Inc., a manufacturer of
sophisticated logic test instruments, including Operation Controller of the
Biomation Division. Mr. Zorn is a licensed certified public accountant.
 
     Stephan Jan Meyers. Mr. Meyers has served as Vice President, General
Counsel and Assistant Secretary of the Company since February 3, 1998. He joined
the Company on December 1, 1997, and plans to resign from his positions with the
Company on or about April 30, 1998. From 1989 until he joined the Company, Mr.
Meyers was in private practice as a sole practitioner in Northern California.
Prior to establishing a private
 
                                       21
<PAGE>   22
 
practice, he held various positions in publicly traded and privately held
companies, as well as with a San Francisco law firm.
 
     James S. Gillespie. Mr. Gillespie has been Vice President of Sales and a
director of the Company since its incorporation in 1996 and also serves as
President of VPI. Mr. Gillespie was the founder of VPI and has served as
President since VPI's incorporation in 1987. Mr. Gillespie was with Centigram
Communications Corporation from 1983 to 1986, during which time he held a number
of positions, with his final position being Director of National Sales. Mr.
Gillespie has indicated his desire to relinquish his Board of Directors and
Officers responsibilities and to transition into a part-time or consulting role
with the Company when his replacement starts.
 
     Gary L. Nemetz. Mr. Nemetz became a director of the Company in February
1996, upon the consummation of the Company's IPO. Mr. Nemetz served in March
1995, and from April 1996 to February 1997, as a director of BFI. Mr. Nemetz
served as a consultant to BFI from April 1995 to April 1996. Since 1984, Mr.
Nemetz has served as President of Admiral Capital Corporation, a private
investment management firm. He is also a general partner of Transition Capital
Management Company, a venture capital fund. Since 1984, Mr. Nemetz also has
conducted a management consulting business and law practice through G.L. Nemetz,
a Professional Corporation. Mr. Nemetz is a certified public accountant
(inactive status). From 1995 to 1997, Mr. Nemetz served as a director of YES!
Entertainment Corporation, which is listed on Nasdaq NMS.
 
     James H. Boyle. Mr. Boyle was elected to the Company's Board of Directors
July 7, 1997, to fill a vacancy created by a resignation and confirmed at its
annual meeting of stockholders on August 19, 1997. Mr. Boyle is President of
Boyle Enterprises, Inc., a management and investment consulting firm, and since
May 1994 has been engaged in the development of the investment strategy and
formation of an international telecommunications partnership. From July 1988 to
July 1991, Mr. Boyle was a Vice President of BCE Ventures Corporation, and a
director of numerous venture capital-backed companies including two
international cellular telephone operating companies. From January 1985 to June
1988, he was employed by Northern Telecom Limited, a leading global provider of
digital network solutions, as Manager-Venture Capital, and from April 1982 to
December 1984, as Senior Treasury Analyst. Since September 1988, Mr. Boyle has
served as a director on the board of Centigram Communications Corporation, a
voice messaging equipment manufacturer listed on Nasdaq NMS and VPI's largest
supplier of voice processing equipment. Mr. Boyle holds a Bachelor of Science
(Honors) in Chemistry from Lakehead University and an M.B.A. in Finance and
Accounting from McMaster University, both in Canada.
 
     Santanu Das. Dr. Das became a director of the Company at its annual meeting
of stockholders on August 19, 1997. Dr. Das has served as President, Chief
Executive Officer and a director of TranSwitch Corporation, a telecommunications
semiconductor systems manufacturer, which is listed on Nasdaq NMS, since its
inception in 1988. Prior to joining TranSwitch Corporation, Dr. Das held various
positions, including President with Spectrum Digital Corporation where he worked
from 1986 through August of 1988. Prior to joining Spectrum Digital Corporation,
he held various positions including Director, Applied Technology Division of ITT
Corporation's Advanced Technology Center. Dr. Das holds a Ph.D. from Washington
University, St. Louis, and an undergraduate degree from Jadavpur University,
Calcutta, India.
 
     Goh Kim Siang. Mr. Goh has served as General Manager of Advantis Network &
System Sdn Bhd since its incorporation in May 1993. From 1992 until he joined
Advantis Network & System Sdn Bhd, Mr. Goh was Account Manager for Uniteers
Communications Sdn Bhd; a wholly-owned subsidiary of United Engineers (M)
Berhad, responsible for the setting up of the networking division. Prior
thereto, he held various sales positions in networking companies well known in
Malaysia.
 
     Diane E. Nowak. Ms. Nowak has served as Vice President of Sales, Western
Region, for VPI since July 1993. Ms. Nowak joined VPI in 1989 and previously
served as Senior Sales Executive (May 1990 to July 1991) and as Director of
Major Accounts (July 1991 to July 1993). Ms. Nowak served as a director of VPI
from November 1995 to September 1996.
 
                                       22
<PAGE>   23
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater than ten percent stockholders are required by Commission regulation
to furnish the Company with copies of all Section 16(a) forms they file.
 
     To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company during the fiscal year ended December 31, 1997,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except for the
filings listed below.
 
  Late Filings
 
     All of the officers and directors of the Company at the time of the
consummation of the Company's initial public offering ("IPO") on February 4,
1997 correctly and timely filed his or her initial Statement of Beneficial
Ownership of Securities on Form 3 ("Form 3"). However, certain of those officers
and directors possessed convertible notes which were automatically converted
upon the consummation of the Company's initial public offering ("IPO") on
February 4, 1997. The conversion of those convertible notes should have been,
but was not, reported on a Statement of Changes of Beneficial Ownership of
Securities on Form 4 ("Form 4") for the month of February 1997. Those same
officers and directors were also issued Common Stock warrants at the
commencement of the IPO. Those warrants should have been, but were not, reported
on a Form 4 for the month February 1997. The following officers and directors
timely filed a Form 5 for the fiscal year ended December 1997 to include the
conversion of the convertible notes and the issuance of the Common Stock
warrants: William Brehm; Esmond T. Goei; Gary L. Nemetz; Richard H. Williams;
and Douglas S. Zorn.
 
     Gary L. Nemetz, a director of the Company, purchased 15,000 shares of
Common Stock of the Company during the month of August 1997, and purchased 6,700
shares of Common Stock of the company during the month of November 1997. These
purchases should have been, but were not, reported on a Form 4 for the months of
August and November 1997. An amended Form 5 for the fiscal year ended December
1997 was filed on behalf of Mr. Nemetz in April 1998.
 
  Incorrect Filing
 
     James S. Gillespie, and officer, director and more than ten percent
stockholder of the Company, timely filed a Form 4 to reflect an open market
purchase of the Company's Common Stock during the month of April 1997. However
the total number of securities owned by him at the end of that month was listed
incorrectly. An amended Form 4 for April 1997 was filed in February 1998.
 
     Santanu Das timely filed his Form 3 upon becoming a director of the
Company. However, the total number of securities owned by him as reflected on
the Form 3 failed to include five hundred shares purchased in the open market
prior to his becoming a director of the Company, but following the consummation
of the Company's IPO. An amended Form 3 was filed for Mr. Das in April 1998 to
include those shares.
 
                                       23
<PAGE>   24
 
ITEM 10. EXECUTIVE COMPENSATION
 
     The following table, and the accompanying explanatory footnotes, include
annual and long-term compensation information for services rendered in all
capacities during the fiscal years ended December 31, 1995, 1996 and 1997, by
(i) the Company's Chief Executive Officer and (ii) the other highly compensated
executive officers of the Company (or its subsidiaries) at December 31, 1997,
who received compensation of at least $100,000 during the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers").
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                            LONG-TERM
                                                                                           COMPENSATION
                                                                                              AWARDS
                                                 ANNUAL COMPENSATION                 ------------------------
                                   -----------------------------------------------   RESTRICTED    SECURITIES
                                                                    OTHER ANNUAL       STOCK       UNDERLYING
NAME AND POSITION                  YEAR     SALARY($)   BONUS($)   COMPENSATION($)   AWARDS($)     OPTIONS(#)
-----------------                  ----     ---------   --------   ---------------   ----------    ----------
<S>                                <C>      <C>         <C>        <C>               <C>           <C>
Esmond T. Goei...................  1997     $163,750    $     --     $   38,000(4)    $    --       100,000
  Chairman of the Board,           1996(1)   135,000     125,000             --(2)         --            --
  President and Chief              1995(1)   108,000          --             --(2)     58,608(1)    168,750(8)
  Executive Officer
Douglas S. Zorn..................  1997     $150,000    $     --     $   60,000(5)    $    --       100,000
  Executive Vice President,        1996(1)   135,000     125,000             --(2)         --            --
  Chief Financial Officer and      1995(1)    90,000          --             --(2)     58,608(1)    140,625(8)
  Secretary
James S. Gillespie(6)............  1997     $150,000    $     --     $  230,000(2)    $    --            --
  Vice President of Sales and      1996      300,000          --     $1,003,130(7)         --            --
  President of VPI                 1995      300,000     550,000             --(2)         --            --
</TABLE>
 
---------------
 
(1) Data reflects compensation paid by BFI for fiscal years 1995 and 1996. In
    1995, the Company and Messrs, Goei and Zorn orally agreed that future cash
    salary payments would be suspended until BFI had obtained sufficient funding
    to pursue a public offering of its securities. During the period of
    suspension, from April through December 1995, Messrs, Goei and Zorn
    continued to pursue their respective duties in the interest of BFI. BFI
    compensated Mr. Goei and Mr. Zorn for their respective past salaries by
    issuing to each of them 87,475 shares of restricted stock of BFI.
 
(2) Prerequisites do not exceed the lesser of $50,000 or 10% of the Named
    Executive Officer's total annual salary and bonus.
 
(3) Represents sales commissions paid to Mr. Gillespie.
 
(4) Mr. Goei was reimbursed by the Company in fiscal 1997 $25,000 for previous
    years vacation accrued but not taken and automobile expenses.
 
(5) Mr. Zorn was reimbursed by the Company in fiscal 1997 for $55,000 in moving
    expenses and $25,000 for previous year vacation accrued but not taken and
    automobile expenses.
 
(6) Data reflects compensation paid by VPI for 1995, 1996 and January 1997.
    Thereafter, compensation was paid by the Company.
 
(7) Mr. Gillespie, formerly the sole stockholder of VPI, received a $1.0 million
    dividend from VPI in 1996, approximately $450,000 of which was to reimburse
    Mr. Gillespie for income taxes paid by him during that year.
 
(8) BFI options for 1995 were re-granted upon the Company's February 4, 1997 IPO
    at the exercise price and vesting schedules as established by BioFactors.
 
                                       24
<PAGE>   25
 
OPTION GRANTS IN CALENDAR 1997
 
     The following option grants were made to the Named Executive Officers
during the fiscal year ended December 31, 1997:
 
                       OPTION GRANTS IN LAST FISCAL YEAR
                              (INDIVIDUAL GRANTS)
 
<TABLE>
<CAPTION>
                                                       PERCENT OF TOTAL
                                     NUMBER OF             OPTIONS
                                    SECURITIES            GRANTED TO
                                    UNDERLYING           EMPLOYEES IN     EXERCISE PRICE      EXPIRATION
              NAME                OPTIONS GRANTED       FISCAL YEAR(6)      ($/SHR)(3)           DATE
              ----                ---------------      ----------------   --------------      ----------
<S>                               <C>                  <C>                <C>                 <C>
Esmond T. Goei,                       100,000(2)(3)           9.5%         $3.875/share       3/18/2007
  CEO, President and Chairman         168,750(1)(4)          16.0            3.20/share(5)    11/2/2005
Douglas S. Zorn,                      100,000(2)(3)           9.5          $3.875/share       3/18/2007
  EVP and CFO                         140,625(1)(4)          13.4            3.20/share(5)    11/2/2005
James S. Gillespie,                        --                  --                   n/a             n/a
  VP Sales and President of VPI
</TABLE>
 
---------------
 
(1) These options were granted by BioFactors Inc. to ten individuals in November
    1995 or February 1996. Pursuant to the terms of the Agreement and Plan of
    Merger among BioFactors, Inc. BioFactors Acquisition Corporation and the
    Company, dated October 30, 1996 (the "Merger Agreement"), these stock
    options were deemed re-granted to all such individuals upon the Company's
    February 4,1997, IPO, in the amounts, at the exercise price (as set forth in
    the Merger Agreement), and with the terms and vesting schedules as
    established by BioFactors. The total number of such options was 520,313. In
    addition, in connection with the acquisition of Voice Plus, which occurred
    immediately prior to the IPO, an additional 100,000 options previously
    approved by the Company on September 12, 1996, for grant to Voice Plus
    employees, were deemed re-granted at a price deemed to be the fair market
    value of the underlying common stock of the Company on the original grant
    date. None of the Named Executive Officers were included in this second
    group, but all of these shares are included as part of the total options
    granted to employees in fiscal year 1997.
 
(2) These options were granted on March 18, 1997 under the Company's Equity
    Incentive Plan ("Plan"). The options become exercisable ratably on a monthly
    basis over 36 months.
 
(3) The exercise price was deemed to be equal to 100% of the fair market value
    on the date immediately preceding the date of the grant, as determined by
    the closing price as reported on the Nasdaq SmallCap listing.
 
