<PAGE>

                                   UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C.  20549
                      ----------------------------------------
                                    FORM 10-KSB

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

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

              For the period from  January 1, 1998 to September 30, 1998

                            COMMISSION FILE NUMBER 0-21999
                      -----------------------------------------

                             NHANCEMENT TECHNOLOGIES INC.
                    (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

                DELAWARE                                84-1360852
      (State or other jurisdiction of      (I.R.S. Employer Identification No.)
     incorporation or organization)

                          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 September 30, 1998, the issuer's revenues totaled
$9.4 million.

     As of December 31, 1998, the aggregate market value of the voting common
equity of NHancement Technologies Inc. held by non-affiliates was approximately
$2,910,900 based upon the closing bid price for such common stock on such date
on The Nasdaq Stock Market SmallCap System, of $0.625 per share.

     As of December 31, 1998, there were 5,808,700 shares of Common Stock 
outstanding.

     Transitional Small Business Disclosure Format (check one)

     Yes      No  X
        ----     ----
     Documents Incorporated by Reference - None


<PAGE>

                             NHANCEMENT TECHNOLOGIES INC.

                                  TABLE OF CONTENTS
<TABLE>
<CAPTION>                                                                 PAGE
                                        PART I
<S>                                                                       <C>
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>

<PAGE>

                                       PART I

ITEM 1.  BUSINESS 

     This report includes "forward-looking" statements within the meaning of 
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 
Securities Act of 1934, as amended. Certain statements included in this Form 
10-KSB, including, without limitation, statements related to anticipated cash 
flow sources and uses under "Liquidity and Capital Resources", the mitigation 
of the Year 2000 issue under "Impact of the Year 2000 Issue" and other 
statements contained in the "Management's Discussion and Analysis of 
Financial conditions and Results of Operations" regarding the Company's 
financing alternatives, financial position, business strategy, plans and 
objectives of management of the Company for future operations, and industry 
conditions, are forward-looking statements. Although the Company believes 
that the expectations reflected in any such forward-looking statements are 
reasonable, it can give no assurances that such expectations will prove to 
have been correct. Any forward-looking statements herein are subject to 
certain risks and uncertainties in the Company's business, including but not 
limited to, reliance on key customers and competition in its markets, market 
demand, business strategy, product performance, technological developments, 
maintenance of relationships with key suppliers, difficulties of hiring and 
retaining key personnel and the effect of the Company's accounting policies, 
all of which may be beyond the control of the Company. 

    In addition, the Company's Nasdaq Small Cap Market System listing is in some
jeopardy. See "Management's Discussion & Analysis - Risk Factors - Risks 
Associated with Delisting of Common Stocks; Penny Stock Rules." The Company 
incurred a net loss of approximately $2.5 million for the nine month 
fiscal year ended September 30, 1998 and expects to continue to experience 
losses for the first and second fiscal quarters of 1999. See "Management's 
Discussion and Analysis of Financial Condition and Results of Operations" and 
"Risk Factors." Any one or more of these factors could cause actual results 
to differ materially from those expressed in any forward-looking statements. 
All subsequent written and oral forward-looking statements attributable to 
the Company or any person acting on its behalf are expressly qualified in 
their entirety by the cautionary statements disclosed in this paragraph and 
elsewhere in this report. This report contains certain trademarks of 
Nhancement and its subsidiaries. 

OVERVIEW

     NHancement Technologies Inc.'s primary objective is to become a leading 
systems integrator of communication products and services. NHancement 
believes that increased competition, shorter time to market trends and the 
reduced importance of geographical borders make it imperative that 
corporations achieve and maintain communications operations worldwide. The 
Company, through its two current operating subsidiaries, Voice 
Plus-Registered Trademark-, Inc., a California corporation renamed NHancement 
Technologies North America, Inc. on October 10, 1998 ("VPI", "Voice Plus" or 
"NHAN NA"), and Infotel Technologies Pte Ltd, a Singapore corporation 
("Infotel"), provide multinational corporations and other businesses with 
communications products and technological innovations designed to enhance 
efficiency.

     0n January 6, 1999, Mr. James S. Gillespie was appointed to fill a newly
created vacancy on the Broad of Directors of NHancement. Subsequently at the
same meeting, Messrs. Boyle, Das and Nemetz resigned from the Board. On January
6, 1999, Mr. Goei resigned his positions as President and CEO pursuant to the
terms of a Separation Agreement approved by the Board of Directors, which 
modifies the terms of his Employment Agreement. Mr. Zorn subsequently became 
Interim President and CEO.

     The Company was incorporated in October 1996 to pursue a business 
combination opportunity with Voice Plus-Registered Trademark-, 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-Registered Trademark-system, a proprietary computerized impairment 
testing system. NHancement acquired these two companies 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.
Voice Plus, now named NHancement Technologies North America, Inc. 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-Registered Trademark- system, which was used for detecting worker
impairment. The Company later determined that such effort was no longer
justified, given the resources required to


                                          3
<PAGE>
develop such a market and the need to dedicate its financial resources to its
other core businesses. It is attempting to sell the Factor 1000 technology.

     On December 15, 1997, NHancement purchased one hundred percent (100%) of
the shares of Advantis Network & System Sdn Bhd ("Advantis"), a communications
systems company in Malaysia. Subsequent weakening of the Malaysian currency
combined with Advantis' poor operating performance and weak local management led
NHancement to divest itself of Advantis in September 1998. NHancement
transferred its ownership interest in Advantis to certain of the original
Advantis shareholders and waived certain potential claims NHancement may have
had for damages under the original Advantis purchase agreement in exchange for
such shareholders agreement to guarantee repayment of a loan made by NHancement
to Advantis in the principal amount of US$300,000.

     On June 22, 1998, NHancement purchased one hundred percent (100%) of the
shares of Infotel Technologies (Pte) Ltd ("Infotel"). As a result of the
acquisition, Infotel became a wholly owned subsidiary of NHancement. Infotel is
an integrator of infrastructure communications equipment products, providing
radar system integration, turnkey project management services and test
instrumentation, as well as a portfolio of communication equipment in Asia. The
operations of the entity are being conducted under the name of "Infotel
Technologies (Pte) Ltd," which is headquartered in Singapore.

     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's goal is to become a provider of diversified communications
products and services. However, the Company first intends to devote its
resources to improving the performance of its domestic operations. The three
principal elements of this strategy are:

     (1)  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 a national sales and
          marketing presence in major markets geared to sell communications
          products and services across the United States and Singapore.

     (2)  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. 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 communications systems
          that achieve these goals. Management believes that VPI's voice
          processing and computer telephony integration capabilities will offer
          solutions to meet the communications needs of corporations.

     (3)  Expand Product Portfolio

          The Company intends to expand its product portfolio while maximizing
          its organizational strength and expertise in marketing and systems
          integration. In particular, the Company seeks to develop relationships
          with organizations that will expand its geographic coverage or provide
          complementary products and services. As an example, the Company
          signed a reseller agreement with Interactive Intelligence, Inc. ("I3")
          to sell its call center product named, Enterprise Information Center.
          I3 has developed advanced computer telephony equipment incorporating
          Internet capabilities and the Windows NT operating system and

                                          4
<PAGE>

          CT/telephony applications developed using the universal JAVA
          programming language. I3 has merged two diverse technologies of
          computer and telephony, and is seamlessly merging various diverse
          functions such as advanced PBX, ACD, IVR, Voice Messaging, FAX
          Messaging, E-Mail and Call Center functions, on a single Windows NT
          server.

THE COMPANY'S PRODUCTS AND SERVICES

     The Company's current systems integration businesses include voice
processing, multimedia messaging and infrastructure communications equipment.
Although the Company believes that its relations are good with all its vendors,
recent cash flow issues in North America have put a strain on these
relationships. If cash flow issues continue, relationships could degrade in the
future and in extreme instances cause a disruption to our product supply that
would have a material adverse effect on operations.

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

     NHancement, through Infotel in Singapore, offers a wide range of
infrastructure communications equipment products that satisfy the most demanding
communications project.With over a decade of experience its technical team can
handle any communications project with confidence. NHancement has satisfied
many customers on simple projects of several hundreds of thousands of dollars
for modems and complex multi-million dollar, multi-node turnkey projects both in
complex radio and networking systems.  Products supported include manufacturers
such as Motorola, Ericsson, Raytheon, Newbridge and Shiva Corp., Rohde & Schwarz
Gmbh, and Siemens. NHancement's Infotel subsidiary focuses principally on large
projects in the government and institutional sectors as well as in the
commercial sector, and targets opportunities for regionalization and
Internetworking.

Turnkey Systems Projects.

     Customers that award turnkey projects do so only to vendors or systems
integrators that have full capabilities in design, installation, commissioning,
project management and documentation. In such projects the Company's emphasis
and competitive edge lies in the practice of sourcing the best product that
meets the customer's requirements.  Emphasis is placed on design and project
management in which the Company maintains strong technical competency. Other
communications activities include the supply and installation of various voice
and data communications equipment on a tender basis.

Test Measuring Systems.

     NHancement's Infotel subsidiary also has an established business providing
test measuring instrumentation and testing environments. The business grew out
of a communications relationship with a German conglomerate, Rohde & Schwarz
Gmbh, which evolved into a dependency on Infotel to service other Rohde &
Schwarz products such as test instruments. Infotel is now the regional
distributor and test and repair center for Rohde & Schwarz test instruments,
which provides a steady stream of revenues. Infotel has since expanded its
repair capability to include Alcatel mobile telephones.


                                          5
<PAGE>
MARKETING

     The Company has a marketing and distribution infrastructure for its voice
processing and multimedia messaging products, which now includes 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 Singapore.

     The Company markets its products and services primarily through focused
telemarketing and calls to prospective customers in specific markets,
participation in trade shows, acquisition of databases 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. If current
cash-flow issues persist, they will have an adverse effect on our abilities to
provide the level of support required by our customers.

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.

     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 1999. 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 in 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 unremedied 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.

     On May 8, 1998 Centigram sold its Customer Premise Equipment ("CPE")
business to Mitel Corporation which now markets Centigram's products through a
newly formed subsidiary, Baypoint Innovations. Baypoint has elected


                                          6
<PAGE>
to honor the Distributor Agreement under the same terms as applied to the
distribution arrangement with Centigram. Any change in the relationship with
Baypoint would have a material adverse effect on the Company.

     On July 8, 1998, the Company signed a reseller agreement with Interactive
Intelligence, Inc. ("I3") to sell its call center product. I3 has developed
advanced computer telephony equipment incorporating Internet capabilities and
the Windows NT operating system and CT/telephony applications developed using
the universal JAVA programming language. I3 has merged two diverse technologies
of computer and telephony, and is also seamlessly merging various diverse
functions such as advanced PBX, ACD, IVR, Voice Messaging, FAX Messaging, E-Mail
and Call Center functions, on a single Windows NT server.