(4) The exercise price was deemed to be equal to 100% of the fair market value
    on the date of the grant as determined by the Board of Directors.
 
(5) The options vest fifty percent (50%) on August 4, 1998, with the remaining
    50% vesting on February 4, 1999.
 
(6) Excludes 290,626 options granted during 1997 to five non-employee directors
    and two consultants. The total number of options deemed granted during 1997
    was 1,053,125.
 
                                       25
<PAGE>   26
 
     The following table sets forth certain information regarding option
exercises during fiscal year 1997 and the number of shares covered by both
exercisable and unexercisable stock options as of December 31, 1997 for each of
the Named Executive Officers:
 
<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES
                                                           UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                    SHARES                       OPTIONS AT              IN-THE-MONEY OPTIONS AT
                                   ACQUIRED                   DECEMBER 31, 1997             DECEMBER 31, 1997
                                      ON       VALUE     ---------------------------   ---------------------------
              NAME                 EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
              ----                 --------   --------   -----------   -------------   -----------   -------------
<S>                                <C>        <C>        <C>           <C>             <C>           <C>
Esmond T. Goei...................     --         --        193,750        75,000           --             --
Douglas S. Zorn..................     --         --        165,625        75,000           --             --
James S. Gillespie...............     --         --             --            --           --             --
</TABLE>
 
COMPENSATION OF DIRECTORS
 
     Directors who are also employees of the Company or its subsidiaries are not
separately compensated for serving on the Board of Directors. Non-employee
directors are entitled to receive a fee of $1,000 per board meeting requiring
personal attendance and a fee of $250 per telephonic Board meeting and committee
meeting not part of, immediately preceding or following, a scheduled Board
meeting and also are reimbursed for reasonable travel-related expenses for
attendance at meetings. The non-employee director who chairs the Board's
compensation committee and the non-employee director who chairs the Board's
audit committee are each entitled to be paid $12,000 per year in addition to
compensation for Board of Director meetings.
 
     In connection with his election to the BFI Board in December 1995, Mr.
Williams (who resigned from the Board April 9, 1997) received a non-statutory
option ("NSO") to purchase shares of BFI Common Stock, which was exchanged for
an NSO to purchase 16,875 shares of the Company's Common Stock, exercisable at a
price per share of $3.20. The option vested 50% on the first anniversary of the
date of grant and the remaining 50% on the second anniversary. The option was
not exercised as of March 31, 1998. On February 4, 1997, in connection with
their respective elections to the Board of Directors, the Company granted to
each of Messrs. Nemetz and Brehm non-qualified stock options ("NSOs") to
purchase 16,875 shares of Common Stock at a price per share of $4.00, 50%
percent of which vest on the first anniversary of the date of grant, and the
remaining 50% percent on the second anniversary. On July 7, 1997, the Company
granted to each of Messrs. Nemetz and Brehm an additional NSO to purchase 3,125
shares of Common Stock at a price per share of $3.50, 50% of which vest on
February 4, 1998, and the remaining 50% vest on February 4, 1999. The purpose of
these grants was to bring the number of options granted to each director up to
20,000. On July 7, 1997, the Company granted to James Boyle, in connection with
his election to the Board of Directors, a NSO to purchase 20,000 shares of
Common Stock at a price per share of $3.50, one quarter of which vests on each
of the four succeeding anniversary dates of the grant. On August 19, 1997, the
Company granted to Santanu Das, in connection with his election to the Board of
Directors, a NSO to purchase 20,000 shares of Common Stock at a price per share
of $3.5625, one quarter of which vests on each of the four succeeding
anniversary dates of the grant. Mr. Brehm resigned from the Board of Directors
of the Company in August 1997; no shares had vested under his NSO as of his date
of resignation. As of March 31, 1998, neither of Messrs. Nemetz or Das had
exercised any of their options. As of March 31, 1998, none of Mr. Boyle's
options had vested. Under the Company's Equity Incentive Plan, each outside
director who has served for a full fiscal year will be granted annually a NSO to
purchase 2,400 shares of Common Stock, which will vest one-third on each of the
first, second and third anniversaries of the date of grant.
 
EMPLOYMENT AGREEMENTS
 
     The Company has three-year employment agreements with each of Esmond T.
Goei, as Chairman of the Board of Directors, President and Chief Executive
Officer of the Company, and Douglas S. Zorn, as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company. Each officer's base
salary may be adjusted from time to time by mutual agreement between each such
officer and the Board of Directors. In 1997, the base salary of Mr. Goei was
increased to $210,000 and the base salary of Mr. Zorn was $150,000. The
agreements provide for an annual bonus to be paid to each officer pursuant to a
written bonus
 
                                       26
<PAGE>   27
 
plan to be approved by the Board of Directors. The agreements provide that each
officer is entitled to reasonable expense reimbursements, four weeks paid
vacation per year and participation in any of the Company's benefit and deferred
compensation plans. Mr. Goei received a $500 monthly automobile allowance
through July 7, 1997, at which time his allowance was increased to $1,100 per
month. Mr. Zorn's automobile allowance was $500 per month throughout 1997 and
was increased to $1,100 in 1998. On the annual anniversary date of each
agreement, the period of employment is extended automatically for one year
unless the officer is notified in writing. The agreements also provide for
payments in the event of termination prior to the end of the term, as follows:
if the officer is terminated without cause, then base salary will be paid for
the greater of two years or the balance of the term plus a bonus for each such
year equal to the average bonus for the two preceding years; if the officer is
terminated upon a change of control, then compensation equal to two times the
sum of the base salary plus average bonus will be paid for one year. In the
event of termination (except termination without cause), the officer is subject
to a two-year non-competition agreement.
 
     The Company has a three-year employment agreement with James S. Gillespie,
Vice President of Sales of the Company and President of VPI. Mr. Gillespie's
agreement provides for a base salary of $150,000, annual sales commissions
targeted to be approximately $200,000 and an annual bonus pursuant to a written
bonus plan to be approved by the Board of Directors. The agreement provides that
Mr. Gillespie is entitled to reasonable expense reimbursements, participation in
any of the Company's benefit and deferred compensation plans, use of a Company
car or a monthly car allowance and annual paid vacation, consistent with the
arrangements provided to the Company's senior management. Additionally, the
agreement contains provisions for assignment of inventions and confidentiality
and, in the event of termination, covenants not to compete, to solicit customers
or to hire employees for two years. The agreement also provides that in the
event of termination without cause or a material breach by the Company, Mr.
Gillespie will receive his base salary and 50% of sales commissions for the
duration of the term of the agreement and, in the event of a material breach by
the Company, a promissory note with a remaining principal amount of $250,000
issued by the Company in consideration for the VPI acquisition will be
accelerated and immediately become due and payable.
 
     VPI has two-year employment agreements with each of Diane E. Nowak, Vice
President of Sales, Western Region, of VPI, and Bradley J. Eickman, Director of
Operations for VPI. Each of these employment agreements provides for a base
salary of $65,000, sales commissions payable pursuant to an annual sales manager
compensation plan and performance-based bonus payments. Both agreements also
provide for reasonable expense reimbursements, participation in any of VPI's
benefit plans, use of a car leased by VPI and annual paid vacation.
Additionally, the agreements contain provisions for assignment of inventions and
confidentiality and, in the event of termination, covenants not to compete, to
solicit customers or to hire employees for two years. The Company granted to Ms.
Nowak and Mr. Eickman incentive stock options ("ISOs") to purchase 50,000 and
40,000 shares of Common Stock, respectively, at a price per share equal to the
fair market value on the date of grant, 50% of which will vest 18 months from
the date of grant and the remaining 50% of which will vest on the second
anniversary of the date of grant. In addition, Ms. Nowak and Mr. Eickman
received signing bonuses that are not tied to continued employment in the
amounts of $100,000 and $50,000, respectively, 50% of which was paid on February
3, 1997 and the balance of which was paid on August 1, 1997.
 
                                       27
<PAGE>   28
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1998, by (a) each person
known to the Company to own beneficially more than 5% of the Company's Common
Stock, (b) each of the Company's directors and Named Executive Officers, and (c)
all executive officers and directors as a group.
 
<TABLE>
<CAPTION>
                                                        SHARES BENEFICIALLY
                 NAMES AND ADDRESSES                         OWNED(1)          OWNERSHIP%(1)
                 -------------------                    -------------------    -------------
<S>                                                     <C>                    <C>
James S. Gillespie....................................         815,000(2)          15.5%
198 Country Club Drive
Incline Village, Nevada 89451
Esmond T. Goei........................................         402,068(3)           8.3
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Douglas S. Zorn.......................................         380,324(4)           7.9
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California 94538
Gary L. Nemetz........................................         132,725(5)           2.9
c/o Admiral Capital Corporation
2420 Sand Hill Road, Suite 101
Menlo Park, California 94025
Santanu Das...........................................          31,718(6)             *
14 Hunter Ridge Road
Monroe, Connecticut 06468
James H. Boyle........................................                                *
4564 Daffodil Trail
Plano, TX 75093
Directors and executive officers as a group (9
  persons)............................................       1,810,210(7)          40.8%
</TABLE>
 
---------------
 
 *  Less than 1%
 
(1) In performing all calculations in connection with this Item 11, the number
    of issued and outstanding share excludes 91,454 shares held in escrow in
    connection with the Advantis acquisition.
 
(2) Includes warrants to purchase 27,500 shares of Common Stock.
 
(3) Includes options that are presently exercisable or that will become
    exercisable within 60 days to purchase 207,638 shares of Common Stock, and
    warrants to purchase 51,518 shares of Common Stock.
 
(4) Includes options that are presently exercisable or that will become
    exercisable within 60 days to purchase 179,514 shares of Common Stock, and
    warrants to purchase 61,375 shares of Common Stock.
 
(5) Includes 67,725 shares beneficially owned by Admiral Capital Corporation, as
    to which Mr. Nemetz has sole voting and investment power, options that are
    presently exercisable or that will become exercisable within 60 days to
    purchase 10,000 shares and warrants to purchase 55,000 shares.
 
(6) Includes a warrant to purchase 25,000 shares of Common Stock.
 
(7) Includes options that are presently exercisable or that will become
    exercisable within 60 days to purchase 405,904 shares of Common Stock and
    warrants to purchase 220,393 shares of Common Stock.
 
                                       28
<PAGE>   29
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     In October 1995, BFI entered into an agreement with Burton Kanter (a
director of BFI until February 3, 1997), that was subsequently amended on July
16, 1996. Mr. Kanter agreed on behalf of Walnut Capital Corp., of which Mr.
Kanter is Chairman: (i) to extend the maturity date of certain unsecured notes
issued to Walnut Capital Corp. in the aggregate principal amount of $54,850,
represented by five notes issued between January 29, 1992 and November 1, 1992
(the "1992 Notes"), and payment of accrued interest thereon until the earlier of
December 31, 1996 or receipt by the Company of the proceeds of an initial public
offering; and (ii) to waive the default on the 1992 Notes (in return for
re-compilation of interest on the 1992 Notes on an annually compounded basis
from the date each of the 1992 Notes was issued). In return for such agreements
and his past and then continuing participation on BFI's Board of Directors, BFI:
(i) executed and delivered to Mr. Kanter a stock option to purchase 75,000
shares of BFI Common Stock, which subsequently was assigned to Windy City, Inc.
and was exchanged for an option to purchase 42,188 shares of NHancement Common
Stock, with an exercise price per share equal to 80% of the initial public
offering price of the Company's Common Stock ($4.00 being the initial public
offering price and $3.20 being equal to 80% of the initial public offering
price); (ii) transferred to Mr. Kanter and a former director all of BFI's rights
to invest in SportsTrac; (iii) transferred to Mr. Kanter and a former director
of BFI all of BFI's 7.5% warrants in SportsTrac; and (iv) agreed to pay Mr.
Kanter a fee of $2,000 per month, plus reasonable expenses, in connection with
his duties as a director. In July 1996, Mr. Kanter agreed to terminate his
$2,000 per month director fees and, from that time forward, to be compensated on
the same basis as other outside directors. The 1992 Notes and all accrued
interest thereon were paid in February 1997.
 
     In May and June 1996, BFI issued 87,475 shares of BFI common stock to each
of Messrs. Goei and Zorn in lieu of cash compensation. The aggregate value of
these shares at the time of issuance totaled $117,200, of which $110,000 was for
payment of deferred compensation accrued in 1995. In June 1996, BFI issued
18,750 shares of common stock to Mr. Kanter as consideration for his special
services as a director during 1995, paid out of compensation otherwise owing to
Messrs. Goei and Zorn, in accordance with an agreement dated July 16, 1996 by
and among BFI and Messrs. Goei, Zorn, Kanter and a former director of BFI.
 
     In November 1996, BFI entered into a Unit Subscription Agreement with each
of VPI, Admiral Capital Corporation (of which Mr. Nemetz has sole voting and
investment power) and Messrs. Goei and Zorn for the purchase and sale of BFI's
units consisting of: (i) unsecured promissory notes in the principal amounts of
$50,000, $50,000, $35,000 and $100,000, respectively, and (ii) warrants to
purchase 50,000, 50,000, 35,000 and 100,000 shares, respectively: at an exercise
price of 120% of the initial public offering price of the Company's common
stock. In January 1997, Mr. Zorn transferred to Richard H. Williams (a director
of BFI until February 3, 1997, and a director of the Company from February 4,
1997 until April 9, 1997) and Mr. Goei notes in the principal amounts of $25,000
and $15,000, respectively, and warrants to purchase 25,000 shares and 15,000
shares, respectively, in exchange for Mr. Williams payment to BFI of $25,000,
Mr. Goei's payment to BFI of $15,000, and Mr. Zorn's receipt of an unsecured
promissory note from BFI in the principal amount of $40,000. Upon the February
4, 1997 closing of NHancement's initial public offering ("IPO"), outstanding
principal and all accrued interest in the amounts of $51,361.11 (VPI),
$51,361.11 (Admiral Capital Corporation), $51,027.78 (Mr. Goei), $102,722.22
(Mr. Zorn) and $25,270.83 (Mr. Williams), respectively, were paid.
 
     Upon consummation of the VPI merger on February 3, 1997, the Company
acquired all of the capital stock of VPI from Mr. Gillespie for total
consideration valued at approximately $6,180,000, consisting of: (i) $1,500,000
in two long-term notes in the principal amounts of $1,000,000 and $500,000,
respectively, bearing interest at the medium-term United States-Treasury Bill
rate declared at the close of business on the maturity date or earlier payment
date and maturing on the three-year anniversary of the date of issuance but
payable earlier, dependent upon the future earnings of VPI, with fifty percent
(50%) of VPI's pre-tax profits to be applied to pay principal and accrued
interest on the $1,000,000 note quarterly, and $62,500 of principal and accrued
interest to be paid on the $500,000 note in any quarter in which VPI is
profitable, beginning 45 days after the close of the first fiscal quarter in
1997; (ii) $2,400,000 in shares of Common Stock sold in the Company's IPO (being
600,000 shares based on the price to the public in the IPO of $4.00 per share);
and (iii) $2,280,000 in restricted shares of Common Stock (being 712,500 shares
based on the estimated fair value
                                       29
<PAGE>   30
 
of $3.20 per share). In the event of a material breach by the Company of the
employment agreement with Mr. Gillespie, the two promissory notes will be
accelerated and immediately become due and payable. During 1997, an aggregate of
$1,250,000 was paid to Mr. Gillespie in connection with the $1,500,000 of notes
payable issued to him by the Company. At December 31, 1997, Mr. Gillespie was
owed a total of $250,000 on these notes. See Item 10, "Employment Agreements."
Except for 150,000 shares, restricted shares are subject to a lock-up agreement
in favor of Chatfield Dean & Co., the representative of the underwriters of the
IPO, for 18 months following the consummation of the IPO with respect to 50% of
the shares, and for 24 months following the consummation of the IPO with respect
to the remaining 50% of the shares. Additionally, the Company has agreed to
register 150,000 shares of Common Stock issued as consideration for VPI one year
after the consummation of the IPO.
 
     On April 15, 1997, the Board of Directors approved a short-term loan to
Esmond T. Goei to assist him with the costs of relocation due to the Company's
headquarters move from Colorado to California. The principal amount of the loan
is $60,000, with interest accruing at seven percent (7%) per annum. Principal
and interest are due in April 1998. As of December 31, 1997, principal and
unpaid interest totaled approximately $63,000.
 
     On December 15, 1997, the Company consummated a stock purchase acquisition
with Advantis Network & System Sdn Bhd, a Malaysian corporation ("Advantis").
The Company purchased all of the shares of stock of Advantis from the six (6)
stockholders who owned all of the issued and outstanding shares of Advantis
("Advantis Stockholders"). The purchase price consisted of newly-issued shares
of the Common Stock of the Company. As a result of the transaction, Advantis
became a wholly-owned subsidiary of the Company, and the Advantis Stockholders
became stockholders of the Company. As of December 31, 1997, the Advantis
Stockholders had received a total of 208,500 shares of the Company's stock, with
no Advantis Stockholder receiving more than 2.3% of the total issued and
outstanding shares of the Company. At the time of the Advantis acquisition, an
Advantis Stockholder had an outstanding loan payable to Advantis. This loan
arose in April 1997, at which time proceeds from a term loan to the Company from
a third party were advanced to such Advantis Stockholder in return for a
promissory note payable to Advantis. Under the terms of the note, repayments,
including interest, will match Advantis' payments due under the term loan. Those
payments provide for monthly principal and interest payments of $2,600 through
April 2012, with interest payable at the Base Lending Rate in Malaysia plus
2.23%. At December 31, 1997, this rate was 12.65%, and the amount owing on the
note was approximately $204,000.
 
     At various times in 1996 and 1997, Advantis purchased inventory from
certain companies whose directors and/or stockholders were also stockholders of
Advantis. At December 31, 1997, the Company's Advantis subsidiary owed $426,700
in relation to these transactions.
 
     At December 31, 1997, the Company's Advantis subsidiary owed $58,200 to
certain of the Advantis Stockholders for expenses paid by those Stockholders on
behalf of Advantis.
 
     The Company's Advantis subsidiary leases its corporate facilities from an
entity that is partially owned by a former minority Advantis Stockholder. The
lease commenced in November 1996, and its terms provide for annual payments of
$42,500 through October 1999.
 
     Reference is made to Items 9 and 10 of this report on Form 10-KSB regarding
options granted to the directors and Named Executive Officers of the Company.
 
                                       30
<PAGE>   31
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as part of the Annual Report on Form
10-KSB
 
     1. Financial Statements
 
          See Index to Financial Statements on page F-1 of this Form 10-KSB
 
     2. Exhibits
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
          3.1            -- Amended and Restated Certificate of Incorporation, as
                            filed with the Delaware Secretary of State on January 27,
                            1997, as amended by Certificate of Designations, as filed
                            with the Delaware Secretary of State on April 9, 1998, as
                            further amended by Amended Certificate of Designations,
                            as filed with the Delaware Secretary of State on April
                            13, 1998.
          3.2            -- Amended and Restated Bylaws(1)
          4.1            -- Form of Common Stock Certificate(2)
          4.2            -- Form of underwriter Warrant(3)
          4.3            -- Registration Rights Agreement, dated September 1, 1996,
                            between BFI and (i) a majority of the holders of
                            securities pursuant to the Secured Note and Warrant
                            Purchase Agreement dated December 1, 1994, as amended;
                            (ii) a majority of the holders of securities issued
                            pursuant to the Secured Note and Stock Purchase
                            Agreement, dated December 1, 1995, as amended; (iii) a
                            majority of the holders of securities issued pursuant to
                            the Unsecured Note and Stock Purchase Agreement, dated
                            February 1, 1996, as amended; (iv) a majority of the
                            holders of securities issued pursuant to the Unit
                            Subscription Agreement, dated May 17, 1996, as amended;
                            (v) the purchasers of securities issued pursuant to the
                            Unit Subscription Agreement dated October 3, 1996; and
                            (vi) the former holders of BFI's Series A Preferred
                            Stock(3)
          4.4            -- Registration Rights Agreement, dated October 25, 1996,
                            between the Company and James S. Gillespie(2)
          4.5            -- Form of Series A Preferred Stock Certificate
          4.6            -- Registration Rights Agreement, dated as of April 13,
                            1998, among the Company, The Endeavour Capital Fund S.A.
                            and AMRO INTERNATIONAL S.A.
         10.1            -- Formation Agreement, dated as of October 15, 1996,
                            between BFI and VPI(2)
         10.2            -- Agreement and Plan of Merger, dated as of October 30,
                            1996, between the Company, BFI Acquisition Corporation
                            and BFI(3)
         10.3            -- Agreement and Plan of Merger, dated as of October 25,
                            1996, between the Company, VPI Acquisition Corporation,
                            VPI and James S. Gillespie, together with Forms of
                            Promissory Notes(4)
         10.4            -- Agreement of Merger between Voice Plus, Inc. and
                            BioFactors, Inc., dated as of October 10, 1997
         10.5            -- License Agreement, dated November 24, 1988, by and
                            between BFI and Systems Technology, Inc., as amended by
                            Addendum to License Agreement, dated May 19, 1994, as
                            amended by Second Addendum to License Agreement, dated
                            November 18, 1996(3)
         10.6            -- Sublicense Agreement, dated August 30, 1995, between BFI
                            and SportsTrac, Inc., as amended by Addendum to
                            Sublicense Agreement, dated July 31, 1996(2)
</TABLE>
 
                                       31
<PAGE>   32
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
         10.7            -- Secured Note and Warrant Purchase Agreement, dated
                            December 1, 1994, between BFI and the purchasers listed
                            therein, as amended by the First Amendment to Secured
                            Note and Warrant Purchase Agreement, Dated July 1995, as
                            amended by Amendment to Secured Note and Warrant Purchase
                            Agreement, dated December 1, 1995, as amended by Third
                            Amendment to Secured Note and Warrant Purchase Agreement,
                            dated March 1, 1996, and as amended by Fourth Amendment
                            to Secured Note and Warrant Purchase Agreement, dated
                            October 1, 1996, together with Amended and restated
                            Security Agreement and Form of Secured Promissory Note(3)
         10.8            -- Secured Note and Stock Purchase Agreement, dated December
                            1, 1995, between BFI and the purchasers listed therein,
                            as amended by the First Amendment to Secured Note and
                            Stock Purchase Agreement, dated March 1, 1996, as amended
                            by Second Amendment to Secured Note and Stock Purchase
                            Agreement, dated July 1, 1996, and as amended by Third
                            Amendment to Secured Note and Stock Purchase Agreement,
                            dated October 1, 1996, together with Form of Secured
                            Promissory Note(3)
         10.9            -- Unsecured Note and Stock Purchase Agreement, dated
                            February 1, 1996, between BFI and the purchasers listed
                            therein, as amended by the First Amendment to Unsecured
                            Note and Stock Purchase Agreement, dated March 1, 1996,
                            as amended by Second Amendment to Unsecured Note and
                            Stock Purchase Agreement, dated July 1, 1996, and as
                            amended by Third Amendment to Unsecured Note and Stock
                            Purchase Agreement, dated October 1, 1996, together with
                            Form of Unsecured Promissory Note(3)
         10.10           -- Unit Subscription Agreement, dated May 17, 1996, between
                            BFI and the purchasers listed therein, as amended by
                            First Amendment to Unit Subscription Agreement, dated
                            October 1, 1996, together with Form of Promissory Note(3)
         10.11           -- Unit Subscription Agreement, dated October 1, 1996,
                            between BFI and the purchasers listed therein, together
                            with Form of Promissory Note and Form of Warrant(1)
         10.12           -- Equity Incentive Plan(1)
         10.13           -- Employment Agreement, dated as of October 30, 1996,
                            between Douglas S. Zorn and the Company(1)
         10.14           -- Employment Agreement, dated as of October 25, 1996,
                            between James S. Gillespie and the Company(2)
         10.15           -- Employment Agreement, dated as of October 30, 1996,
                            between Esmond T. Goei and the Company(2)
         10.16           -- Form of FACTOR 1000(R) Service Contract(2)
         10.17           -- Office Building Lease, dated April 8, 1996, between BFI
                            and Denver West Office Building No. 21 Venture(3)
         10.18           -- Authorized U.S. Distributor Agreement, dated April 16,
                            1996, between Centigram Communications Corporation and
                            VPI(2)
         10.19           -- Office Lease, dated October 16, 1995, between AJ Partners
                            Limited Partnership and VPI(3)
         10.20           -- Agreement, dated October 16, 1995, between BFI, Burton
                            Kanter and Elliot Steinberg, as amended by Amendment
                            dated July 16, 1996, between BFI, Esmond Goei, Douglas
                            Zorn, Burton Kanter and Elliot Steinberg(3)
         10.21           -- Stockholder Agreement, dated October 25, 1996, between
                            the Company and James D. Gillespie(3)
         10.22           -- 1997 Management and Company Performance Bonus Plan(3)
         10.23           -- Employment Agreement, dated as of November 1, 1996,
                            between Diane E. Nowak and VPI(1)
</TABLE>
 
                                       32
<PAGE>   33
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
         10.24           -- Employment Agreement, dated as of November 1, 1996,
                            between Bradley Eickman and VPI(1)
         10.25           -- Promissory Note Payable to the Company by Esmond T. Goei
         10.26           -- Agreement for the Sale of Shares in Advantis Network &
                            System Sdn. Bhd. Dated June 20, 1997, Between the Company
                            and the shareholders of Advantis, as amended by the
                            Supplemental Agreement to the Agreement dated November
                            26, 1997; and the Second Supplemental Agreement Dated
                            November 26, 1997(5)
         10.27           -- Building Lease dated June 9, 1997 by and between the
                            company, as Tenant and El Dorado Holding Company, Inc.,
                            as Landlord(7)
         10.28           -- Form of Lock Up Agreement between the Company the former
                            Shareholders of Advantis(6)
         10.29           -- Securities Purchase Agreement, dated as of April 13,
                            1998, by and among the Company, the Endeavour Capital
                            Fund S.A. and AMRO INTERNATIONAL S.A.
         10.30           -- Form of Escrow Instructions related to Securities
                            Purchase Agreement, dated as of April 13, 1998.
         21              -- Subsidiaries
         27.1            -- Financial Data Schedule for the year ended December 31,
                            1996 and 1997
         27.2            -- Restated Financial Data Schedule for the year ended March
                            31, 1997
         27.3            -- Restated Financial Data Schedule for the year ended June
                            30, 1997
         27.4            -- Restated Financial Data Schedule for the year ended
                            September 31, 1997
</TABLE>
 
---------------
 
(1) Incorporated by reference to the document bearing the same exhibit number as
    contained in Amendment No. 2 to Registrant's Registration Statement on Form
    SB-2, File Number 333-15563, as filed with the Securities and Exchange
    Commission on January 13, 1997.
 