     Pursuant to the terms of the Reseller Agreement, VPI is a Premier Partner
of I3 with rights to market, license, install, support and/or deliver services
based on I3 products throughout North America. The Reseller Agreement is for an
initial term of 2 years and will be automatically extended for additional
one-year terms unless terminated in writing by either party six (6) months prior
to the anniversary date. I3 may assign VPI a revised annual sales quota for each
succeeding one-year term. If VPI does not meet its sales quota, the Agreement
can be terminated however; VPI will not be considered to be in breach or default
under these circumstances. Either party can also terminate the Agreement if the
other party commits a material breach that is not cured within 30 days. The
Agreement will terminate immediately without notice if VPI reverse engineers,
disassembles or decompiles any I3 product to a source code version or if VPI
transfers or assigns it rights under the Agreement or rights to the I3 products
without I3's permission.

     VPI has distributor agreements with a number of equipment manufacturers.
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. Current cash flow problems have negatively impacted the Company's
relations with several key vendors and continued or worsened cash problems could
result in a material adverse effect on the Company.

CUSTOMERS

     The Company currently services approximately 1000 clients. Revenues from
our two largest customers accounted for approximately 26% and 12% of total net
revenues during the nine-month period ended September 30, 1998. This
concentration of revenues between two customers results in additional risk to
the Company and any disruption of orders from either of these customers would
have an adverse effect on the Company. The Company's order backlog as of
September 30, 1998 totaled approximately $ 1.9 million.

YEAR 2000 POTENTIAL IMPACT

     The Company has developed an implementation plan to correct any internal
computer systems that could be affected by "Year 2000" issue. 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 middle of calendar year 1999. 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.


                                          7
<PAGE>
     The Company distributes products from third party voice product equipment
manufacturers in North America, 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.

     As for our Asian operations, the Company has only begun its review of
third-party products distributed by 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 system of Singapore would result in more or
less litigation exposure to the Company and its subsidiaries if there were
disputes between the end user of a product installed by Infotel, and the
manufacturer.

     The Company's internal computer systems for North American operations were
purchased this year from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant and the implementation in North America
is scheduled to be completed during fiscal year 1999. As for Asian operations,
the Company acquired Infotel, a company organized under the laws of Singapore on
June 22, 1998. The Company has since completed its review of the internal
computer systems of Infotel and is aware that Infotel's systems are not Year
2000 compliant; thus, a plan has been established to convert Infotel to the
Company's internal business system during fiscal 1999 about three months behind
the North America implementation. Estimated cost of the new business systems
for all locations combined is $400,000 and was needed not only because of Year
2000 compliance but also in order to maintain proper controls by which to manage
the Company.

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-Registered Trademark- and currently has two federally registered trademarks
related to the FACTOR 1000-Registered Trademark- system. In addition, VPI, as
the successor in interest to BFI, holds an exclusive worldwide license to market
the FACTOR 1000-Registered Trademark- system until 2008. The FACTOR
1000-Registered Trademark- 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 decided during fiscal 1998 to exit from the business related to
the FACTOR 1000-Registered Trademark- product and ultimately 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: (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 must make about $100,000 in
additional minimum payments under the terms of its license by December 31, 1999
or its license will become non-exclusive. The Company has granted an exclusive
license of sports-related and sports entertainment applications of the FACTOR
1000-Registered Trademark- system


                                          8
<PAGE>
(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 two systems. As
a result, the Company had collected only $1100 (in the first quarter of 1997 and
the fourth quarter of fiscal 1998) in on-going royalties from SportsTrac. The
Company has not projected significant revenue from any such on-going royalties
in the future and will continue its efforts to sell the FACTOR 1000 technology
in fiscal 1999.

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.

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 $1,000,000 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. 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 December 31, 1998, the Company employed a total of 98 employees, of
whom 55 were employed by Infotel, the Company's Singapore subsidiary. At
September 30, 1998 the employee headcount was substantially the same. The
Company has never had a work stoppage and no 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-


                                          9
<PAGE>
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. 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
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 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.

     VPI is a national distributor that focuses solely on voice processing
systems integration. While manufacturers of voice processing equipment could be
viewed as national competitors, such manufacturers are concerned 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 its principal existing competitors and new
competitors will offer new or enhanced products. 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.

     Infrastructure Communications Equipment

     Generally Infotel does not compete for business with small companies.
Infotel's competitors are mainly large system integrators and distribution
companies having the competitive advantage of a lower cost structure. Rather,
Infotel leverages its lower cost structure and flexibility to compete with the
bigger competitors and to achieve higher margins on its sales.

     In the data-communication market key competitors are Datacraft Asia Ltd, 
Teledata Ltd, National Computer Systems Pte Ltd and ST Computer Systems Ltd. 
Most of these companies are either government-linked or listed companies and 
they represent some of the best lines of products like Cisco, Ascend, Fore 
Systems, etc.

     In the radio communications market, which serves largely the government, 
there are fewer competitors and most are government-linked companies such as 
CET Technologies Pte Ltd and Keppel Communications Pte Ltd. There

                                          10
<PAGE>
are occasions where Infotel will work with these competitors for government
projects in which its products can find a good fit with the products and
capabilities offered by these large system houses.

     In the test instrumentation market, Infotel has only one major competitor
which is Hewlett Packard Singapore (Pte) Ltd, the largest electronic test
equipment manufacturer in the world.

ITEM 2.  DESCRIPTION OF PROPERTY

     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 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 $9,700. In addition, the Company's
Singapore subsidiary, Infotel, leases approximately 8700 square feet of office
space at a monthly office rental expense of approximately US $13,000 per month
under a lease which expires in October of 1999 with an option to be extended for
two additional years. The Company believes that leased office space at market
rates is readily available at all such locations.


ITEM 3.  LEGAL PROCEEDINGS

     In Re C.C. and Associates et al vs. NHancement Technologies, Inc., et al,
on July 30, 1988 a default judgment against the Company was entered by the Santa
Clara County Superior Court; on or about December 10, 1998, plaintiff requested
Entry of Default and Clerk's Judgment against the Company in the amount of
$54,722.00. The dispute related to payment of legal expenses pursuant to a
non-binding letter of intent.

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 fiscal 1998, which ended September 30, 1998.

                                       PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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
December 31, 1998 there were approximately 111 shareholders of record. The
Company's Series A Preferred Stock is not publicly traded and the underlying
Common Stock is subject to receipt of Stockholder approval which has not yet
been obtained. The underlying Common Stock was registered pursuant to a
Registration Statement on Form S-3 declared effective by the SEC on June 2,
1998. 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 1998 (Nine Months Ended September 30, 1998)            HIGH            LOW
          ----------------------------------------------------------------   -------        -------- 
          <S>                                                                <C>            <C>
          First quarter (January 1, 1998 to March 31, 1997). . . . . . . .   $ 3.9375       $ 2.4375
          Second quarter . . . . . . . . . . . . . . . . . . . . . . . . .   $ 3.4375       $ 1.6875
          Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . .   $ 2.1250       $ 0.6250

</TABLE>


                                         11
<PAGE>
<TABLE>
<CAPTION>

            CALENDAR YEAR 1997                                                 HIGH            LOW
          --------------------                                               --------        -------
          <S>                                                                <C>             <C>
          First quarter (February 4, 1997 to December 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>

     Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, in November 1998 the Company informed Nasdaq that it no
longer met the requirements for continued listing on the Nasdaq SmallCap Market
System. Nasdaq is currently reviewing the propriety of continuing the Company's
listing on the Nasdaq SmallCap Market System. There can be no assurance that the
Company will in fact meet these requirements in this or any future period.

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>
                                                           TITLE OF         NUMBER      AGGREGATE         FORM OF
     CLASS OF                                 DATE OF     NHANCEMENT          OF        PURCHASE         CONSIDER-
    PURCHASERS(1)                              SALE       SECURITIES        SHARES       PRICE            ATION
    -------------                              ------     ----------        ------      ---------        ---------
<S>                                           <C>         <C>               <C>         <C>              <C>
Options granted to thirteen                               Shares of
 optionees(2)                                 07-02-98    Common Stock      258,000         2                2

</TABLE>

--------------------
(1) The grant of options to 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) The options were granted to employees of NHancement under the Company's
Equity Incentive Plan. The options generally expire ten years from the date of
grant and become exercisable for twenty-five percent 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 on the date of grant.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This report includes "forward-looking" statements within the meaning of 
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 
Securities Act of 1934, as amended. Certain statements included in this Form 
10-KSB, including, without limitation, statements related to anticipated cash 
flow sources and uses under "Liquidity and Capital Resources", the mitigation 
of the Year 2000 issue under "Impact of the Year 2000 Issue" and other 
statements contained in the "Management's Discussion and Analysis of 
Financial conditions and Results of Operations" regarding the Company's 
financing alternatives, financial position, business strategy, plans and 
objectives of management of the Company for future operations, and industry 
conditions, are forward-looking statements. Although the Company believes 
that the expectations reflected in any such forward-looking statements are 
reasonable; it can give no assurances that such expectations will prove to 
have been correct. Any forward-looking statements herein are subject to 
certain risks and uncertainties in the Company's business, including but not 
limited to, reliance on key customers and competition in its markets, market 
demand, business strategy, product perfomance, technological developments, 
maintenance of relationships with key suppliers, difficulties of hiring and 
retaining key personnel and the effect of the Company's accounting policies, 
all of which may be beyond the control of the Company. In addition, the 
Company's Nasdaq Small Cap Market System listing is in jeopardy. The Company 
incurred a net loss of approximately $2.5 million for the nine months 
fiscal year ended September 30, 1998 and expects to continue to experience 
losses for the first and second fiscal quarters of 1999. 

Any one or more of these factors could cause actual results to differ
materially from those expressed in any forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this paragraph and elsewhere
in this report. 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.


                                          12
<PAGE>

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., now named NHancement Technologies North
America Inc. ("VPI", "Voice Plus" or "NHAN NA"), 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.

     For financial accounting purposes, BFI was deemed to be the acquirer 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-Registered Trademark- 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-Registered Trademark-," 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 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.  On September 30, 1998,
NHancement disposed of Advantis. The Company and three of the former
shareholders of Advantis entered into a guarantee agreement pursuant to which
each such shareholder agreed to guarantee repayment of the outstanding loan made
by the Company to Advantis (together with all the interest accrued through
August 31, 1998) pursuant to that certain loan agreement and related promissory
notes dated July 7, 1997. In exchange, the Company delivered all of the Advantis
shares and transferred its ownership interest in Advantis to three of the
original Advantis stockholders. As of September 30, 1998, NHancement ceased
conducting business under its former subsidiary, Advantis Network & System Sdn
Bhd. and does not have any liabilities for Advantis' obligations. The financial
effect of this disposal on the balance sheet of NHancement was to increase our
tangible net worth, due to the disposal of the Advantis balance sheet, which
contained more liabilities than tangible assets. The results of operations are
expected to improve with the disposition of Advantis' recent losses.  The
results of Advantis' operations and the related loss on its disposal have been
classified as discontinued operations in the December 31, 1997 and September 30,
1998 financial statements and are excluded from the loss from continued
operations.