(2) Incorporated by reference to the document bearing the same exhibit number as
    contained in Registrant's Registration Statement on Form SB-2, File Number
    333-15563, as filed with the Securities and Exchange Commission on November
    5, 1996.
 
(3) Incorporated by reference to the document bearing the same exhibit number as
    contained in Amendment No. 1 to Registrant's Registration Statement on Form
    SB-2, File Number 333-15563, as filed with the Securities and Exchange
    Commission on December 20, 1996.
 
(4) Incorporated by reference to the document bearing the same exhibit number as
    contained in Amendment No. 3 to Registrant's Registration Statement on Form
    SB-2, File Number 333-15563, as filed with the Securities and Exchange
    Commission on January 28, 1997.
 
(5) Incorporated by reference to Exhibit 2.01 on registrant's Form 8-K, SEC File
    No. 0-21999, as filed with the Securities and Exchange Commission on
    December 30, 1997.
 
(6) Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K, SEC File
    Number 0-21999, as filed with the Securities and Exchange Commission on
    December 30, 1997.
 
(7) Incorporated by reference to the document bearing the same exhibit number as
    contained in registrant's Quarterly Report on Form 10-QSB, SEC File Number
    0-21999, as filed with the Securities and Exchange Commission on November
    14, 1996.
 
(b) Reports on Form 8-K
 
     Registrant filed Reports on Form 8-K on April 7, 1997, and December 30,
1997. A Report on Form 8-K/A was filed by the Registrant on February 11, 1998.
 
                                       33
<PAGE>   34
 
                                   SIGNATURES
 
     In accordance with Section 13 or 15(d) Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
                                            NHANCEMENT TECHNOLOGIES INC.
 
                                            By      /s/ ESMOND T. GOEI
                                             -----------------------------------
                                                       Esmond T. Goei
                                                Chairman of the Board, Chief
                                                           Executive
                                               Officer, President and Director
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Esmond T. Goei and Douglas S. Zorn and each of
them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to this
report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue hereof.
 
     In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                        TITLE                        DATE
                      ---------                                        -----                        ----
<C>                                                      <S>                                <C>
 
                 /s/ ESMOND T. GOEI                      Chairman of the Board, Chief          April 15, 1998
-----------------------------------------------------      Executive Officer, President and
                   Esmond T. Goei                          Director (Principal Executive
                                                           Officer)
 
                 /s/ DOUGLAS S. ZORN                     Executive Vice President-Finance,     April 15, 1998
-----------------------------------------------------      Secretary, Treasurer, Chief
                   Douglas S. Zorn                         Financial Officer and Director
                                                           (Principal Financial and
                                                           Accounting Officer)
 
               /s/ JAMES S. GILLESPIE                    Vice President Sales, President of    April 15, 1998
-----------------------------------------------------      Voice Plus, Inc. and Director
                 James S. Gillespie
 
                 /s/ GARY L. NEMETZ                      Director                              April 15, 1998
-----------------------------------------------------
                   Gary L. Nemetz
 
                   /s/ SANTANU DAS                       Director                              April 15, 1998
-----------------------------------------------------
                     Santanu Das
 
                 /s/ JAMES H. BOYLE                      Director                              April 15, 1998
-----------------------------------------------------
                   James H. Boyle
</TABLE>
 
                                       34
<PAGE>   35
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                       Consolidated Financial Statements
                     Years Ended December 31, 1996 and 1997
<PAGE>   36
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                               TABLE OF CONTENTS
 
<TABLE>
<S>                                                           <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..........   F-2
CONSOLIDATED FINANCIAL STATEMENTS
  Consolidated balance sheet as of December 31, 1997........   F-3
  Consolidated statements of operations for the years ended
     December 31, 1996 and 1997.............................   F-4
  Consolidated statements of stockholders' equity (deficit)
     for the years ended December 31, 1996 and 1997.........   F-5
  Consolidated statements of cash flows for the years ended
     December 31, 1996 and 1997.............................   F-6
  Summary of accounting policies............................   F-8
  Notes to the consolidated financial statements............  F-12
</TABLE>
 
                                       F-1
<PAGE>   37
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Board of Directors
and the Stockholders of
NHancement Technologies Inc. and Subsidiaries
Fremont, California
 
     We have audited the accompanying consolidated balance sheet of NHancement
Technologies Inc. and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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.
 
     As discussed in Note 8 to the consolidated financial statements, the
Company purchases substantially all of its inventory requirements from one
vendor. Additionally, this vendor has announced its intentions to sell its
customer premise equipment business which services the largest portion of the
Company's current business.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NHancement
Technologies Inc. and Subsidiaries at December 31, 1997 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
 
                                            BDO Seidman, LLP
 
San Francisco, California
April 13, 1998
 
                                       F-2
<PAGE>   38
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEET
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1997
                                                              ------------
<S>                                                           <C>
CURRENT
  Cash and cash equivalents (Note 8)........................  $  1,363,200
  Accounts receivable, less allowance for doubtful accounts
    of $515,000 (Note 8)....................................     3,005,200
  Inventory.................................................       536,200
  Current portion of notes receivable from stockholders
    (Notes 2 and 7).........................................       109,500
  Income tax receivable.....................................       172,000
  Prepaid expenses and other (Note 3).......................       179,300
                                                              ------------
TOTAL CURRENT ASSETS........................................     5,365,400
                                                              ------------
PROPERTY AND EQUIPMENT
  Office equipment..........................................       694,500
  Computers.................................................       312,300
  Automobiles...............................................       221,800
  Furniture and fixtures....................................        82,800
                                                              ------------
                                                                 1,311,400
Less accumulated depreciation...............................       608,600
                                                              ------------
PROPERTY AND EQUIPMENT, NET.................................       702,800
                                                              ------------
Excess of cost over net assets acquired of Voice Plus, Inc.
  (Note 1)..................................................     1,500,000
Excess of cost over net assets acquired of Advantis, net of
  accumulated amortization of $4,200 (Note 1)...............       987,100
Long-term portion of notes receivable from stockholders
  (Notes 2 and 7)...........................................       157,500
Deferred acquisition costs (Note 1).........................        49,600
Other assets................................................       142,500
                                                              ------------
                                                              $  8,904,900
                                                              ============
 
                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
  Lines of credit (Note 3)..................................  $    192,100
  Current portion of long-term debt (Notes 3 and 7).........       296,500
  Deferred revenue..........................................     1,057,000
  Accounts payable..........................................     1,392,200
  Accrued liabilities.......................................       440,600
  Payable to affiliates (Note 7)............................       426,700
  Payable to stockholders (Note 7)..........................        58,200
  Accrued professional fees.................................       159,800
  Payroll related liabilities...............................       249,200
                                                              ------------
TOTAL CURRENT LIABILITIES...................................     4,272,300
LONG-TERM DEBT, net of current portion (Notes 3 and 7)......       157,500
                                                              ------------
TOTAL LIABILITIES...........................................     4,429,800
                                                              ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6, 8 and 12)
STOCKHOLDERS' EQUITY (Notes 4 and 5)
  Preferred stock, $0.01 par value, 2,000,000 shares
    authorized, no shares issued and outstanding at December
    31, 1997................................................            --
  Common stock, $0.01 par value, 20,000,000 shares
    authorized, 4,437,000 shares issued and outstanding at
    December 31, 1997.......................................        44,400
  Additional paid-in capital................................    18,020,600
  Accumulated deficit.......................................   (13,601,200)
  Cumulative translation gain...............................        11,300
                                                              ------------
TOTAL STOCKHOLDERS' EQUITY..................................     4,475,100
                                                              ------------
                                                              $  8,904,900
                                                              ============
</TABLE>
 
   See accompanying summary of accounting policies and notes to consolidated
                             financial statements.
 
                                       F-3
<PAGE>   39
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                                 1996           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
NET REVENUES, including $700,000 from the sale of sublicense
  in 1996
  (Note 8)..................................................  $   796,400    $ 8,983,000
Cost of sales...............................................      129,200      5,149,500
                                                              -----------    -----------
GROSS PROFIT................................................      667,200      3,833,500
                                                              -----------    -----------
OPERATING EXPENSES
Research and development....................................       98,400         87,900
  Selling, marketing and administrative (Note 7)............    1,812,800      3,726,900
  Amortization of excess of cost over net assets acquired,
     including impairment loss of $4,084,300 (Note 1).......           --      4,649,100
                                                              -----------    -----------
TOTAL OPERATING EXPENSES....................................    1,911,200      8,463,900
LOSS FROM OPERATIONS........................................   (1,244,000)    (4,630,400)
OTHER INCOME (EXPENSE)
  Interest income...........................................           --        136,900
  Interest expense..........................................     (582,000)       (97,700)
  Other.....................................................       (2,000)            --
                                                              -----------    -----------
TOTAL OTHER INCOME (EXPENSE)................................     (584,000)        39,200
                                                              -----------    -----------
NET LOSS....................................................  $(1,828,000)   $(4,591,200)
                                                              ===========    ===========
BASIC AND DILUTIVE NET LOSS PER COMMON SHARE................  $     (4.20)   $     (1.18)
                                                              ===========    ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................      435,400      3,883,300
                                                              ===========    ===========
</TABLE>
 
   See accompanying summary of accounting policies and notes to consolidated
                             financial statements.
 
                                       F-4
<PAGE>   40
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                                                                 ADDITIONAL                   CUMULATIVE
                                              COMMON STOCK         PAID-IN     ACCUMULATED    TRANSLATION
                                            SHARES     AMOUNT      CAPITAL       DEFICIT         GAIN          TOTAL
                                           ---------   -------   -----------   ------------   -----------   -----------
<S>                                        <C>         <C>       <C>           <C>            <C>           <C>
BALANCE, January 1, 1996.................     93,200   $1,000    $ 4,972,600   $(7,182,000)     $    --     $(2,208,400)
Issuance of common stock with notes
  payable (Note 4).......................    303,400    3,000        199,300            --           --         202,300
  Issuance of common stock for payment of
    salaries and outside service fees
    (Note 7).............................    216,200    2,100        142,000            --           --         144,100
  Issuance of warrants with notes payable
    (Note 5).............................         --       --         50,000            --           --          50,000
Net loss.................................         --       --             --    (1,828,000)          --      (1,828,000)
                                           ---------   -------   -----------   ------------     -------     -----------
BALANCE, December 31, 1996...............    612,800    6,100      5,363,900    (9,010,000)          --      (3,640,000)
  Common stock issued for Voice Plus,
    Inc. acquisition (Note 1)............  1,312,500   13,100      4,666,900            --           --       4,680,000
  Sale of common stock in an Initial
    Public Offering, net of stock
    issuance costs of $1,660,200 (Note
    11)..................................  2,045,000   20,500      6,499,300            --           --       6,519,800
  Conversion of debt and accrued interest
    into common stock (Note 11)..........    258,200    2,600      1,030,000            --           --       1,032,600
  Issuance of common stock options for
    payment of outside service fees......         --       --          3,800            --           --           3,800
  Common stock issued for Advantis
    acquisition (Note 1).................    208,500    2,100        456,700            --           --         458,800
Cumulative translation gain -Advantis....                                                        11,300          11,300
Net loss.................................         --       --             --    (4,591,200)          --      (4,591,200)
                                           ---------   -------   -----------   ------------     -------     -----------
BALANCE, December 31, 1997...............  4,437,000   $44,400   $18,020,600   $(13,601,200)    $11,300     $ 4,475,100
                                           =========   =======   ===========   ============     =======     ===========
</TABLE>
 
   See accompanying summary of accounting policies and notes to consolidated
                             financial statements.
 