     On June 22, 1998, the Company acquired all outstanding shares of common
stock of Infotel Technologies (Pte) Ltd, a Singapore corporation ("Infotel").
As a result of the acquisition, Infotel became a wholly owned subsidiary of
NHancement. Infotel is a system integrator of infrastructure communications
equipment products, providing radar system integration, turnkey project
management services and test instrumentation, as well as a portfolio of
communication equipment in Asia. The acquisition was accounted for as a
purchase, and, accordingly, the results of Infotel's operations were included in
the Company's financial statements commencing June 22, 1998.

     The ongoing business of NHancement will be conducted by its operating
company subsidiaries, Voice Plus, Inc. and of Infotel Technologies (Pte) Ltd.
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


                                          13
<PAGE>

IPO and the acquisition of Advantis. For the nine month period ended 
September 30, 1998, the historical financial statement information for 
continuing operations includes BFI, VPI, and the results of Infotel for June 
22, 1998 through September 30, 1998. The historical financial statement 
information presented for 1997 includes twelve months of BFI operations and 
approximately eleven months of VPI operations. As noted above, the results of 
Advantis's operations were classified as discontinued operations. During 
1998, the Company changed its fiscal year-end from December 31st to September 
30th. As a consequence, management's discussion addresses audited financial 
data for the nine-month period ended September 30, 1998 compared to unaudited 
financial data for the same period a year earlier. Also discussed is the 
audited financial results for the calendar years ended December 31, 1996 and 
1997. 

     On November 20, 1998, the Company informed Nasdaq, 
that due to continued losses, that it no longer met the requirements for 
continued listing on the Nasdaq SmallCap Market System. Specifically, the 
Company failed to meet the requirements of Nasdaq Marketplace Rule 4310(c)(2) 
which requires that an issuer maintain (i) net tangible assets of Two Million 
Dollars ($2,000,000); (ii) market capitalization of Thirty-Five Million 
Dollars ($35,000,000); or (iii) net income of Five Hundred Thousand Dollars 
($500,000) in the most recently completed fiscal year or in two of the last 
three most recently completed fiscal years. There can be no assurance that 
the Company will in fact meet these requirements in any future period. The 
Company's cash position increased by about $314,000 during the nine months 
ended September 30, 1998 due to the net effect of the following; (i) 
continued losses resulted in a use of funds from operations for the 
nine-months ended September 30, 1998 of approximately $500,000 and (ii) net 
proceeds from the Company's Series A Preferred Stock financing was about 
$1,000,000. Continued losses from operations would have a materially adverse 
effect on the financial condition of the Company. However, the Company 
believes that the management changes implemented in January 1999 and the 
corresponding cost reduction measures expected to be implemented primarily 
thru a 10% headcount reduction and certain operating expense cutbacks in 
travel, outside services, discretionary sales cost, corporate overhead, and 
administrative costs will return the Company to profitability during fiscal 
1999 despite sales that are expected to be well below recent historical run 
rates in the first fiscal quarter of 1999 and a one time restructuring charge 
related to severance benefits to be incurred in the second fiscal quarter. As 
a mitigating factor, sales in the second fiscal quarter of 1999 are expected 
to equal or exceed historical run rates. Therefore, management also believes 
that this anticipated return to profitability coupled with an increased 
credit facility and planned financing activities will provide adequate cash 
flow for future operations, although no assurances can be given that current 
efforts will be successful. See "Risk Factors".

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 AND NINE
MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997

                             NHANCEMENT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
                                                                           (Unaudited)
                                                                            Nine Months      Nine Months
                                            Year Ended      Year Ended         Ended            Ended
                                            December 31,    December 31,    September 30,    September 30,
                                               1996            1997             1997             1998
                                            ------------    ------------    -------------    -------------
<S>                                         <C>             <C>             <C>              <C>
     Net revenues. . . . . . . . . . . .       100.0%         100.0%          100.0%          100.0%
     Cost of goods sold. . . . . . . . .        16.2%          56.8%           52.3%           62.1%
     Gross margin. . . . . . . . . . . .        83.8%          43.2%           47.7%           37.9%
     Research, selling and
       administration expenses . . . . .       240.0%          96.4%           37.3%           53.1%
     Operating income (loss) . . . . . .      (156.2)%        (53.2)%          10.4%          (15.2)%
     Other income (expense). . . . . . .       (73.3)%          0.6%           (5.6)%          (0.2)%
     Income (loss) before
       income taxes. . . . . . . . . . .      (229.5)%        (52.6)%           4.8%          (15.4)%
     Income taxes. . . . . . . . . . . .         0.0%           0.0%            1.4%            0.7%
     Net Income (loss) from
       continuing operations . . . . . .      (229.5)%        (52.6)%           3.4%          (16.1)%
     Discontinued operations . . . . . .         0.0%           0.0%            0.0%           10.1%
     Net income (loss) . . . . . . . . .      (229.5)%        (52.6)%           3.4%          (26.2)%

</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997


                                          14
<PAGE>
     FACTOR 1000-Registered Trademark- revenues in the nine-month periods ended
September 30, 1998 and 1997 were negligible. The Company has decided to pursue
a buyer for its FACTOR 1000 technology and products, as no significant FACTOR
1000 revenue is anticipated for any periods in the future. The carrying value
of the assets and liabilities associated with the FACTOR 1000 technology are
insignificant at September 30, 1998 and December 31, 1997.

     The Company's primary focus in the nine-month periods ended September 30,
1998 and 1997 was as an integrator and distributor of voice processing and
telecommunications systems for businesses, which operations were conducted
through the Company's VPI subsidiary. VPI's revenues for the nine-month period
ended September 30, 1998 totaled $6.4 million as compared to nine month proforma
revenue of $7.6 million (revenue from the date of acquisition in February to
September 30, 1997 was $6.7 million) during the same period a year earlier,
which represents a decrease of 15.8%. The decrease in VPI net revenues between
1998 and 1997 was due primarily to a slow down in voice processing systems and
parts sales. The VPI order backlog at September 30, 1998 was about $1.0 million
or unchanged from the prior year. VPI revenues in the September quarter of 1998
were slightly below the same period in 1997, and management expects sales levels
to continue to be well below recent historical run rates in the first 
fiscal quarters of 1999. Projected revenue for the first fiscal quarter of 1999
is estimated at less than $1.5 million. 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 and Mitel Corporation or its subsidiary, Baypoint Innovations, the
successor in interest to the Centigram CPE business, would have a material
adverse impact upon the Company's voice processing business.

Based on the estimated future undiscounted operating cash flows of its related
business, the Company periodically evaluates the carrying value of goodwill.
Due to issues not known by management at the time of the VPI acquisition, the
estimated future undiscounted operating cash flows of VPI were calculated to be
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. On December 31,
1997 and September 30, 1998, the Company recorded impairment losses of
$4,084,300 and $525,000, representing the difference between the carrying
amounts of goodwill over its estimated fair value. The remaining balance of the
VPI goodwill at September 30, 1998 was $750,000 and the useful life was reduced
from five years to three years. The second write-off of $525,000 in 1998 was
due to lower than projected revenues in the nine-month period ended September
30, 1998, continued losses in the VPI subsidiary and changes in the voice
processing industry. Management believes that the Company will experience
future revenue growth in 1999 due to our Year 2000 program which was implemented
to identify potential customers with voice processing systems which are not year
2000 compliant. Management believes that after 1999, revenues for legacy
systems will decline and that VPI revenues will come increasingly from new
technologies and products that are just now being introduced to the marketplace.
The Company is in the process of repositioning the VPI subsidiary to take
advantage of the new trends in the voice processing industry, specifically the
migration from legacy systems to the new NT computer-based systems of the
future. This transition required the addition of several new management members
and new technological capabilities within the VPI subsidiary resulting in
significant expense to the Company. In April of 1998, the Company announced
that James B. Linkous accepted the position of General Manager of VPI and that
James Gillespie, who previously held that position, had become a part-time
consultant to the Company. Mr. Linkous has been tasked with strengthening the
sales infrastructure and expanding VPI's product offering.

     The Company's former subsidiary, Advantis, had net revenues decrease
sharply, due mainly to the economic decline in Malaysia and poor local
management. Poor performance, the economic decline and the weakening of the
Malaysian currency combined with weak local management led to the Company's
disposal of Advantis in September 1998. The Company recorded a loss from
discontinued Advantis' operations of $581,400 and a one-time charge of $368,600
on the disposal of Advantis.

     The Company's Infotel subsidiary was acquired June 22, 1998 and added a
little over three months, or about $3.0 million of revenues during the fiscal
period ended September 30, 1998. On a stand-alone pro forma basis, Infotel
revenues have increased $2.7 million or 40.3% from $6.7 million for the
nine-month period ended September 30, 1997 compared $9.4 million for the same
period in 1998. The increase was due primarily to the sale of several large
radio systems ($850,000), increased test instrumentation sales ($150,000) and
several large management contracts ($1.7 million) during the first nine months
of 1998. Due to the economic slow-down in Asia, revenues are projected to be
flat during fiscal 1999 as compared to fiscal 1998. The Infotel order backlog
at September 30, 1998 was approximately $900,000.


                                          15
<PAGE>

     Gross margins in the nine-month period ended September 30, 1998 decreased
from 47.7% to 37.9% in 1998. The gross margin in 1997 was associated almost
exclusively with the Company's VPI subsidiary. No significant 1997 revenues or
gross margin were recorded from FACTOR 1000-Registered Trademark- systems or the
Company's former Advantis subsidiary. The gross margin in 1998 was associated
with the Company's VPI subsidiary and approximately three months of Infotel
sales in Singapore. VPI's gross margin, as a stand-alone business, decreased to
39.2% in 1998 compared to 46.6% in the same period of 1997 due primarily to
higher product cost as a percentage of revenues and increased overhead spending
within the operations function. Infotel as a stand-alone business enjoyed an
increase in gross margins for the first nine months of 1998 to 30.4% as compared
to the same period the year before of 23.5%. The increase in Infotel gross
margins was due primarily to Infotel's decision in 1997 to terminate its retail
modem business and sell all existing stock at or below cost, as well as to the
introduction of a new high margin network product in 1998.

     Company-wide selling, general and administrative ("SG&A") expenses as a 
percentage of net revenues were abnormally high during the first nine months 
of 1998 at 53.1% as compared to 37.3% in the same period of 1997. The SG&A 
expenses in 1998 included the VPI subsidiary's and NHancement's corporate 
office expenses for the nine months and about three months of Infotel's SG&A 
expenses. The majority of SG&A expenses in 1997 were associated with the 
Company's VPI subsidiary and the corporate office. For VPI, as a stand-alone 
business, SG&A in 1998 increased as a percent of revenues to 58.2% compared 
to 30.1% in 1997 due to (i) a 1998 impairment loss and amortization of the 
excess of cost over net assets acquired of $750,000 which reduced the 
carrying value of the excess of cost over net assets acquired relating to the 
VPI acquisition compared to $400,000 in 1997, (ii) corporate allocated 
expenses, as a percent of revenue, increased from 6.0% in 1997 to 9.8% in 
1998 which is related to the expense of implementing a new Year 2000 
compliance management information system ("MIS") which included software and 
hardware, (iii) a 6.3% increase in expenses associated with the hiring of 
additional sales and marketing personnel during 1997, and (iv) general and 
administrative expenses increased 4.5% due to increased expenses related to 
rent and MIS support costs. Infotel added about $900,000 in SG&A expenses 
during the three months since the acquisition of Infotel. On a stand-alone 
basis Infotel's SG&A as a percent of revenues remained constant at 
approximately 23% for the nine-month period ended September 30, 1998 and 
1997. For an analysis of the differences between the Company's effective tax 
rate and the statutory rate see Note 9, Income Taxes in the Consolidated 
Financial Statements. At September 30, 1998, the Company fully provided 
against its deferred tax assets. The Company believes sufficient uncertainty 
exists regarding the realizability of the deferred tax assets, such that a 
full valuation allowance is required. At September 30, 1998 the Company had 
approximately $9 million of federal net operating loss carryforwards expiring 
between 2008 and 2013. The federal net operating loss carryforwards are 
subject to an annual limit of approximately $250,000.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     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-Registered Trademark- technology and products, as no significant FACTOR
1000-Registered Trademark- 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 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, which were almost exclusively derived from the sale
of Centigram products. 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.

     Gross margins in 1997 decreased to 43.2% from 83.8% in 1996. Gross margins
in 1996 related only to


                                          16
<PAGE>
FACTOR 1000-Registered Trademark- 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-Registered Trademark- 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.

     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-Registered Trademark- 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-Registered Trademark- 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.

LIQUIDITY AND CAPITAL RESOURCES

     Although the acquisition of complementary businesses and products is an
element of the Company's business strategy, the Company may need to obtain
additional debt or equity financing to engage in any acquisition activities.
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. In April of 1998, the Company negotiated an equity
financing for $3.0 million of which $1,250,000 was received, with substantially
all of the proceeds having been used for the acquisition of Infotel. The
Company amended the agreement in September of 1998 limiting the aggregate
financing amount to $1,250,000, (approximately $985,000 net of expenses) except
by mutual consent of the parties.

     During the nine-month period ended September 30, 1998, net cash used in 
operating activities was $0.5 million consisting primarily of cash used to 
fund the operating losses in the U.S. operations. Net cash provided by 
financing activities totaled $1.9 million. Net proceeds from the preferred 
stock financing of almost $1.0 million were used for the acquisition of 
Infotel in June of 1998. The amount of cash remaining on Infotel's books was 
nearly equal to the cash paid for the acquisition of Infotel. At September 
30, 1998, the Company's working capital was $0.36 million and cash and cash 
equivalents totaled $1.7 million. The current ratio decreased slightly from 
1.3 to 1 at December 31, 1997 to 1.1 to 1 at September 30, 1998. The reduced 
level of revenues projected for VPI and the corresponding projected losses in 
the first quarters of fiscal 1999 will result in a net use of cash from 
operations and a further reduction of the current ratio. Management believes 
that available cash reserves coupled with additional available credit and the 
implementation of cost reductions management believes that this will provide 
adequate funds for future operations, although no assurance can be given that 
current efforts will be successful.

     As of September 30, 1998, the Company had outstanding debt, exclusive of 
accounts payable, accrued liabilities and deferred revenue totaling about $4 
million, of approximately $2.5 million consisting of about $231,000 in 
revolving credit, $670,000 in shareholder loans, $187,500 due to the former 
shareholder of VPI and $1.4 million in additional purchase consideration due 
to the former Infotel shareholders. During fiscal 1998, the Company 
completed a $1.0 million accounts receivable credit line with a U.S. finance 
company with an advance rate of 80% of eligible receivables at an interest 
rate of 2.0% every 15 days. In October 1998, the terms of the revolving 
credit line were re-negotiated to a maximum of $1.0 million at an interest 
rate of 2.75% per month. In January of 1999 the Company received a letter 
from its lender committing to increase the credit line from $1,000,000 
to $2 million under similar terms and conditions. The Company, through 
its Infotel subsidiary is attempting to complete a credit line with a major 
Singapore bank for S$3.5 million with interest at 1.25% above bank prime to 
be used for overdraft protection, letters of credit, letters of guarantee, 
foreign exchange and revolving credit. The Company hopes to complete this 
facility early in calendar 1999.

                                          17
<PAGE>
     The Company's management estimates that it will incur about $200,000 in
capital expenditures during the next 12 months, representing mostly company-wide
business systems hardware and communication systems. 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 cost reduction plans, management believes that
operating cash flow, available cash and available credit resources 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, if any
are pursued in this fiscal year, 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.

     Although the acquisition of complementary businesses and products has been
an element of the Company's business strategy, none of the proceeds of the IPO,
which occurred in February 1997, were reserved specifically for the funding of
future acquisitions.

     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.

     As of December 31, 1997, the Company had outstanding interest-bearing debt
of approximately $0.5 million inclusive of associated accrued interest.

SUBSEQUENT EVENTS

     On January 6, 1999, Mr. James S. Gillespie was appointed to fill a newly 
created vacancy on the Broad of Directors of NHancement. Subsequently at the 
same meeting, Messrs. Boyle, Das and Nemetz resigned from the Board. On 
January 6, 1999, a Mr. Goei resigned his positions as President and CEO 
pursuant to the terms of a Separation Agreement approved by the Board of 
Directors, which modifies the terms of his Employment Agreement. In exchange 
for Mr. Goei's resignation, the Company has agreed to a severance package 
with the following principal terms: (i) six and one-half months of regular 
pay at his current rate, (ii) continued benefits under the Company's 
medical and group insurance plan through May 15, 1999, (iii) use of the 
Company paid leased automobile through the end of the lease term 
in July 1999, (iv) the Company will reimburse Mr. Goei's for certain accrued 
moving expenses totaling $70,000, (v) the Company will issue warrants to 
purchase 50,000 shares of NHancement Common Stock at the fair market price 
effective as of the date of his resignation at $1.00 per share, and (vi)
Mr. Goei and the Company agree to a mutual waiver of all claims related to 
Mr. Goei's employment. Mr. Zorn subsequently became Interim President and 
CEO.

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.

     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


                                          18
<PAGE>
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, its implementation does not have an impact on the financial condition
or results of operations of the Company.

     In June 1997, the Financial Accounting Standards Board 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. The financial statements
include the disclosures required by this Statement. Results of operations and
financial position, however, are 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 are unaffected by
implementation of this standard.

     In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes. However,
in light of its recent acquisition of Infotel, management may enter into
derivative contracts to hedge its foreign currency risk in the future. The
Company has not yet evaluated the financial statement impact of adopting this
new standard.

RISK FACTORS

     The following risk factors, in addition to the risks described elsewhere 
in the description of the Company's business in this report on Form 10-KSB, 
including, without limitation, those under the captions "Strategy," 
"Principal Suppliers," "Marketing," and "Competition," as well as under 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations," may cause actual results to differ materially from those in any 
forward-looking statements contained in the business description, 
management's discussion and analysis or elsewhere in this report or made in 
the future by the Company or is representatives. Such forward-looking 
statements involve known risks, uncertainties and other factors which may 
cause the actual results, performance or achievements expressed or implied by 
such forward-looking statements.

RISKS ASSOCIATED WITH DELISTING OF COMMON STOCK; PENNY STOCK RULES.

     Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, on November 20, 1998, the Company informed Nasdaq that
it no longer met the requirements for continued listing on the Nasdaq SmallCap
Market System. Specifically, the Company failed to meet the requirements of
Nasdaq Marketplace Rule 4310(c)(2) which requires that an issuer maintain
(i) net tangible assets of Two Million Dollars ($2,000,000); (ii) market
capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net income
of Five Hundred Thousand Dollars ($500,000) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal years.
Nasdaq is currently reviewing the


                                          19
<PAGE>
possibility of continuing the Company's listing on the Nasdaq Small Cap Market
System. There can be no assurance that the Company will in fact meet these
requirements in any future period. Nasdaq is currently reviewing the propriety
of continuing the Company's listing on the Nasdaq Small Cap Market System.
There can be no assurances that the Company will in fact meet these requirements
in this or any other future period.

     If the Company is otherwise unable to meet the Nasdaq SmallCap Market
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including placing restrictions on or
additional requirements for listing of its Common Stock or the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from the Nasdaq
SmallCap Market System, the Company will become subject to the Securities and
Exchange Commission's "penny stock" rules, and as a result, an investor will
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock.

     The "penny stock" rules under the Exchange Act impose additional sales
practice and market-making requirements on broker-dealers who sell and/or make a
market in such securities. For transactions covered by the penny stock rules, a
broker-dealer must make special suitability determinations for purchasers and
must have received the purchaser's written consent to the transaction prior to
sale. In addition, for any transaction involving a penny stock, unless exempt,
the rules require delivery prior to any transaction in a penny stock of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market and penny stocks. As a result, the Company's
delisting from the Nasdaq SmallCap Market System and its becoming subject to the
rules on penny stocks would negatively affect the ability or willingness of
broker-dealers to sell or make a market in the Company's securities and,
therefore, would severely and adversely affect the market liquidity for the
Company's Common Stock.

PRIOR LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.

     For the nine months ended September 30, 1998, the Company incurred a net 
loss in the amount of $2.4 million on net revenues of $9.4 million. The loss 
resulted primarily from (i) a loss from continuing operations of $1.5 million 
which includes a combined charge of a $750,000 impairment write-off and 
amortization of goodwill associated with the Company's acquisition of Voice 
Plus in February 1997, and a repayment premium of $135,000 associated with 
the repayment of $750,000 of promissory notes from Preferred Stock investors. 
(ii) losses associated with the discontinued operations of Advantis of 
$581,400, and (iii) a one-time charge of $368,600 associated with the disposal
of Advantis. Furthermore, future issuances of the Series A Convertible 
Preferred Stock that is convertible into shares of Common Stock at a 25% 
discount will be reflected as a preferred dividend and will result in an 
increase in the loss applicable to Common Stock in computing loss per share.

     The failure of the Company to produce positive operating results may affect
the future value of the Common Stock, may contribute to the Company losing its
eligibility for listing of the Common Stock on the Nasdaq SmallCap Market
System, may adversely affect the Company's ability to obtain debt or equity
financing on terms acceptable to the Company, and may prevent the Company from
completing future acquisitions.

VOLATILITY OF STOCK PRICES.

     The over-the-counter markets for securities such as the Common Stock
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and trends in the Company's industry and the investment
markets generally, as well as economic conditions and quarterly variations in
the Company's results of operations, may adversely affect the market price of
the Common Stock. In addition, there can be no assurance that the Company's
Common Stock will remain eligible for listing on the Nasdaq SmallCap Market
System.

FINANCING RISKS.