                                       F-5
<PAGE>   41
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           1996           1997
      ------------------------------------------------        -----------    -----------
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................  $(1,828,000)   $(4,591,200)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and other amortization.......................       36,200        159,500
  Amortization of excess cost over net assets acquired,
     including impairment loss..............................           --      4,649,100
  Amortization of discount and debt issue costs on notes
     payable................................................      252,300             --
  Compensation related to grant of stock options and common
     stock..................................................       34,100          3,800
  Other.....................................................           --          8,800
  Changes in operating assets and liabilities:
     Accounts receivable....................................       15,000       (265,600)
     Notes receivable, related party........................      700,000             --
     Income tax receivable..................................           --       (172,000)
     Inventory..............................................        1,200        653,900
     Prepaid expense and other..............................       29,800        (89,300)
     Other assets...........................................           --        (48,100)
     Deferred revenue.......................................     (723,900)      (459,900)
     Accounts payable.......................................      200,800     (1,283,700)
     Other current liabilities..............................      609,400     (1,442,600)
                                                              -----------    -----------
NET CASH USED IN OPERATING ACTIVITIES.......................     (673,100)    (2,877,300)
                                                              -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Deferred acquisition costs................................     (100,100)      (188,000)
  Cash acquired from VPI and Advantis acquisitions..........           --        851,900
  Note receivable from stockholder..........................           --        (63,000)
  Purchases of property and equipment.......................      (12,500)      (252,500)
                                                              -----------    -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.........     (112,600)       348,400
                                                              -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from initial public offering of common stock, net
     of offering costs......................................           --      6,519,800
  Deferred stock offering costs.............................     (376,200)       376,200
     Proceeds from long-term debt...........................    1,170,000             --
     Principal payments on long-term debt...................     (118,500)    (1,814,000)
     Principal payments on long-term debt due stockholder...           --     (1,250,000)
                                                              -----------    -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................      675,300      3,832,000
                                                              -----------    -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........     (110,400)     1,303,100
CASH AND CASH EQUIVALENTS, beginning of year................      170,500         60,100
                                                              -----------    -----------
CASH AND CASH EQUIVALENTS, end of year......................  $    60,100    $ 1,363,200
                                                              ===========    ===========
SUPPLEMENTAL DATA:
Interest paid...............................................  $    35,400    $   267,700
Income taxes paid...........................................  $        --    $   191,200
                                                              ===========    ===========
</TABLE>
 
   See accompanying summary of accounting policies and notes to consolidated
                             financial statements.
 
                                       F-6
<PAGE>   42
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
 
     In 1996, the Company issued 178,700 shares of its Common Stock to three
officers in lieu of cash compensation. The aggregate value of these shares
totaled $119,700, of which $110,000 was for payment of deferred compensation
accrued in 1994 (see Note 7).
 
     On February 3, 1997, the Company issued 1,312,500 shares of its Common
Stock and $1,500,000 in promissory notes for all the outstanding shares of Voice
Plus, Inc. pursuant to a purchase and plan of merger agreement (see Note 1).
 
     On February 4, 1997, the Company issued 258,200 shares of its Common Stock
as repayment of certain notes payable and accrued interest thereon (see Note
11).
 
     On December 15, 1997, the Company issued 208,500 shares of its Common Stock
in exchange for all the outstanding shares of Advantis pursuant to a purchase
and plan of merger agreement (see Note 1).
 
                                       F-7
<PAGE>   43
 
                 NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES
 
                         SUMMARY OF ACCOUNTING POLICIES
 
ORGANIZATION
 
     NHancement Technologies Inc., a Delaware corporation ("NHancement" or the
"Company"), was incorporated in October 1996 as a holding company and successor
to the business of BioFactors, Inc. ("BFI" or "BioFactors"), a Delaware
corporation. On February 3, 1997, prior to the February 4, 1997 consummation of
the initial public offering ("IPO") of the Company's common stock (see Note 11),
BFI merged with a subsidiary of NHancement whereupon BFI, as the surviving
corporation, became a wholly-owned subsidiary of NHancement (the "BFI Merger").
Also, on February 3, 1997, the Company acquired Voice Plus, Inc. ("VPI" or
"Voice Plus"), a California corporation, a systems integrator and national
distributor of voice processing equipment, pursuant to a transaction by which
VPI merged with a subsidiary of NHancement, whereupon VPI, as the surviving
corporation, became a wholly-owned subsidiary of NHancement (the "VPI
Acquisition"). The acquisition was accounted for as a purchase, and,
accordingly, the results of VPI's operations were included in the Company's
consolidated financial statements commencing February 3, 1997. For financial
accounting purposes, BFI is deemed to be the acquirer of VPI.
 
     Effective November 12, 1997, BioFactors, Inc. was merged with and into
Voice Plus, Inc. in a statutory merger intended to qualify, for federal income
tax purposes, as a reorganization under Section 368 of the Internal Revenue Code
of 1986, as amended. Voice Plus is the surviving corporation in the merger
transaction with BioFactors, and the separate existence of BioFactors ceased on
the effective date of the merger. The operations of the combined entity are
being conducted under the name of "Voice Plus," which is headquartered in
Fremont, California. Voice Plus remains a wholly-owned subsidiary of NHancement.
 
     On December 15, 1997, NHancement purchased one hundred percent (100%) of
the outstanding shares of Advantis Network & System Sdn Bhd ("Advantis"). As a
result of the acquisition, Advantis has become a wholly-owned subsidiary of
NHancement. Advantis is a telecommunications systems integrator. The operations
of the entity are being conducted under the name of "Advantis Network & System
Sdn Bhd," which is headquartered in Kuala Lumpur, Malaysia. The acquisition was
accounted for as a purchase, and, accordingly, the results of Advantis'
operations were included in the Company's consolidated financial statements
commencing December 15, 1997.
 
     The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. (see Note
1).
 
BUSINESS
 
     The Company, via its Voice Plus subsidiary, is a systems integrator and
distributor of voice processing equipment. VPI also provides various services
including equipment installation, technical support and ongoing maintenance.
Revenues generated by Voice Plus represented approximately 97% of total 1997
consolidated net revenues. VPI maintains offices in the states of California,
New York, Georgia, Arizona, Utah and Texas.
 
     In March 1998, the Company formalized a plan to exit from the business
related to its FACTOR 1000(R) product, which measures human sensorimotor skills
to determine an individual's performance readiness and fitness to perform, given
the resources required to develop a market for the product and the need to
dedicate its financial resources to its other core businesses. The remaining
assets and liabilities associated with the FACTOR 1000(R) product at December
31,1997 and the related revenues and expenses for the year then ended were
insignificant. Management does not expect to incur a loss on the planned sale
during 1998 of the FACTOR 1000(R) product. The Company's FACTOR 1000(R) system
is based upon the Critical Tracking Task (CTT) software, which is exclusively
licensed from Systems Technology Inc. (STI) in Hawthorne, California. The
license agreement with STI is effective through November 2008 and grants the
Company the right to issue sublicenses during the term of the agreement.
 
     Under the terms of a sublicense agreement entered into with SportsTrac,
Inc., a company whose chief executive officer is a minority stockholder and
former executive officer of the Company, the Company has
                                       F-8
<PAGE>   44
 
granted an exclusive world-wide sublicense for sports and
on-field-athletic-performance related uses of the FACTOR 1000(R) system through
November 2008. In connection with this agreement, the Company recognized
$700,000 in revenue in 1996 and is entitled to royalties of 8.5% of cash
receipts from the sale of products or services containing the licensed
technology. During 1997, the company received $900 relating to these ongoing
royalties.
 
     The Company's subsidiary, Advantis Network & Systems Sdn Bhd, is an
integrator of communications systems in Malaysia, designing, integrating and
installing communications systems that range from highly sophisticated systems
to simplistic infrastructure cabling. Advantis also provides various services
including equipment installation, technical support and ongoing maintenance.
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts and results of
operations of the Company and its wholly-owned subsidiaries Voice Plus, Inc. and
Advantis Network & System Sdn Bhd since their respective dates of acquisition
(see Note 1). Significant intercompany accounts and transactions have been
eliminated.
 
REVENUE RECOGNITION
 
     The Company recognizes revenue under several methods as dictated by the
nature of the service or product provided and the terms of the sales agreement.
Generally, system sales are recognized when all significant uncertainties about
customer acceptance of the system have been resolved. Once system installation
is complete, seller obligations, including estimated future technical support
costs, are immaterial. Revenue from maintenance contracts is prorated over the
life of the contract, normally one year, although the entire amount of the
contract is collected at the beginning of the term. Services, labor and the sale
of parts, upgrades, moves, adds and changes are recorded in the period shipped
or provided. Revenue on the sale of a FACTOR 1000(R) system is recognized when
the system has been installed and the Company's related contractual training and
support obligations are substantially complete. Revenue based on the sublicense
of the FACTOR 1000(R) system is recognized as payment is received.
 
INVENTORY
 
     Inventory consists primarily of systems and system components and is valued
at the lower of cost (first-in, first-out method) or market.
 
PROPERTY, EQUIPMENT, AND DEPRECIATION
 
     Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, generally three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or their
estimated useful life. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
 
EXCESS OF COST OVER NET ASSETS ACQUIRED
 
     The excess of cost over net assets acquired ("goodwill"), which relates to
the Company's acquisition of Voice Plus, Inc. and Advantis Network & System Sdn
Bhd, is being amortized over a five to ten year period using the straight-line
method.
 
LONG-LIVED ASSETS
 
     Long-lived assets are evaluated for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life, assets to be paid or otherwise disposed of
are not subject to further
 
                                       F-9
<PAGE>   45
 
depreciation or amortization. In determining whether an impairment exists, the
Company uses undiscounted future cash flows compared to the carrying value of
the asset.
 
RESEARCH AND DEVELOPMENT COSTS
 
     Research and development costs are expensed as incurred.
 
INCOME TAXES
 
     The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are recognized
based on the temporary differences between the financial statement and income
tax bases of assets, liabilities and carryforwards using enacted tax rates.
Valuation allowances are established for deferred tax assets when realization is
not deemed more likely than not.
 
USE OF ESTIMATES
 
     The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used in preparing these consolidated
financial statements include those assumed in computing the fair value of
goodwill. Actual results could differ from those estimates.
 
STOCK-BASED COMPENSATION
 
     Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under this standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Companies are permitted to
continue to account for employee stock-based transactions under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," but are required to disclose pro forma net income (loss) and
earnings (loss) per share as if the fair value method had been adopted. The
Company has elected to continue to account for stock-based compensation under
APB No. 25.
 
NET LOSS PER SHARE
 
     Effective for the year ended December 31, 1997, the Company adopted the
provisions of SFAS No. 128, Earnings per Share. SFAS No. 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity. Because of losses in 1996 and
1997, calculations under SFAS No. 128 were the same as those under the prior
method. Options and warrants to purchase 534,400 and 1,154,100 shares were
outstanding during the years ended December 31, 1996 and 1997 but were not
included in the computation of diluted loss per common share because the effect
would be antidilutive.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be
 
                                      F-10
<PAGE>   46
 
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other statements.
 
     SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Management believes that the Company's current financial
statement disclosures will not need to be significantly modified based upon
current operations. Results of operations and financial position, however, will
be unaffected by future implementation of this standard.
 
     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, ("SFAS No.
131") which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS No. 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
 
     SFAS No. 131 is effective for financial statements for the period beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosure. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
 
     In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, Employers' Disclosures about Pensions and Other Post Retirement Benefits
("SFAS No. 132"). SFAS No. 132 standardizes the disclosure requirements for
pensions and other post retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when previous related
accounting standards were issued.
 
     SFAS No. 132 is effective for financial statements for the period beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated unless the information is not readily available, in which case
the notes to the financial statements should include all available information
and a description of the information not available. Management believes that the
Company's current financial statement disclosures will not need to be modified
based upon current operations. Results of operations and financial position will
be unaffected by implementation of this standard.
 
FOREIGN CURRENCY TRANSLATION
 
     Assets and liabilities of the Company's foreign subsidiary are translated
at the exchange rate on the balance sheet date, while revenues and expenses are
translated at average rates prevailing during the period. Translation
adjustments are reported as a component of stockholders' equity.
 
FINANCIAL INSTRUMENTS
 
     The Company's financial instruments consist of cash, accounts receivable
and debt. The carrying value of cash and accounts receivable approximate fair
value based upon the liquidity and short-term nature of the assets. The carrying
value of short-term and long-term debt approximates the fair value based upon
short-term and long-term borrowings at market rate interest.
 
                                      F-11
<PAGE>   47
 
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BUSINESS ACQUISITIONS
 
     On February 3, 1997, NHancement merged a wholly-owned subsidiary with and
into BFI, whereupon BFI, as the surviving corporation, became a wholly-owned
subsidiary of NHancement, and shares of NHancement common stock were exchanged
for all the issued and outstanding common stock of BFI, in a ratio of three
shares of common stock for every four shares of BFI common stock. Pursuant to
the BFI Merger agreement, NHancement assumed (i) the obligations of BFI's
outstanding stock options, by which assumption the optionee has the right to
purchase 5.625 shares of NHancement Common Stock for every 10 shares of BFI
common stock the optionee could have purchased prior to the BFI Merger at an
exercise price per share equal to 80% of the IPO Price, (ii) the obligations of
BFI's issued and outstanding warrants in accordance with their terms, and (iii)
the obligations of the Registration Rights Agreement dated as of September 1,
1996, and NHancement issued to certain holders of BFI notes, warrants to
purchase an aggregate of 109,900 shares of NHancement's common stock,
exercisable commencing one year from the close of the IPO at an exercise price
of 120% of the IPO Price.
 