     The acquisition of complementary businesses although currently
de-emphasized, is still an element of the Company's business strategy. 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 as
interest and principal payments, thus reducing the resources available to


                                          20
<PAGE>
expand its existing businesses. Equity financing may be dilutive to 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
that, if available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing would have a
material adverse effect on the Company's acquisition strategy. Further, the
refusal of potential acquisition candidates to accept Common Stock in payment of
the Company's purchase price obligations, in whole or in part, could require the
Company to reduce or curtail its acquisition strategy. To the extent that
Common Stock is used as consideration in an acquisition transaction, such stock
issuance may be dilutive to the Company's existing stockholders. Even if the
Company is able to obtain financing needed for an acquisition, the terms of such
financing may involve considerable costs to the Company. In this regard, as of
December 31, 1998, 10,059 shares of Preferred Stock and accrued dividends were
converted into 901,160 shares of Common Stock at an average price per share of
about $0.90.

VPI'S STRATEGIC RELATIONSHIP WITH CENTIGRAM COMMUNICATIONS CORPORATION.

     VPI's business is based upon the integration of hardware and software and
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, or any other adverse change in the Company's distributor
relationship with Centigram, would adversely affect the Company's business for
an indeterminate period of time until new supplier relationships could be
established. In this regard, Centigram recently sold to its customer premises
equipment ("CPE") business to Mitel Corporation ("Mitel") and is now known as
Baypoint Innovations ("Baypoint"). The distributor agreement entered into with
Centigram may be canceled by either party upon ninety (90) days' notice and is
subject to termination in the event that the Company defaults on or is otherwise
in breach of various of its obligations under the agreement. Baypoint has
continued to distribute the CPE products and honor the VPI distribution
agreement. Any disruption to product supplied by Centigram or Baypoint would
have a significant adverse impact upon the Company's business for an
indeterminate period of time until new supplier relationships could be
established.

RELIANCE UPON COMPANY'S DISTRIBUTOR AND SUPPLIER RELATIONSHIPS; DEPENDENCE ON
SIGNIFICANT CUSTOMERS.

     VPI has distributor agreements with a number of equipment manufacturers in
addition to Centigram. In accordance with the terms of these 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 any exclusive distribution rights, and/or 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.

     For the fiscal year ended September 30, 1998, revenues from sales to two of
the Company's customers accounted for approximately 26% and 12% of the total net
revenues for the nine-month period. The loss of one or more significant
customers of the Company would have a material adverse effect upon the Company's
financial condition. In addition, while Infotel's business is diversified over
several business segments and customer groups, its systems and networking
business is characterized by very large contracts and projects directed at a
limited number of customers in any one period. The loss or rescheduling of one
or more such contracts would affect the timing of Infotel's revenues and cash
flow, and could result in a material adverse effect upon the Company's financial
condition.

COMPETITION IN VPI'S VOICE PROCESSING AND CUSTOMER PREMISES EQUIPMENT
BUSINESSES.


                                          21
<PAGE>
     The voice processing and customer premises equipment markets are highly
competitive and competition in this industry is expected to 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 operating 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
greater revenues than the Company, and, as a result, may encroach on the
Company's voice processing equipment and service markets. Additionally, in the
CPE 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 (now owned by Lucent).
Digital Sound Corporation, Active Voice Corporation, Applied Voice Technology,
Inc., Glenayre Technologies, Inc. and Comverse Technology, Inc., among others,
also compete with the Company in the service provider market. VPI's competitors
have better name recognition in the market, a larger installed base of customers
and greater financial, marketing and technical resources than the Company.

COMPETITION IN INFOTEL'S INFRASTRUCTURE COMMUNICATIONS EQUIPMENT BUSINESSES.

     Infotel competes against several large companies in Singapore that are
better capitalized. Although Infotel has in the past managed to compete
successfully against such larger companies on the basis of its engineering and
project management expertise; there can be no assurance that such expertise will
permit Infotel to compete effectively with such larger companies in the future.
Further, various large manufacturers have established their own branch offices
in Singapore and compete against Infotel.

RISKS IN INTEGRATING ACQUIRED COMPANIES.

     Acquisitions may involve a number of special risks, including adverse 
short-term effects on the Company's operating results, diversion of 
management's attention from the operations of the Company, 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. Successfully 
integrating 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 operations 
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. As 
discussed in previous sections, the acquisition of Voice Plus and Advantis 
have yielded operating results that were significantly lower than expected. 
Other acquisitions could generate results different from our expectations. 
Accordingly, no assurance can be given that the future performance of the 
Company's subsidiaries will be commensurate with the consideration paid to 
acquire such companies. If management fails to establish the needed controls 
and to manage growth effectively, the Company's operating results, cash flows 
and overall financial condition will be adversely affected.

RISKS INVOLVED IN CHANGES OF MANAGEMENT.

     Management changes often have a disruptive effect on businesses and can 
lead to the loss of key employees because of the uncertainty inherit in 
change. The loss of key employees could have a materially adverse effect on 
the Company's operations. Furthermore, no assurances can be given that the 
current changes in management of the Company will be adequate to reverse 
losses recorded in previous years, to return the Company to profitability or 
to meet future growth targets.

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.


                                          22
<PAGE>

YEAR 2000 DISCLOSURE

     The Company has developed an implementation plan to correct any internal
computer systems that could be affected by "Year 2000" issue. 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 middle of calendar year 1999. 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 in North America, 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.

     As for our Asian operations, the Company has only begun its review of
third-party products distributed by 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 system of Singapore would result in more or
less litigation exposure to the Company and its subsidiaries if there were
disputes between the end user of a product installed by Infotel, and the
manufacturer.

     The Company's internal computer systems for North American operations were
purchased this year from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant. As for Asian operations, the Company
acquired Infotel, a company organized under the laws of Singapore on June 22,
1998. The Company has since completed its review of the internal computer
systems of Infotel and is aware that Infotel's systems are not Year 2000
compliant; thus, a plan has been established to convert Infotel to the Company's
internal business system during fiscal 1999. The estimated cost of the new
business systems for all locations combined is $400,000 and was needed not only
because of Year 2000 compliance but also in order to maintain proper controls by
which to manage the Company.

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.
                                      PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE


                                          23
<PAGE>

     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 December 31, 1998. As indicated in the table and
accompanying footnotes, in January 1999, Esmond T. Goei resigned as CEO and
President, Messrs. Boyle, Das and Nemetz resigned as Directors, Douglas S. Zorn
was appointed Interim CEO and President and James S. Gillespie was reappointed
as a Director.

<TABLE>
<CAPTION>

                  NAME                                                AGE               POSITION
                  ----                                                ---               --------
<S>                                                                   <C>       <C>
Esmond T. Goei (resigned officer positions January 1999. . .          47        Chairman and Director

Douglas S. Zorn. . . . . . . . . . . . . . . . . . . . . . .          49        President, Chief Executive Officer, Chief Financial
                                                                                Officer, Treasurer, Secretary and Director

Linda V. Moore . . . . . . . . . . . . . . . . . . . . . . .          52        Vice President, General Counsel and Assistant
                                                                                Secretary

James S. Gillespie . . . . . . . . . . . . . . . . . . . . .          45        Former Vice President Sales and President of Voice
                                                                                Plus, Inc.;  appointed Director January 6, 1999

James Linkous. . . . . . . . . . . . . . . . . . . . . . . .          42        Sr. Vice President Sales, General Manager of Voice
                                                                                Plus, Inc.

James Han. . . . . . . . . . . . . . . . . . . . . . . . . .          49        General Manager, Infotel Technologies Pte Ltd

Gary L. Nemetz (resigned January 1999) . . . . . . . . . . .          46        Director

James H. Boyle (resigned January 1999) . . . . . . . . . . .          44        Director

Santanu Das (resigned January 1999). . . . . . . . . . . . .          54        Director

Thomas L. Lawrence . . . . . . . . . . . . . . . . . . . . .          62        Director
</TABLE>


     Esmond T. Goei. Mr. Goei served as President and Chief Executive 
Officer of the Company from its incorporation in October 1996 until his 
resignation on January 6, 1999. Mr. Goei continues to serve as Chairman of 
the Board and Director of the Company, but is expected to resign these 
positions promptly following filing of this report of Form 10-KSB. 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. 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 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. Mr. Goei currently serves as a 
director of Mayan Network Systems, a newly formed and privately financed 
early stage company in the high technology internet market.

     Douglas S. Zorn. Effective January 6, 1999 Mr. Zorn became Interim 
President and Chief Executive Officer to fill the vacancy created by Mr. 
Goei's resignation. Mr. Zorn had served as Executive Vice President, Chief 
Financial Officer, Treasurer, Secretary and a director of the Company since 
its incorporation in October 1996. Mr. Zorn's current titles are Interim 
President, CEO, CFO and Secretary. Mr. Zorn also had 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., including Operation Controller of the Biomation 
Division, a manufacturer of sophisticated logic test instruments. Mr. Zorn 
is a licensed certified public accountant.

     Linda V. Moore. Ms. Moore has served as Vice President, General Counsel
and Assistant Secretary of the Company since September 7, 1998. From 1989, until
she joined the Company, Ms. Moore served as General Counsel and Secretary for
Jabil Circuit, Inc., a printed circuit board assembly manufacturer. Ms. Moore
has also held positions with El Camino Resources, Ltd., Chrysler Systems
Leasing, Inc., Caterpillar Inc. and CMI Corporation.


                                          24
<PAGE>
     James S. Gillespie. Mr. Gillespie served as Vice President of Sales and 
a Director of the Company since its incorporation in 1996. He resigned his 
position as Vice president of Sales in April 1998, and resigned as a director 
of the Company on September 22, 1998; he was reappointed as a director on 
January 6, 1999. In addition, he currently serves as a consultant to the 
Company. Mr. Gillespie was the founder of VPI and has served as President 
from VPI's incorporation in 1987 until his resignation in April 1998. 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.

     James B. Linkous. Mr. Linkous has served as Sr.Vice President of Sales and
General Manager of VPI since April 1998. Mr. Linkous has worked for several key
telecommunications distributors, including most recently COM-AID/NEXUS
Integrated Solutions, where he was Vice President and General Manager. Linkous
helped position COM-AID as the largest independent NEC dealer in the Western
U.S. previously he was National and Major Accounts Manager for U.S. WEST
Communications. He also has extensive background in Call Center and CTI
applications, which are future target markets for NHancement Technologies Inc.

     James Han. Mr. Han is a founding member of Infotel and has served as
General Manager since the company started operation in 1984. Prior to joining
Infotel, he was with an Australian company, Associated Technical Services Pte.
Ltd. (ATS), from 1977 to 1984 and was the General Manager at the time of his
departure. ATS is a wholly owned subsidiary of Elders IXL, an Australian public
company. AST was involved in distribution and support of telecommunication
products, marine communication and navigational equipment and medical and
analytical instruments.

     Gary L. Nemetz. Mr. Nemetz became a director of the Company in February
1996, upon the consummation of the Company's IPO and served until his
resignation on January 6, 1999. 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 March 1995, to
June 1997, Mr. Nemetz served as a director of YES! Entertainment Corporation and
has served since May 1998. YES! Entertainment Corporation is listed on Nasdaq
NMS. Mr. Nemetz is a general partner of DCC Growth Fund.

     James H. Boyle. Mr. Boyle was appointed to the Company's Board of Directors
July 7, 1997, to fill a vacancy created by a resignation, was elected as a
director at the Company's 1997 annual meeting of stockholders and served until
his resignation on January 6, 1999. 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.

     Santanu Das. Dr. Das became a director of the Company at its 1997 annual
meeting of stockholders and served until his resignation on January 6, 1999.
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.

     Thomas J. Lawrence. Mr. Lawrence was appointed to the Company's Board of
Directors to fill a vacancy created by the resignation of James Gillespie, the
former owner of Voice Plus. Mr. Lawrence is Chairman and CEO of TJL, Inc., a
sales and marketing consulting company specializing in high technology. From
1970 to 1986, Mr. Lawrence served as the General Manager of the European
subsidiaries of Intel Corporation, Apple Computer, Valid Logic Systems and
Silicon Compilers. Mr. Lawrence has held various positions at Lockheed Missiles
and Space,


                                          25
<PAGE>
Stanford University and RCA Corporation. He also served on the European Boards
of Directors of Intel, Apple, Valid Logic and Option International and on the
United States Boards of Directors of Intel and Apple.

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 for the fiscal year ended September 30, 1998,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.

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 September 30, 1998 and December 31,
1997 and 1996 by (i) the Company's Chief Executive Officer and (ii) the three
other highly compensated executive officers of the Company (or its subsidiaries)
at September 30, 1998, who received compensation of at least $100,000 during the
fiscal year ended September 30, 1998 (collectively, the "Named Executive
Officers").

                              SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                             LONG-TERM
                                                             ANNUAL COMPENSATION                           COMPENSATION
                                                                                                              AWARDS
                                                                                                      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 . . . . . . . . . .       1998 (1)        $157,500      $     --          $9,700  (2)       $  --            --
Chairman of the Board,                   1997             163,750            --          38,000  (6)          --       100,000 (10)
  President and Chief                    1996 (3)         135,000       125,000              --  (4)          --
  Executive Officer

Douglas S. Zorn. . . . . . . . . .       1998 (1)        $112,500      $     --         $ 8,400  (2)       $  --            --
  Executive Vice President,              1997             150,000            --         $86,000  (7)          --       100,000 (10)
  Chief Financial Officer and            1996 (3)         135,000       125,000              --  (4)          --            --
  Secretary

James S. Gillespie (8) . . . .           1998 (13)        $93,700            --         $88,400 (14)
  Vice President of Sales and            1997             150,000            --         $230,00  (5)          --            --
  President of VPI                       1996             300,000       550,000      $1,003,130  (9)          --            --

James B. Linkous . . . . . . . . .       1998 (11)        $65,400      $ 36,000 (16)    $13,650 (12)          --       100,000 (15)
  Vice President of Sales and
  General Manager of VPI

</TABLE>
-----------------

(1)  Represents the nine-month period ended September 30, 1998.
(2)  Automobile allowance for the nine-month period ended September 30, 1998.
(3)  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.
(4)  Perquisites do not exceed the lesser of $50,000 or 10% of the Named
     Executive Officer's total annual salary and bonus.
(5)  Represents sales commissions paid to Mr. Gillespie.
(6)  Mr. Goei was reimbursed by the Company in fiscal 1997 $25,000 for previous
     years vacation accrued but not taken and automobile expenses.


                                          26
<PAGE>
(7)  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.
(8)  Data reflects compensation paid by VPI for 1995, 1996 and January 1997.
     Thereafter, compensation was paid by the Company.
(9)  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.
(10) 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.
(11) Represents the period from Mr. Linkous hire date April 18, 1998 through
     September 30, 1998.
(12) Represents commissions of $10,900 and automobile allowance of $2,750.
(13) Represents the period January 1, 1998 through his last date of employment
     April 16, 1998.
(14) Represents accrued vacation pay of $39,500, consulting fees of $44,700
     accrued for the period April 16, 1998 through September 30, 1998 and
     automobile allowance of $4,200.
(15) These options were granted on July 2, 1998 under the Company's Equity
     Incentive Plan ("Plan").  The options become exercisable at  the rate of
     1/4 after one year and then 1/36 per month  over 36 months.
(16) Represents signing bonus repayable to the Company if Mr. Linkous leaves the
     Company within 1 year.

OPTION GRANTS IN CALENDAR 1998

     The following option grants were made to the Named Executive Officers
during the fiscal year ended September 30, 1998:

<TABLE>
<CAPTION>
                                                      OPTION GRANTS IN LAST FISCAL YEAR
                                                             (INDIVIDUAL GRANTS)

                                            Number of     Percent of Total
                                            Securities        Options
                                            Underlying       Granted to
                                             Options        Employees in    Exercise Price      Expiration
            Name                            Granted (1)      Fiscal Year        ($/Shr) (2)         Date
--------------------------------------     ------------   --------------    ---------------    -----------
<S>                                         <C>            <C>              <C>                 <C>
James B. Linkous, VP Sales and General        100,000           38.9%       $2.06/share         7/2/2008
Manager of VPI

</TABLE>


(1)  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 Market System.
(2)  These options were granted on July 2, 1998 under the Company's Equity
     Incentive Plan ("Plan"). The options generally expire in ten years,
     become exercisable at the rate of 1/4 after one year and then 1/36 per 
     month over 36 months.


     The following table sets forth certain information regarding option
exercises during the 9 month period ended September 30, 1998 and the number of
shares covered by both exercisable and unexercisable stock options as of
September 30, 1998 for each of the Named Executive Officers:

<TABLE>
<CAPTION>
            AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

                                                         Number of Securities
                              Shares                     Underlying Unexercised         Value of Unexercised
                             acquired                           Options at             In-the-Money Options at
                                on          Value          September 30, 1998               September 30, 1998
                                                       ---------------------------     ---------------------------
      Name                   Exercise     Realized     Exercisable   Unexercisable     Exercisable   Unexercisable
-----------------           ---------     ---------    -----------   -------------     -----------   -------------
<S>                          <C>          <C>          <C>           <C>               <C>           <C>
Esmond T. Goei                 --           --           218,750        50,000          --              --
Douglas S. Zorn                --           --           190,625        50,000          --              --
James S. Gillespie             --           --              --            --            --              --
James B. Linkous               --           --              --         100,000          --              --

</TABLE>


                                          27
<PAGE>
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.  Prior to November
1998, non-employee directors were 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 were 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 were each entitled to be paid $12,000 per year in
addition to compensation for Board of Director meetings. Effective November
1998, non-employee directors no longer receive fees for attendance at board
meetings requiring personal attendance, telephonic board meetings or committee
meetings. In addition, the non-employee director who chairs the Board's
compensation or audit committee will not receive additional compensation for
either of these positions.

     On October 30, 1998, the Company granted to Thomas Lawrence, in connection
with his appointment to the Board of Directors, a Non Statutory Option  to
purchase 20,000 shares of Common Stock at a price per share of $1.15625, one
quarter of which vests on each of the four succeeding anniversary dates of the
grant.   As of  December 31, 1998, none of Messrs. Nemetz, Boyle or Das had
exercised any of their options.  These former Board members have until March 6,
1999 to exercise their vested options. As of December 31, 1998, none of Mr.
Lawrence'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 2,000 shares of Common Stock, which will vest one-third on
each of the first, second and third anniversaries of the date of grant. Messrs.
Boyle, Das and Nemetz who resigned as directors in January 1999, did not receive
these grants.

EMPLOYMENT AGREEMENTS

     Prior to recent changes in management, the Company had 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. In January 1999, Mr. Goei resigned 
his officer positions and Mr. Zorn was appointed Interim CEO and President.  
Each officer's base salary under such agreements was adjustable from time to 
time by mutual agreement between each such officer and the Board of 
Directors. The base salary for calendar year 1998 of Mr. Goei  was $210,000 
and the base salary of Mr. Zorn in 1998 was $150,000.  The agreements 
provided, subject to their terms, for an annual bonus to be paid to each 
officer pursuant to a written bonus plan to be approved by the Board of 
Directors.  The agreements also provide that each officer was entitled to 
reasonable expense reimbursements, four weeks paid vacation per year and 
participation in any of the Company's benefit and deferred compensation 
plans.  In fiscal 1998, Mr. Goei and Mr. Zorn received a $1,100 monthly 
automobile allowance. 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. Mr. Goei's Separation 
Agreement supercedes his Employment Agreement.

     On January 7, 1999, Mr. Goei resigned his position as President and Chief
Executive Officer of the Company pursuant to a  Separation  Agreement which
modified his Employment Agreement. The Agreement provides that Mr. Goei will
receive 6 1/2 months' severance pay and payment for all accrued vacation time.
He will remain as an employee of the Company for a period of 3 months during
which time he will be available to advise and counsel the Company. During this
period of employment he will continue to receive all benefits for which he was
eligible as an officer of the Company. The Agreement also contains provisions 
for confidentiality, covenants not to compete, to solicit customers or hire
employees for a period of 2 years from Mr. Goei's resignation.

     The Company previously had a three-year employment agreement with James S.
Gillespie, former Vice President of Sales of the Company and President of VPI.
Mr. Gillespie's agreement provided 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
provided that Mr. Gillespie was 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 contained provisions for


                                          28
<PAGE>
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 provided that in the event of 
termination without cause or a material breach by the Company, Mr. Gillespie 
would 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 would be 
accelerated and immediately become due and payable.  Mr. Gillespie has 
reached verbal agreement with the Company to terminate his employment and to 
provide consulting services to the Company. Mr. Gillespie no longer has the 
rights afforded him under his previous employment agreement. Instead, Mr. 
Gillespie's rights are now governed by the terms of the consulting agreement 
which provides for annual payments to Mr. Gillespie of $115,000. 
Additionally, the agreement also contains provisions for confidentiality, 
convenants not to compete, to solicit customers or hire employees for two 
years after the expiration of this consulting agreement.

     VPI has a two-year employment agreement with Bradley J. Eickman, former
Director of Operations who has since transferred into a sales position for VPI.
This agreement will expire in March, 1999. This employment agreement provides
for a base salary of $65,000, sales commissions payable pursuant to an annual
sales manager compensation plan and performance-based bonus payments. The
agreement also provides 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 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 Company granted to
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
grant date and the remaining 50% of which will vest on the second anniversary of
the date of grant.

     VPI has a two-year employment agreement with Diane E. Nowak, former Vice
President of Sales, Western Region.  This agreement will expire in March, 1999.
This employment agreement provides for a base salary of $65,000, sales
commissions payable pursuant to an annual sales manager compensation plan and
performance-based bonus payments.  The agreement also provides 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 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.  Ms. Nowak's employment with VPI was terminated
September 18, 1998 however, VPI will continue to pay Ms. Nowak through March,
1999 according to the terms of her employment agreement.

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 December 30, 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. Subsequent to the end
of the Company's fiscal year ended September 30, 1998, Messrs. Boyle, Das and
Nemetz resigned as directors of the Company and Mr. Gillespie was reappointed to
serve as a director of the Company. Mr. Lawrence, currently a director of the
Company, was appointed as a director on October 30, 1998.