     Also, on February 3, 1997, the Company entered into a stock purchase
agreement with Voice Plus, Inc., pursuant to a transaction by which the Company
merged a wholly-owned subsidiary with and into VPI whereupon VPI, as the
surviving corporation, became a wholly-owned subsidiary of the Company. This
merger provided for the exchange of (i) the Company's unsecured promissory note
in a principal amount of $1,000,000, bearing interest at the medium term T-bill
rate, with all principal and accrued interest paid in full during 1997, (ii) the
Company's unsecured promissory note in a principal amount of $500,000, bearing
interest at the medium term T-bill rate, due on the third anniversary of the
consummation of the merger subject to accelerated payment based upon quarterly
earnings of Voice Plus, and (iii) shares of NHancement common stock with an
estimated fair value of $4,680,000 (of which, shares valued at $2,400,000 were
sold in the IPO, and the remainder of the shares are subject to restrictions on
transferability under the Securities Act of 1933 (as amended) and pursuant to a
lock-up agreement with the underwriter of the IPO), for all the issued and
outstanding common stock of VPI. In connection with the VPI Acquisition, the
Company entered into a three-year employment agreement with the president and
sole stockholder of VPI, pursuant to which the Company pays a base salary of
$150,000 per year, commissions of approximately $200,000 per year and an annual
performance based bonus. The employment agreement provides that, if the Company
materially breaches the agreement or terminates the employee without "cause,"
the Company will continue to pay base salary and 50% of the commissions for the
duration of the term and, in the event of a material breach by the Company, the
two promissory notes will be accelerated and immediately become due and payable.
In addition, the Company paid signing bonuses in the aggregate amount of
$170,000 to three employees of VPI. The bonuses, of which 50% was paid upon
consummation of the IPO and the remainder was paid in August 1997, were not
contingent upon continued employment.
 
                                      F-12
<PAGE>   48
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The purchase price and fair value of net assets acquired in the VPI
Acquisition are summarized as follows:
 
<TABLE>
<S>                                                             <C>
Consideration:
  Common stock -- 600,000 selling shares....................    $2,400,000
  Long-term notes...........................................     1,500,000
  Common stock -- 712,500 shares subject to lockup
     agreements.............................................     2,280,000
                                                                ----------
Total consideration.........................................     6,180,000
                                                                ----------
Calculation of goodwill:
  Net assets acquired(1)....................................     1,012,200
  Cost of acquisition.......................................      (270,100)
                                                                ----------
                                                                   742,100
                                                                ----------
Excess of cost over net assets acquired.....................    $5,437,900
                                                                ==========
</TABLE>
 
---------------
 
(1) Net assets of $390,600 and an increase of estimated fair value of (i)
    inventories of $486,300 and (ii) equipment of $135,300. The increase in
    valuation of inventories is based on estimated selling prices less a
    reasonable profit allowance for installation and selling effort. The
    increase in valuation of fixed assets is based on physical counts valued at
    current replacement cost.
 
     The carrying value of goodwill is periodically evaluated by the Company
based on the estimated future undiscounted operating cash flows of the related
business. Because of an anticipated change in voice processing technology over
the next several years and uncertainties regarding the Company's distributor
relationship with its principal supplier, Centigram Communications Corporation
(see Note 8), the estimated future undiscounted operating cash flows of Voice
Plus, Inc. are less than those estimated at the time of its acquisition and less
than the carrying amount of the excess of cost over net assets acquired at
December 31, 1997. As such, the Company has recorded an impairment loss of
$4,084,300, representing the difference between the carrying amount of goodwill
over its estimated fair value. Fair value was determined using estimated future
cash flows of Voice Plus, Inc., discounted at 20%. In addition, the useful life
of the $1,500,000 balance of the goodwill of Voice Plus, Inc. at December 31,
1997 was reduced from ten years to five years.
 
     On December 15, 1997, the Company consummated the acquisition of Advantis
Network & System Sdn Bhd, a Malaysian corporation and systems integrator and
distributor of communication equipment, pursuant to a transaction by which
Advantis merged with NHancement, whereupon Advantis became a wholly-owned
subsidiary of NHancement.
 
     The purchase price and fair value of net assets acquired in the Advantis
acquisition are summarized as follows:
 
<TABLE>
<S>                                                             <C>
Consideration:
  Common stock -- 208,500 shares subject to lockup
     agreements.............................................    $458,800
Calculation of goodwill:
          Net liabilities assumed...........................    (394,100)
          Cost of acquisition...............................    (138,400)
                                                                (532,500)
                                                                --------
Excess of cost over net assets acquired.....................    $991,300
                                                                ========
</TABLE>
 
     In addition to the above consideration, the Advantis stockholders are
entitled to receive up to an additional 321,500 shares of the Company's common
stock if certain profit and accounts receivable collection goals are attained.
 
                                      F-13
<PAGE>   49
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following unaudited pro forma summary combines the consolidated results
of operations of the Company, Voice Plus and Advantis as if the acquisitions had
occurred January 1, 1996 and January 1, 1997. The pro forma information gives
effect to certain adjustments, including the amortization of excess cost over
net assets acquired, the increase in corporate overhead resulting from the
renegotiation of employment agreements with key management employees of VPI,
additional depreciation expense resulting from recording certain equipment of
VPI at estimated fair values and additional interest expense on notes payable to
the former stockholder of VPI. This pro forma summary does not necessarily
reflect results of operations as they would have been if the Company, Voice Plus
and Advantis had constituted a single entity during such periods and is not
necessarily indicative of results which may be obtained in the future.
 
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           ---------------------------
                                                              1996            1997
                                                           (UNAUDITED)     (UNAUDITED)
                                                           -----------     -----------
<S>                                                        <C>             <C>
Net revenues.............................................  $13,411,900     $14,209,700
Loss before income taxes.................................   (1,136,200)     (4,913,800)
                                                           -----------     -----------
Net loss.................................................  $(1,136,300)    $(4,914,400)
                                                           ===========     ===========
Basic and diluted loss per share:
Net loss per common share................................  $     (0.58)    $     (1.17)
Weighted average shares..................................    1,955,900       4,208,400
</TABLE>
 
2. NOTES RECEIVABLE FROM STOCKHOLDERS
 
     At December 31, 1997, notes receivable from stockholders consist of the
following:
 
<TABLE>
<S>                                                           <C>
Note receivable, principal due in monthly payments of
  $2,600, including interest at the Base Lending Rate
  ("BLR") in Malaysia plus 2.25% (12.65% at December 31,
  1997) through April 2012..................................  $204,000
Note receivable from an officer of the Company, interest at
  7%, with principal and unpaid interest due April 1998.....    63,000
                                                               267,000
Less current portion........................................   109,500
                                                              --------
                                                              $157,500
                                                              ========
</TABLE>
 
                                      F-14
<PAGE>   50
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. LONG-TERM DEBT AND LINES OF CREDIT
 
     Long-term debt consists of the following at December 31, 1997:
 
<TABLE>
<S>                                                           <C>
Note payable to the former sole stockholder of Voice Plus,
  Inc. pursuant to the terms of the acquisition of Voice
  Plus, Inc. in February 1997, interest at medium term
  T-bill rate (5.3% at December 31, 1997).(1)...............  $250,000
Term loan with a financial institution in Malaysia,
  guaranteed by the officers of Advantis, principal due in
  monthly payments of $2,600, including interest at the BLR
  plus 2.25% per annum (12.65% at December 31, 1997) through
  April 2012.(2)............................................   204,000
                                                               454,000
Less current portion........................................   296,500
                                                              --------
                                                              $157,500
                                                              ========
</TABLE>
 
---------------
 
(1) Pursuant to the terms of the VPI stock purchase agreement, the Company
    issued an unsecured promissory note in the principal amount of $1,000,000,
    bearing interest at the medium term T-bill rate to the sole stockholder of
    Voice Plus. Early repayment was based on the profitability of Voice Plus,
    with the unpaid balance, if any, due on the third anniversary of the
    consummation of the merger. As of December 31, 1997, this note and all
    accrued interest was paid in full. The Company also issued an unsecured
    promissory note in a principal amount of $500,000, bearing interest at the
    medium term T-bill rate to the sole stockholder of Voice Plus. Principal
    repayment of $62,500 per quarter plus all accrued interest is to be made for
    each quarter that Voice Plus is profitable (as defined) by one dollar, with
    the balance due on the third anniversary of the consummation of the merger.
    As of December 31, 1997 a principal balance of $250,000 remained unpaid.
 
(2) A stockholder has pledged certain owned real property as collateral on this
    loan. All proceeds of the loan were advanced by the Company's Advantis
    subsidiary to the stockholder. The Company has recorded a note receivable
    from the stockholder and a related loan payable under the credit facility.
    Under the terms of the stockholder loan agreement, repayments including
    interest, will match the Company's payments due under the term loan.
 
     Future minimum principal payments on long-term debt are as follows:
 
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,                            AMOUNT
-------------------------                           --------
<S>                                                 <C>
1998..............................................  $296,500
1999..............................................    14,200
2000..............................................    14,200
2001..............................................    14,200
2002..............................................    14,200
Thereafter........................................   100,700
                                                    --------
                                                    $454,000
                                                    ========
</TABLE>
 
     At December 31, 1997, the Company's financing arrangements include the
following credit facilities with financial institutions in Malaysia:
 
     - A $64,300 overdraft facility for working capital expiring June 1998 and
       bearing interest at the BLR plus 2.0% (12.4% at December 31, 1997). At
       December 31, 1997, $37,000 was outstanding under this overdraft facility.
       Included in prepaid expenses and other is a cash deposit of $25,700 which
       is pledged as collateral and restricted for repayment of this facility.
 
                                      F-15
<PAGE>   51
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     - A $192,900 credit facility for overdraft, letters of credit and trust
       receipts which expired in February, 1998 and bearing interest at the BLR
       plus 2.25%. Management is currently in the process of negotiating renewal
       terms. At December 31, 1997, $155,100 was outstanding under this credit
       facility.
 
     - A $385,900 facility collateralized by eligible accounts receivable, used
       for document advances, letters of credit and trust receipts bearing
       interest at the BLR plus 2.25% and expired in February, 1998. Management
       is currently in the process of negotiating renewal terms. No borrowings
       were outstanding at December 31, 1997.
 
4. STOCKHOLDERS' EQUITY
 
  Convertible Preferred Stock
 
     The Company is authorized to issue 2,000,000 shares of preferred stock with
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's common stock (See
Note 12).
 
  Common Stock
 
     In February 1997, pursuant to the BFI Merger agreement, all outstanding
shares of BFI common stock were exchanged for the Company's Common Stock. The
consolidated financial statements have been retroactively restated to give
effect to the 3-for-4 exchange ratio in connection with the BFI Merger (see Note
1). Accordingly, all references in the consolidated financial statements to
share amounts and per share amounts have been adjusted to reflect the BFI Merger
exchange.
 
     In connection with the issuance of various notes payable during 1996, BFI
issued to the note holders an aggregate of 303,400 shares of BFI common stock at
$0.01 per share. During 1996, the Company recorded $202,300, in debt issue costs
based on the estimated fair value of $0.67 per share.
 
     On February 3, 1997, the Company issued 1,312,500 shares of its common
stock and $1,500,000 in promissory notes to the sole stockholder of VPI in
exchange for all of the outstanding shares of VPI, and VPI became a wholly-owned
subsidiary of the Company (see Note 1).
 
     Immediately preceding the Company's IPO, certain of the holders of the
Company's convertible notes had those notes, and any accrued interest thereon,
converted into 258,200 shares of the Company's common stock (See Note 11).
 
     On February 4, 1997, the Company completed an IPO of its shares, selling
2,045,000 shares of its common stock, including the over-allotment, to the
public and raising approximately $6.5 million net of fees and expenses. In
addition, the former sole stockholder of VPI sold 600,000 of his shares of
Company stock in the IPO (See Note 11).
 
     Effective December 15, 1997, the Company issued 208,500 shares of the
Company's common stock for all of the outstanding shares of Advantis Network &
Systems Sdn Bhd. Further, depending upon Advantis collecting certain accounts
receivable prior to June 30, 1998 and meeting certain profit targets over the
following two years, the Company could be obligated to issue up to an additional
321,500 shares of its common stock to the former Advantis stockholders (see Note
1).
 
                                      F-16
<PAGE>   52
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
5. STOCK OPTIONS AND WARRANTS
 
  Stock Options
 
     BFI's Stock Option Plan adopted in February 1994 (the BFI Plan) provided
for the granting of 976,500 stock options (after giving effect to the 3-for-4
exchange ratio in connection with the BFI Merger). Upon consummation of the BFI
Merger (see Note 1), the stock options outstanding under BFI's Plan were re-
granted by the Company and are subject to the terms of the Equity Incentive Plan
adopted by the Company and approved by its stockholders on January 23, 1997. At
its August 1997, stockholders meeting, the stockholders of the Company approved
an increase to the Company's stock option plan of 500,000 shares. The Equity
Incentive Plan is administered by the Company's Board of Directors. Options
granted may be either incentive stock options, as defined in the Internal
Revenue Code, or non-qualified options. The stock options are exercisable over a
period determined by the Board of Directors, but no longer than ten years after
the date of grant. The vesting schedule for incentive stock options usually
covers a three or four year period ranging from one-third immediately and the
remainder equally over the next two years to 25% at the end of the first year
and the remainder monthly over the next three years. Vesting for non-qualified
stock options is determined on a grant-by-grant basis. Incentive stock options
must have an exercise price of not less than fair market value of the common
stock on the date of grant (or, for incentive stock options granted to a person
holding more than 10% of the voting power of the Company, options must have an
exercise price equal to 110% of the fair market value, and be exercisable for a
period of five years). The aggregate fair value of the common stock subject to
options granted to an optionee that are exercisable for the first time by an
optionee during any calendar year may not exceed $100,000. Options generally
expire three months following termination of employment. The Company recorded no
compensation expense related to grants and exercise of stock options in 1996 and
$3,800 in 1997.
 
     The following table summarizes transactions pursuant to the Company's Plan:
 
<TABLE>
<CAPTION>
                                          WEIGHTED                                              WEIGHTED
                                          AVERAGE                                                AVERAGE
                                        OPTION PRICE                                            REMAINING
                                            PER                                    AVAILABLE   CONTRACTUAL
                                           SHARE       OUTSTANDING   EXERCISABLE   FOR GRANT      LIFE
                                        ------------   -----------   -----------   ---------   -----------
<S>                                     <C>            <C>           <C>           <C>         <C>
January 1, 1996.......................     $3.20          492,200      277,400      484,300     9.8 years
Granted...............................      3.20           42,200           --      (42,200)     10 years
Became exercisable....................      3.20               --      110,000           --
                                           -----        ---------      -------     --------     ---------
December 31, 1996.....................      3.20          534,400      387,400      442,100     8.8 years
                                           =====        =========      =======     ========     =========
Added to option reserve...............        --               --                   500,000
Canceled..............................      3.20         (126,600)     (59,800)     126,600
Granted...............................      3.15          746,300           --     (746,300)     10 years
Became exercisable....................      3.50               --      113,000           --
                                           -----        ---------      -------     --------     ---------
December 31, 1997.....................     $3.16        1,154,100      440,600      322,400       9 years
                                           =====        =========      =======     ========     =========
</TABLE>
 
     The Company applies APB Opinion. No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for the plan. Under APB
Opinion No. 25, because the exercise price of the Company's stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
 
     FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
the Company to provide pro forma information regarding net loss as if
compensation cost for the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in FASB Statement No.
123. The Company estimates the fair value of each stock option at the grant date
by using a modified Black-Scholes pricing model with the following
weighted-average assumptions used for grants in 1996 and 1997, respectively:
 
                                      F-17
<PAGE>   53
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
no dividend yield for any year; expected volatility of near-zero and 20%;
risk-free interest rates of 6.65% and 6.6%; and expected lives of approximately
three to five years. The weighted average fair value of options granted in 1996
and 1997 was $0.77 and $0.99.
 
     Under the accounting provisions of FASB Statement No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                             YEARS ENDED DECEMBER 31,
                                                            --------------------------
                                                               1996           1997
                                                            -----------    -----------
<S>                                                         <C>            <C>
Net loss
  As reported.............................................  $(1,828,000)   $(4,591,200)
  Pro forma...............................................  $(1,837,000)   $(4,749,100)
  Per share as reported...................................  $     (4.20)   $     (1.18)
  Per share pro forma.....................................  $     (4.22)   $     (1.22)
</TABLE>
 
     The above pro forma information includes only the effects of 1996 and 1997
grants. Because options potentially vest over several years and additional
awards are made each year, the results shown above may not be representative of
the effects on net earnings in future years.
 
  Warrants
 
     In connection with certain debt financing and the IPO, the Company has
granted various warrants to purchase common stock. The following schedule
summarizes the activity:
 
<TABLE>
<CAPTION>
                                                  WEIGHTED
                                                   AVERAGE                    WEIGHTED AVERAGE
                                                WARRANT PRICE                    REMAINING
                                                  PER SHARE     OUTSTANDING   CONTRACTUAL LIFE
                                                -------------   -----------   ----------------
<S>                                             <C>             <C>           <C>
January 1, 1996...............................     $37.23           7,200        4.5 years
Warrants issued in connection with debt
  financing...................................     $ 4.80         609,900
                                                   ------         -------        ---------
December 31, 1996.............................     $ 5.18         617,100        3.0 years
Warrants issued to Underwriter in connection
  with Initial Public Offering................     $ 4.80         230,000
                                                   ------         -------        ---------
December 31, 1997.............................     $ 5.08         847,100        2.6 years
                                                   ======         =======        =========
</TABLE>
 
6. COMMITMENTS AND CONTINGENCIES
 
     The Company's impairment testing business exposes it to potential
litigation (i) by employees of companies using the FACTOR 1000(R) system if the
employee's employment relationship is affected thereby and (ii) by third parties
who may be indirectly affected by the Company's services or products. Product
and service liability insurance is expensive, to the extent it is available at
all. As of December 31, 1997, the Company maintained general liability insurance
in the amount of $2.0 million per occurrence and $2.0 million in the aggregate,
and an umbrella policy with a $5.0 million limit which was obtained in
connection with the VPI Acquisition. The Company maintains product liability
insurance of $2.0 million per occurrence and $2.0 million in the aggregate.
 
     The Company's FACTOR 1000(R) product is based on licensed technology.
Accordingly, the Company is required to pay a royalty of up to 8.5% of sales of
the related product. Beginning January 1997, the license agreement also provides
for a minimum aggregate payment over each three-year period of $150,000. In
addition, the Company's license permits the sublicense of the CTT technology and
requires that the Company make payments to its licensor on such sublicensing
arrangements as follows: (i) a royalty payment of 8.5% on up to $250,000 of the
initial sublicense fee and 50% of any sublicense fee in excess of $250,000; and
(ii) a royalty payment equal to 50% of the sublicense fee, which amount must be
at least 4.25% of the sublicensee's
 
                                      F-18
<PAGE>   54
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
gross contract revenue. The Company's ability to sell its product is dependent
on the continuation of this license. See business section of summary of
accounting policies regarding the Company's March 1998 formalization of a plan
to exit from the business related to its FACTOR 1000(R) product.
 
     The Company leases certain property consisting of corporate and sales
office facilities and equipment under operating leases that expire at varying
dates through August 2000. Certain facility leases require the Company to pay
real estate taxes, maintenance and utilities. Future minimum annual commitments
under these leases are as follows:
 
<TABLE>
<CAPTION>
                                                     AMOUNT
                                                     -------
<S>                                                 <C>
1998..............................................  $311,000
1999..............................................   316,000
2000..............................................   166,000
                                                    --------
                                                    $793,000
                                                    ========
</TABLE>
 
     Rent expense for the years ended December 31, 1996 and 1997 was $44,500 and
$287,500.
 
     The Company has entered into employment agreements with two officers that
provide for specified severance payments should the Company terminate the
executive's employment with the Company, other than for cause. The amount to be
paid is two years' base salaries and bonuses. In addition, pursuant to an
employment agreement with the President of the Voice Plus subsidiary, should the
Company terminate the executive's employment with the Company, other than for
cause, the Company is obligated to make certain severance payments. The amount
to be paid through the end of his employment agreement on February 3, 2000 is
his base salary of $150,000 per annum and 50% of the commissions he would have
earned during the period. In addition, the Company has entered into two-year
employment agreements with two VPI employees which expire in January 1999 and
provide for an annual base salary of $65,000, sales commissions payable pursuant
to an annual sales compensation plan and performance-based bonus payments.
 
7. RELATED PARTY TRANSACTIONS
 
     In June 1996, BFI issued an aggregate of 178,700 shares of its common stock
to three of its officers in lieu of cash compensation; and, in June 1996, BFI
issued an aggregate of 37,500 shares to two of its directors for services
rendered. These shares were valued at $0.67 per share. In connection therewith,
$110,000 was accrued as deferred compensation to officers as of December 31,
1995, and the Company recorded an additional $9,700 of compensation expense and
$25,000 of outside service fees in 1996.
 
     On November 5, 1996, two of BFI's officers, VPI and a company controlled by
a director of BFI purchased $135,000, $50,000 and $50,000, respectively, of
unsecured promissory notes pursuant to Unit Subscription Agreements. These
borrowings were subsequently repaid, utilizing proceeds from the IPO in February
1997 (see Note 11).
 
     At December 31, 1997, the Company had notes receivable from stockholders
totaling $267,000 (see Note 2).
 
     At December 31, 1997, the Company owed $250,000 to a stockholder of the
Company in connection with the acquisition of Voice Plus (see Note 3). During
1997, the Company paid $1,250,000 in principal and $36,100 in interest to this
stockholder.
 
     At December 31, 1997, the Company's Advantis subsidiary owed $426,700 for
various inventory purchases from certain companies whose directors are also
stockholders of the Company.
 
     At December 31, 1997, the Company's Advantis subsidiary owed $58,200 to
certain stockholders for expenses paid by these stockholders on behalf of the
Company.
 
                                      F-19
<PAGE>   55
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company's Advantis subsidiary leases its corporate facilities from an
entity that is partially owned by a minority stockholder of the Company. The
lease commenced in November 1996, and its terms provide for annual payments of
$42,500 through October 1999.
 
8. CONCENTRATION RISK
 
     Revenues from one customer accounted for approximately 88% of total net
revenues during the year ended December 31, 1996. Revenues from two customers
accounted for approximately 19% and 7% of total net revenues during the year
ended December 31, 1997. Included in accounts receivable at December 31, 1997 is
$270,000 and $500,600 due from these two customers.
 
     Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States and Malaysia. The Company
performs ongoing credit evaluations of its customers' financial condition and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. The Company does
not require collateral from its customers.
 
     The Company's Voice Plus subsidiary historically purchases substantially
all of its inventory requirements from one vendor, Centigram Communications
Corporation ("Centigram"). Any termination or adverse change in the Company's
distributor relationship with Centigram would have a material adverse impact
upon the Company's voice processing business. Centigram has publicly announced
that it has hired a third party firm to identify potential buyers for its
customer premise equipment business which may adversely effect the largest
portion of the Company's current business. The effect on the Company cannot be
fully determined at this time. In addition, the Company depends upon Centigram
to offer products which are competitive with products offered by other
manufacturers as to technological advancement, reliability and price. If
Centigram's competitors should surpass Centigram in any of these qualities, the
Company may be required to establish alternative strategic relationships. Any
such development would have an adverse effect on the Company's business for an
indeterminate period of time until new supplier relationships could be
established. Included in accounts payable at December 31, 1997, is $668,100 due
to Centigram.
 
     Cash and cash equivalents are held principally at three high quality
financial institutions. At times, such balances may be in excess of the FDIC
insurance limit.
 
9. INCOME TAXES
 
     From its inception, the Company has generated losses for both financial
reporting and tax purposes. As of December 31, 1997, the Company's net operating
losses for federal income tax purposes were approximately $6 million, and expire
between the years 2008 and 2012. For state income tax purposes, as of December
31, 1997, the Company had net operating loss carryforwards of approximately
$47,000 which expire in 2002. The use of Federal net operating loss
carryforwards is subject to an annual limit of approximately $250,000 as the
Company has incurred an "ownership change". Subject to the approval of the tax
authorities of Malaysia, the Company's Malaysian subsidiary has a $30,000
unabsorbed tax loss carryforward as of December 31, 1997.
 
     Deferred tax assets at December 31, 1997 consist primarily of the
following:
 
<TABLE>
<S>                                                             <C>
Cash to accrual change for tax purposes.....................    $   462,000
Reserves and accrued liabilities............................        199,700
Net operating loss carryforwards............................      2,095,400
                                                                  2,757,100
Less valuation allowance....................................     (2,757,100)
                                                                -----------
Net deferred tax asset......................................    $        --
                                                                ===========
</TABLE>
 
                                      F-20
<PAGE>   56
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1997, the Company established a 100% valuation allowance
for the gross deferred tax asset since management could not determine that it
was more likely than not that the deferred tax asset can be realized.
 
10. EMPLOYEE COMPENSATION AND BENEFITS
 
     The Company's Voice Plus subsidiary has a 401(k) profit sharing plan in
which all qualifying employees with a minimum of 1,000 hours of service at year
end are eligible to participate. Matching contributions are made at the
discretion of the Company's Board of Directors. The Company pays all fees to
administer the plan. Total expense under this plan was $48,100 for the year
ended December 31, 1996. There were no matching contributions during the year
ended December 31, 1997.
 
     Advantis, as a Malaysian company, is obligated to pay a minimum
contribution equivalent to 12% of employee salaries to a fund administered by
the government. Contributions in excess of 12% are discretionary. The
contribution expense for the period from December 15, 1997 (acquisition date) to
December 31, 1997 amounted to $1,400.
 