<TABLE>
<CAPTION>
                                                  COMMON STOCK                           PREFERRED STOCK
                                       ------------------------------------     ---------------------------------
                                       BENEFICIALLY           OWNERSHIP (1)     BENEFICIALLY        OWNERSHIP (1)
   NAMES AND ADDRESSES                   OWNED (1)                %                OWNED (1)            %
   -------------------                 ------------           -------------     ------------        -------------
<S>                                    <C>                    <C>               <C>                 <C>
James S. Gillespie
198 Country Club Drive
Incline Village, Nevada 89451           815,000 (2)             13.1%            --                  --

Esmond T. Goei
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California  94538              427,070 (3)               6.6%            --                 --

Douglas S. Zorn
c/o NHancement Technologies Inc.
39420 Liberty Street, Suite 250
Fremont, California  94538              405,325 (4)               6.3%           --                  --


                                       29
<PAGE>
Gary L. Nemetz
c/o Admiral Capital Corporation
2420 Sand Hill Road, Suite 101
Menlo Park, California 94025            142,725 (5)               2.3%           --                  --

Santanu Das
14 Hunter Ridge Road
Monroe, Connecticut 06468                38,593 (6)                  *           --                  --

James H. Boyle
4564 Daffodil Trail
Plano, TX 75093                           5,000 (7)                  *           --                  --

Thomas J. Lawrence
505 Cypress Point Dr.
Mountain View, CA 94043                       --                     *           --                  --

The Endeavour Capital Fund S.A.
c/o Endeavour Management Inc.
14/14 Divrei Chaim St.
Jerusalem 94479                         469,490 (8)               6.2%          2,441              100.0%

AMRO INTERNATIONAL S.A.
50 ULTRA FINANCE
Gross Munster Platz 26
Zurich LH 8022
Switzerland                             401,734 (9)               6.5%           --                  --

Directors and executive officers
   as a group (10 persons)            1,838,518(10)              26.6%          2,441               10.0%
                                      ----------                 -----          ------              -----
                                      ----------                 -----          ------              -----

</TABLE>
--------------------------------

-- Less than 1%

(1)  Based on 5,808,682 shares of Common Stock and 2,441 shares of Preferred
     Stock issued and outstanding as of December 31, 1998

(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 168,750 shares of Common Stock at 
     an exercise price of $3.20 per share, 63,900 shares of Common Stock at 
     $3.875 per share 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 140,625 shares of Common Stock at 
     an exercise price of $3.20 per share, 63,900 shares of Common Stock at 
     $3.875 per share and warrants to purchase 61,375 shares of Common Stock.

(5)  Includes 46,025 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 16,875 shares at an exercise price of $4.00 per share, 3,125 
     shares at $3.50 per share and warrants to purchase 55,000 shares of 
     Common Stock.

(6)  Includes options that are presently exercisable or that will become
     exercisable within 60 days to purchase 5,000 shares of Common Stock at an
     exercise price of $3.5625 per share and a warrant to purchase 26,875 
     shares of Common Stock.

(7)  Represents options that are presently exercisable or that will become
     exercisable within 60 days to purchase 5,000 shares of Common Stock at an
     exercise price of $3.50 per share.

(8)  Includes 382,965 shares of Common Stock received upon conversion of 
     Preferred Stock and 357,559 shares of Common Stock receivable upon 
     conversion of Preferred Stock (including accrued dividends) held by the 
     Endeavour Capital Fund S.A. assuming conversion as of December 31, 1998.

(9)  Represents the number of shares of Common Stock received upon conversion of
     Preferred Stock (including accrued dividends) held by AMRO INTERNATIONAL
     S.A.

(10) Includes options that are presently exercisable or that will become
     exercisable within 60 days to purchase 467,178 shares of Common Stock and
     warrants to purchase 222,269 shares of Common Stock.


                                          30
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Loans to Employees

     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 on April 18, 1999.  As of September 30, 1998, principal and
unpaid interest totaled approximately $66,100. According to the terms of Mr.
Goei's separation agreement, the amount Mr. Goei owed on the note will be offset
against accrued moving and relocation expenses that the Company owed to Mr.
Goei.

     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 September 30, 1998, the Company had no further involvement with
this loan arrangement as the disposal of Advantis had been completed prior to 
the end of September 1998.

     Loans to Company

     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 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
September 30, 1998, Mr. Gillespie was owed a total of $187,500 on these notes.
See Item 10, "Employment Agreements."  Except for 150,000 shares which were
registered under an S-3 Registration Statement declared effective by the SEC on
June ___, 1998,  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. Regardless of the lock-up agreement and the
shares registered on Form S-3, Mr. Gillespie is an affiliate of the Company and,
as such, is subject to various restrictions  on any transfers of his shares.

     The Company entered into a bridge loan with the holders of the Series A
Convertible Preferred Stock (the "Preferred Stockholders") and certain
management stockholders. NHancement Technologies Inc. used the funds in the
aggregate amount of $1,400,000 to complete the acquisition of Infotel. Interest
was payable on the promissory notes at a rate of 10% per annum. Funds loaned to
the Company by the Preferred Stockholders totaled $750,000. The notes payable to
the Preferred Stockholders provided for repayment on the earlier of the closing
of the next tranche of the Company's Preferred Stock in accordance with the
terms of the Securities Purchase Agreement, as amended, or 90 days from the date
of issuance.  The Company amended the agreement in September of 1998


                                          31
<PAGE>
limiting further dilutive issuances under the financing agreement, except by
mutual consent of the parties.   Additionally, the notes payable to the
preferred Stockholders, which were originally to be applied against the purchase
price of additional Preferred Stock available for purchase under the Securities
Purchase Agreement, subject to receipt by the Company of certain stockholder
approvals, and all accrued interest and a $135,000 premium, were on September
30, 1998.  Management loans of $650,000 were repaid with interest in November,
1998.

     Other Related Party Transactions

     At various times in 1997 and 1998, Advantis purchased inventory from
certain companies whose directors were also stockholders of Advantis. At
September 30, 1998, the Company had no further involvement with these
arrangements as the disposal of Advantis was completed prior to the end of
September 1998.

     The Company's former subsidiary, Advantis, 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. At September 30, 1998, the
Company had no further involvement with these arrangements as the disposal of
Advantis was completed prior to the end of September 1998.

     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, 
the terms of certain of the Company's employment arrangements and the terms of 
Mr. Goei's Separation Agreement.

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
    --------                          ----------------------
<S>         <C>   <C>
     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. (8)

     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 (8)

     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. (8)

     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 (8)


                                          32
<PAGE>

    EXHIBIT
     NUMBER                           DESCRIPTION OF EXHIBIT
    --------                          ----------------------
<S>         <C>   <C>

     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)

     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-Registered Trademark- Service Contract (2)

     10.18  --   Authorized U.S. Distributor Agreement, dated April 16, 1996,
                 between Centigram Communications Corporation and VPI (2)

     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 S. 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 (8)

     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. (9)

     10.30  --   Form of Escrow Instructions related to Securities Purchase
                 Agreement, dated as of April 13, 1998. (8)


                                          33
<PAGE>

    EXHIBIT
     NUMBER                           DESCRIPTION OF EXHIBIT
    --------                          ----------------------
<S>         <C>   <C>
     10.31  --   Form of Reseller Agreement between Interactive Intelligence
                 Inc. and the Company dated July 8, 1998.

     10.32  --   Form of Associate Agreement between NEC, Inc. and the Company
                 dated May 26, 1998.

     10.33  --   Form of Loan and Security Agreement between AEROFUND FINANCIAL
                 and the Company dated October 9, 1998.

     10.34  --   Form of Guaranty from Lee Giam Teik, Man Yiew Ming and Ng Kok
                 Wah dated September 30, 1998.

     10.35  --   Letter Agreement between Lee Giam Teik, Man Yiew Ming and Ng
                 Kok Wah and the Company dated September 30, 1998.

     10.36       Agreement relating to the sale and purchase of 500,000
                 ordinary shares in the Capital of Infotel Technologies (Pte)
                 Ltd ("Infotel"), dated as of January 19, 1998, by and between
                 the Company and the stockholders of Infotel (the "SALE
                 AGREEMENT"). (10)

     10.37  --   Letter Agreement amending the Sale Agreement, dated as of
                 April 2, 1998, by and between the Company and the stockholders
                 of Infotel ("SUPPLEMENT NO. 1"). (11)

     10.38  --   Form of letter agreement amending the Sale Agreement, as
                 amended by Supplement No. 1, dated as of April 22, 1998, by
                 and between the Company and the stockholders of Infotel
                 ("SUPPLEMENT NO. 2"). (12)

     10.39  --   Letter agreement amending the Sale Agreement, as amended by
                 Supplement No. 1 and Supplement No. 2, dated as of June 22,
                 1998, by and between the Company and stockholders of Infotel.
                 (13)

     10.40  --   Promissory Note, dated as of June 15, 1998, in the original
                 principal amount of $375,000, payable by the Company to AMRO
                 INTERNATIONAL S.A. ("AMRO"). (14)

     10.41  --   Promissory Note, dated as of June 15, 1998, in the original
                 principal amount of $375,000, payable by the Company to
                 Endeavour Capital Fund S.A. ("ENDEAVOUR"). (15)

     10.42  --   Letter agreement, dated as of June 15, 1998, amending
                 Securities Purchase Agreement, dated as of April 13, 1998, by
                 and among the Company, AMRO and Endeavour. (16)

     10.43  --   Letter Agreement, dated as of June 12, 1998, by and among the
                 Company, Esmond T. Goei, Douglas S. Zorn and James S.
                 Gillespie. (17)

     10.44  --   Promissory Note, dated as of June 12, 1998, in the original
                 principal amount of $125,000 payable by the Company to Esmond
                 T. Goei. (18)

     10.45  --   Promissory Note, dated as of June 12, 1998, in the original
                 principal amount of $225,000 payable by the Company to Douglas
                 S. Zorn. (19)

     10.46  --   Promissory Note, dated as of June 12, 1998, in the original
                 principal amount of $300,000 payable by the Company to James
                 S. Gillespie. (20)

     21     --   Subsidiaries

     24     --   Power of Attorney - included on signature page(s) to this
                 Report on Form 10-KSB.

     27.1   --   Financial Data Schedule for the nine months ended September
                 30, 1998 and 1997.

     27.2   --   Financial Data Schedule for the year ended December 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.

(8)  Incorporated by reference to the document bearing the same exhibit number
on registrant's Form 10-KSB, SEC file number 333-15563 as filed with the
Securities and Exchange Commission on April 15, 1998.


                                          34
<PAGE>
(9)  Incorporated by reference to document 2.1 contained in the Company's form
10-KSB, SEC File No. 0-21999, as filed with the Securities and Exchange
Commission on April 15, 1998.

(10) Incorporated by reference to Exhibit 2.1 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.

(11) Incorporated by reference to Exhibit 2.2 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.

(12) Incorporated by reference to Exhibit 2.3 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.

(13) Incorporated by reference to Exhibit 2.4 contained in the company's
Registration Statement on Form S-3 (Commission File No. 333-52709), as initially
filed with the Securities and Exchange Commission on May 14, 1998.