11. INITIAL PUBLIC OFFERING
 
     On February 4, 1997, the Company completed its IPO of 2,300,000 shares of
$0.01 par value common stock, of which 1,700,000 shares were sold by the Company
and 600,000 shares, representing a portion of the consideration for the
outstanding shares of VPI, were sold by a stockholder of the Company. On
February 11, 1997, the underwriters exercised an option to purchase from the
Company an additional 345,000 shares of common stock to cover over-allotments.
The Company raised approximately $6.5 million of funds, net of underwriting
commissions, printing costs, legal and accounting fees and other offering
expenses totaling approximately $1,660,200, from the offering (including the
over-allotment shares) and did not receive any of the proceeds from the sale of
shares by the stockholder. The Company's common stock is quoted on The NASDAQ
Stock Market SmallCap System. In connection with the closing of the IPO, the
Company converted certain notes and related accrued interest in an aggregate
amount of $1,032,600 to common stock and issued warrants for various amounts of
common stock for every $1,000 of notes.
 
12. PROPOSED ACQUISITION AND FINANCING
 
     On January 16, 1998, the Company entered into a definitive agreement to
acquire all of the issued and outstanding shares of capital stock of Infotel
Technologies Pte Ltd ("Infotel"), a company organized under the laws of
Singapore which provides radar system integration, turn key project management
services, test instrumentation, as well as a wide portfolio of communication
equipment. Consummation of the transaction is contingent upon the Company
obtaining third party financing on terms satisfactory to the Company by April
13, 1998 or such later date as agreed upon by the parties. The Company recently
closed a financing to be used in part to pay the cash portion of the Infotel
acquisition. Under the terms of the financing, the Company will not receive
sufficient funds in the time needed to meet the terms of the Infotel
acquisition. Consequently, the Company has requested an extension from the
Infotel shareholders and has received confirmation of their intention to grant
an extension subject to several concessions. This acquisition will not close
under its terms unless an extension is granted and the initial cash portion of
the purchase price is funded. The basic terms of the acquisition agreement
require an initial cash payment of about $2.3 million, performance payments
based on profits in 1998 and 1999 of about $2 million and 431,000 shares of
NHancement's Common Stock, subject to certain price protections.
 
     On April 9, 1998, the Company signed a $3.0 million Convertible Preferred
Stock financing agreement. Under the terms of the agreement, the Company
received $750,000 (less certain commissions and expenses) upon signing, and will
receive $500,000 upon filing of an S-3 registration statement, $500,000 sixty
days after the effective date of the registration statement, $500,000 thirty
days thereafter and the final $750,000
                                      F-21
<PAGE>   57
                 NHANCEMENT TECHNOLOGIES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
thirty days thereafter. The Preferred Stock bears a 5% cumulative dividend and
has a liquidation preference equal to the original purchase price plus cumulated
but unpaid dividends. If the Company's common stock trades for a thirty day
average below $2.00 or the average daily volume for a thirty day period falls
below 20,000 shares, the investors are not required to fund any remaining
portion of the $3 million in excess of the first two payments aggregating
$1,250,000. Further, if the five day average closing bid price of the Company's
common stock falls below $2.00 per share, the Company has the option to redeem
the Preferred Stock at 118% of the original purchase price plus cumulated but
unpaid dividends. Any shares of Preferred Stock tendered for conversion prior to
delivery of the Company's notice of redemption shall not be affected by the
redemption notice and shall be converted into shares of redemption shall not be
affected by the redemption notice and shall be converted into shares of common
stock. As to any shares with respect to which such conversion rights have not
been timely exercised, such conversion rights shall terminate upon delivery by
the Company of its notice of redemption. The Preferred Stock is convertible into
common at the lesser of the five day average closing bid price at the time of
signing or 75% of the five day average closing bid price at the time of each
conversion. The Company intends to utilize the proceeds of this financing to pay
a portion of the initial cash payment on the pending Infotel acquisition and for
working capital.
 
                                      F-22
<PAGE>   58
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
          3.1            -- Amended and Restated Certificate of Incorporation, as
                            filed with the Delaware Secretary of State on January 27,
                            1997, as amended by Certificate of Designations, as filed
                            with the Delaware Secretary of State on April 9, 1998, as
                            further amended by Amended Certificate of Designations,
                            as filed with the Delaware Secretary of State on April
                            13, 1998.
          3.2            -- Amended and Restated Bylaws(1)
          4.1            -- Form of Common Stock Certificate(2)
          4.2            -- Form of underwriter Warrant(3)
          4.3            -- Registration Rights Agreement, dated September 1, 1996,
                            between BFI and (i) a majority of the holders of
                            securities pursuant to the Secured Note and Warrant
                            Purchase Agreement dated December 1, 1994, as amended;
                            (ii) a majority of the holders of securities issued
                            pursuant to the Secured Note and Stock Purchase
                            Agreement, dated December 1, 1995, as amended; (iii) a
                            majority of the holders of securities issued pursuant to
                            the Unsecured Note and Stock Purchase Agreement, dated
                            February 1, 1996, as amended; (iv) a majority of the
                            holders of securities issued pursuant to the Unit
                            Subscription Agreement, dated May 17, 1996, as amended;
                            (v) the purchasers of securities issued pursuant to the
                            Unit Subscription Agreement dated October 3, 1996; and
                            (vi) the former holders of BFI's Series A Preferred
                            Stock(3)
          4.4            -- Registration Rights Agreement, dated October 25, 1996,
                            between the Company and James S. Gillespie(2)
          4.5            -- Form of Series A Preferred Stock Certificate
          4.6            -- Registration Rights Agreement, dated as of April 13,
                            1998, among the Company, The Endeavour Capital Fund S.A.
                            and AMRO INTERNATIONAL S.A.
         10.1            -- Formation Agreement, dated as of October 15, 1996,
                            between BFI and VPI(2)
         10.2            -- Agreement and Plan of Merger, dated as of October 30,
                            1996, between the Company, BFI Acquisition Corporation
                            and BFI(3)
         10.3            -- Agreement and Plan of Merger, dated as of October 25,
                            1996, between the Company, VPI Acquisition Corporation,
                            VPI and James S. Gillespie, together with Forms of
                            Promissory Notes(4)
         10.4            -- Agreement of Merger between Voice Plus, Inc. and
                            BioFactors, Inc., dated as of October 10, 1997
         10.5            -- License Agreement, dated November 24, 1988, by and
                            between BFI and Systems Technology, Inc., as amended by
                            Addendum to License Agreement, dated May 19, 1994, as
                            amended by Second Addendum to License Agreement, dated
                            November 18, 1996(3)
         10.6            -- Sublicense Agreement, dated August 30, 1995, between BFI
                            and SportsTrac, Inc., as amended by Addendum to
                            Sublicense Agreement, dated July 31, 1996(2)
         10.7            -- Secured Note and Warrant Purchase Agreement, dated
                            December 1, 1994, between BFI and the purchasers listed
                            therein, as amended by the First Amendment to Secured
                            Note and Warrant Purchase Agreement, Dated July 1995, as
                            amended by Amendment to Secured Note and Warrant Purchase
                            Agreement, dated December 1, 1995, as amended by Third
                            Amendment to Secured Note and Warrant Purchase Agreement,
                            dated March 1, 1996, and as amended by Fourth Amendment
                            to Secured Note and Warrant Purchase Agreement, dated
                            October 1, 1996, together with Amended and restated
                            Security Agreement and Form of Secured Promissory Note(3)
</TABLE>
<PAGE>   59
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
         10.8            -- Secured Note and Stock Purchase Agreement, dated December
                            1, 1995, between BFI and the purchasers listed therein,
                            as amended by the First Amendment to Secured Note and
                            Stock Purchase Agreement, dated March 1, 1996, as amended
                            by Second Amendment to Secured Note and Stock Purchase
                            Agreement, dated July 1, 1996, and as amended by Third
                            Amendment to Secured Note and Stock Purchase Agreement,
                            dated October 1, 1996, together with Form of Secured
                            Promissory Note(3)
         10.9            -- Unsecured Note and Stock Purchase Agreement, dated
                            February 1, 1996, between BFI and the purchasers listed
                            therein, as amended by the First Amendment to Unsecured
                            Note and Stock Purchase Agreement, dated March 1, 1996,
                            as amended by Second Amendment to Unsecured Note and
                            Stock Purchase Agreement, dated July 1, 1996, and as
                            amended by Third Amendment to Unsecured Note and Stock
                            Purchase Agreement, dated October 1, 1996, together with
                            Form of Unsecured Promissory Note(3)
         10.10           -- Unit Subscription Agreement, dated May 17, 1996, between
                            BFI and the purchasers listed therein, as amended by
                            First Amendment to Unit Subscription Agreement, dated
                            October 1, 1996, together with Form of Promissory Note(3)
         10.11           -- Unit Subscription Agreement, dated October 1, 1996,
                            between BFI and the purchasers listed therein, together
                            with Form of Promissory Note and Form of Warrant(1)
         10.12           -- Equity Incentive Plan(1)
         10.13           -- Employment Agreement, dated as of October 30, 1996,
                            between Douglas S. Zorn and the Company(1)
         10.14           -- Employment Agreement, dated as of October 25, 1996,
                            between James S. Gillespie and the Company(2)
         10.15           -- Employment Agreement, dated as of October 30, 1996,
                            between Esmond T. Goei and the Company(2)
         10.16           -- Form of FACTOR 1000 Service Contract(2)
         10.17           -- Office Building Lease, dated April 8, 1996, between BFI
                            and Denver West Office Building No. 21 Venture(3)
         10.18           -- Authorized U.S. Distributor Agreement, dated April 16,
                            1996, between Centigram Communications Corporation and
                            VPI(2)
         10.19           -- Office Lease, dated October 16, 1995, between AJ Partners
                            Limited Partnership and VPI(3)
         10.20           -- Agreement, dated October 16, 1995, between BFI, Burton
                            Kanter and Elliot Steinberg, as amended by Amendment
                            dated July 16, 1996, between BFI, Esmond Goei, Douglas
                            Zorn, Burton Kanter and Elliot Steinberg(3)
         10.21           -- Stockholder Agreement, dated October 25, 1996, between
                            the Company and James D. Gillespie(3)
         10.22           -- 1997 Management and Company Performance Bonus Plan(3)
         10.23           -- Employment Agreement, dated as of November 1, 1996,
                            between Diane E. Nowak and VPI(1)
         10.24           -- Employment Agreement, dated as of November 1, 1996,
                            between Bradley Eickman and VPI(1)
         10.25           -- Promissory Note Payable to the Company by Esmond T. Goei
         10.26           -- Agreement for the Sale of Shares in Advantis Network &
                            System Sdn. Bhd. Dated June 20, 1997, Between the Company
                            and the shareholders of Advantis, as amended by the
                            Supplemental Agreement to the Agreement dated November
                            26, 1997; and the Second Supplemental Agreement Dated
                            November 26, 1997(5)
</TABLE>
<PAGE>   60
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
         10.27           -- Building Lease dated June 9, 1997 by and between the
                            company, as Tenant and El Dorado Holding Company, Inc.,
                            as Landlord(7)
         10.28           -- Form of Lock Up Agreement between the Company the former
                            Shareholders of Advantis(6)
         10.29           -- Securities Purchase Agreement, dated as of April 13,
                            1998, by and among the Company, the Endeavour Capital
                            Fund S.A. and AMRO INTERNATIONAL S.A.
         10.30           -- Form of Escrow Instructions related to Securities
                            Purchase Agreement, dated as of April 13, 1998.
         21              -- Subsidiaries
         27.1            -- Financial Data Schedules for the years ended December 31,
                            1996 and 1997
         27.2            -- Restated Financial Data Schedule for the three months
                            ended March 31, 1997
         27.3            -- Restated Financial Data Schedule for the six months ended
                            June 30, 1997
         27.4            -- Restated Financial Data Schedule for the nine months
                            ended September 31, 1997
</TABLE>
 
---------------
 
(1) Incorporated by reference to the document bearing the same exhibit number as
    contained in Amendment No. 2 to Registrant's Registration Statement on Form
    SB-2, File Number 333-15563, as filed with the Securities and Exchange
    Commission on January 13, 1997.
 
(2) Incorporated by reference to the document bearing the same exhibit number as
    contained in Registrant's Registration Statement on Form SB-2, File Number
    333-15563, as filed with the Securities and Exchange Commission on November
    5, 1996.
 
(3) Incorporated by reference to the document bearing the same exhibit number as
    contained in Amendment No. 1 to Registrant's Registration Statement on Form
    SB-2, File Number 333-15563, as filed with the Securities and Exchange
    Commission on December 20, 1996.
 
(4) Incorporated by reference to the document bearing the same exhibit number as
    contained in Amendment No. 3 to Registrant's Registration Statement on Form
    SB-2, File Number 333-15563, as filed with the Securities and Exchange
    Commission on January 28, 1997.
 
(5) Incorporated by reference to Exhibit 2.01 on registrant's Form 8-K, SEC File
    No. 0-21999, as filed with the Securities and Exchange Commission on
    December 30, 1997.
 
(6) Incorporated by reference to Exhibit 4.01 to Registrant's Form 8-K, SEC File
    Number 0-21999, as filed with the Securities and Exchange Commission on
    December 30, 1997.
 
(7) Incorporated by reference to the document bearing the same exhibit number as
    contained in registrant's Quarterly Report on Form 10-QSB, SEC File Number
    0-21999, as filed with the Securities and Exchange Commission on November
    14, 1996.