(14) Incorporated by reference to Exhibit 10.1 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.

(15) Incorporated by reference to Exhibit 10.2 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.

(16) Incorporated by reference to Exhibit 10.3 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.

(17) Incorporated by reference to Exhibit 10.4 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.

(18) Incorporated by reference to Exhibit 10.5 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.

(19) Incorporated by reference to Exhibit 10.6 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.

(20) Incorporated by reference to Exhibit 10.7 as contained in the Company's
Form S-8, as filed with the Securities and Exchange Commission on July 7, 1998.




(b)  Reports on Form 8-K

     None

                                          35
<PAGE>

                                     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/ Douglas S. Zorn
                                           ------------------------------------
                                        Douglas S. Zorn, President, Chief
                                        Executive Officer, Chief Financial
                                        Officer, Secretary and Director

                                 POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Esmond T. Goei, Douglas S. Zorn and Linda V.
Moore 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
----------------------------      ------------------------------------    -------------
<S>                               <C>                                     <C>
/s/ Esmond T. Goei
--------------------------        Chairman of the Board and Director      Dec. 12, 1998
Esmond T. Goei                    (Former Principal Executive Officer)

/s/ Douglas S. Zorn
--------------------------        President, Chief Executive Officer,     Dec. 12, 1998
Douglas S. Zorn                   Chief Financial Officer, Secretary
                                  and Director (Principal Executive,
                                  Financial and Accounting Officer)

/s/ James S. Gillespie
--------------------------        Director                                Dec. 12, 1998
James S. Gillespie                

/s/ Thomas J. Lawrence
--------------------------        Director                                Dec. 12, 1998
Thomas J. Lawrence                

</TABLE>


                                          36
<PAGE>

                                                    Nhancement Technologies Inc.
                                                                And Subsidiaries








                                              Consolidated Financial Statements
          NINE MONTHS ENDED SEPTEMBER 30, 1998 AND YEAR ENDED DECEMBER 31, 1997


                                         F-1
<PAGE>



                                                    Nhancement Technologies Inc.
                                                                And Subsidiaries

                                                               Table of Contents

<TABLE>
<S>                                                                 <C>
Report of Independent Certified Public Accountants                          F-3

Consolidated Financial Statements

  Consolidated Balance Sheet as of September 30, 1998                 F-4 - F-5

  Consolidated Statements of Operations for the nine months                 F-6
  ended September 30, 1998 and 1997 (unaudited) and year
  ended December 31, 1997

  Consolidated Statements of Stockholders' Equity (Deficit)                 F-7
  for the nine months ended September 30, 1998 and year ended
  December 31, 1997

  Consolidated Statements of Cash Flows for the nine months                 F-8
  ended September 30, 1998 and 1997 (unaudited) and year ended
  December 31, 1997

  Summary of Accounting Policies                                     F-9 - F-14

  Notes to the Consolidated Financial Statements                    F-15 - F-27
</TABLE>


                                         F-2
<PAGE>


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 September 30, 1998 and the related 
consolidated statements of operations, stockholders' equity (deficit), and 
cash flows for the year ended December 31, 1997, and the nine months ended 
September 30, 1998. 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 
did not audit the financial statements of Infotel Technologies (Pte) Ltd, a 
wholly-owned subsidiary, as of September 30, 1998 and from June 22, 1998
(date of its acquisition) through September 30, 1998, which statements reflect 
total assets and revenues constituting 42 percent and 32 percent, 
respectively, of the related consolidated totals. Those statements were 
audited by other auditors whose report has been furnished to us, and our 
opinion, insofar as it relates to the amounts included for Infotel 
Technologies (Pte) Ltd, is based solely on the report of other auditors.

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 9 to the consolidated financial statements, a 
significant subsidiary of the Company purchases substantially all of its 
inventory from two vendors.


In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of NHancement Technologies Inc. and
Subsidiaries at September 30, 1998 and the results of their operations and their
cash flows for the year ended December 31, 1997 and the nine months ended
September 30, 1998 in conformity with generally accepted accounting principles.


                                                                BDO Seidman, LLP

San Francisco, California
December 8, 1998, except for Note 17 which is as of January 6, 1999


                                         F-3
<PAGE>


                                                      Consolidated Balance Sheet

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30, 1998
--------------------------------------------------------------------------------
<S>                                                           <C>
ASSETS

CURRENT

  Cash and cash equivalents (Note 9)                                $ 1,677,200
  Restricted cash                                                       369,000
  Accounts receivable, less allowance for doubtful
  accounts of $246,000 (Note 9)                                       4,579,300
  Inventory                                                           1,341,100
  Current portion of notes receivable from related
  parties (Notes 3 and 8)                                               171,400
  Income tax receivable                                                 140,600
  Prepaid expenses and other                                            242,100
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                  8,520,700
--------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT
  Office equipment                                                      688,400
  Computers and software                                                756,500
  Automobiles                                                           125,100
  Furniture and fixtures                                                340,300
--------------------------------------------------------------------------------
                                                                      1,910,300
Less accumulated depreciation                                           664,900
--------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET                                           1,245,400
--------------------------------------------------------------------------------

  Excess of cost over net assets acquired of
  Voice Plus, Inc. (Note 2)                                             750,000
  Excess of cost over net assets acquired of Infotel,
  net of accumulated amortization of $47,600 (Note 2)                 1,880,500
  Long-term portion of notes receivable from related parties
  (Notes 3 and 8)                                                       227,900
  Other assets                                                          246,800
--------------------------------------------------------------------------------

                                                                    $12,871,300
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>


                SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                         F-4
<PAGE>


                                                      Consolidated Balance Sheet

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30, 1998
--------------------------------------------------------------------------------
<S>                                                           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT

  Due to factor (Note 4)                                           $    231,000
  Accounts payable                                                    1,888,400
  Accrued liabilities                                                 1,451,400
  Payroll related liabilities                                           228,500
  Deferred revenue                                                    1,735,300
  Income tax payable                                                    332,000
  Notes payable to stockholders (Notes 4 and 8)                       2,247,500
  Capital lease obligations, current portion (Note 4)                    45,000
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                             8,159,100


CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION (NOTE 4)               68,300
--------------------------------------------------------------------------------

TOTAL LIABILITIES                                                     8,227,400
--------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTES 2, 7, 9, AND 11)

STOCKHOLDERS' EQUITY (NOTES 5 AND 6)
  Convertible preferred stock, $0.01 par value, 2,000,000
  shares authorized, 3,200 shares issued and outstanding                252,200
  Common stock, $0.01 par value, 20,000,000 shares authorized,
  5,579,235 shares issued and outstanding                                55,800
  Additional paid-in capital                                         21,020,900
  Accumulated deficit                                               (16,510,100)
  Cumulative translation loss                                          (174,900)
--------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY                                            4,643,900
--------------------------------------------------------------------------------

                                                                   $ 12,871,300
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>


                SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                         F-5
<PAGE>


                                           Consolidated Statements of Operations

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                       YEAR ENDED         NINE MONTHS ENDED
                                                       DECEMBER 31,         SEPTEMBER 30,
                                                          1997           1997           1998
                                                                      (UNAUDITED)
------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>           <C>
NET REVENUES (NOTE 9)                                  $8,737,800     $6,720,800     $9,442,200

Cost of sales                                           4,967,300      3,513,400      5,863,300
------------------------------------------------------------------------------------------------

GROSS PROFIT                                            3,770,500      3,207,400      3,578,900
------------------------------------------------------------------------------------------------

OPERATING EXPENSES
  Selling, general and administrative                   3,778,900      2,507,100      4,211,500
  Amortization of excess of cost over net assets
  acquired, including impairment loss of $4,084,300
  in 1997 and $525,000 in 1998 (Note 2)                 4,644,900        409,800        797,600
------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES                                8,423,800      2,916,900      5,009,100
------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM OPERATIONS                          (4,653,300)       290,500     (1,430,200)
OTHER INCOME (EXPENSE)
  Interest income                                         136,900        103,300         76,900
  Interest expense                                        (77,900)       (71,300)      (138,900)
  Other                                                        --             --         39,800
------------------------------------------------------------------------------------------------
Total other income (expense)                               59,000         32,000        (22,200)
Income (loss) from continuing operations before
  income taxes                                         (4,594,300)       322,500     (1,452,400)
Income taxes (Note 10)                                         --         92,500         70,800
------------------------------------------------------------------------------------------------
Income (loss) from continuing operations               (4,594,300)       230,000     (1,523,200)
------------------------------------------------------------------------------------------------
Discontinued operations: (Note 15)
  Income (loss) from operations of Advantis                 3,100             --       (581,400)
  Loss from disposal of Advantis                               --             --       (368,600)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                     ($4,591,200)    $  230,000    ($2,473,200)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Preferred dividends                                            --             --       (435,700)
------------------------------------------------------------------------------------------------
Income (loss) available to common stockholders        ($4,591,200)    $  230,000    ($2,908,900)
------------------------------------------------------------------------------------------------
Basic and diluted income (loss) from continuing
  operations per common share                              ($1.18)         $0.06         ($0.41)
Basic and diluted income (loss) from discontinued
  operations per common share                                  --             --         ($0.20)
Basic and diluted net income (loss) per common
  share (Note 13)                                          ($1.18)         $0.06         ($0.61)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>



                SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                         F-6

<PAGE>


                       Consolidated Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                        CONVERTIBLE
                                      PREFERRED STOCK        COMMON STOCK      ADDITIONAL                   CUMULATIVE
                                         PAR VALUE             PAR VALUE         PAID-IN     ACCUMULATED    TRANSLATION
                                     SHARES     AMOUNT     SHARES     AMOUNT     CAPITAL       DEFICIT      GAIN (LOSS)     TOTAL
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1997                 --         --      612,800   $6,100   $5,363,900   ($9,010,000)            $-- ($3,640,000)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>         <C>        <C>       <C>         <C>              <C>         <C>
Common stock issued for Voice            --         --    1,312,500   13,100    4,666,900             --             --   4,680,000
Plus, Inc. acquisition (Note 2)

Sale of common stock in an               --         --    2,045,000   20,500    6,499,300             --             --   6,519,800
initial public offering, net of
stock issuance costs of
$1,660,200 (Note 12)

Conversion of debt and accrued           --         --      258,200    2,600    1,030,000             --             --   1,032,600
interest into common stock
(Note 12)

Issuance of common stock                 --         --           --       --        3,800             --             --       3,800
options for payment of outside
service fees

Common stock issued for                  --         --      208,500    2,100      456,700             --             --     458,800
Advantis acquisition (Note 2)

Comprehensive income (loss):
Net loss                                 --                               --           --    (4,591,200)             --  (4,591,200)
Cumulative translation gain              --         --           --       --           --             --         11,300      11,300
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss)        --         --           --       --           --    (4,591,200)         11,300  (4,579,900)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997               --         --    4,437,000   44,400   18,020,600   (13,601,200)         11,300   4,475,100
------------------------------------------------------------------------------------------------------------------------------------

Issuance of Preferred Stock, net     12,500    984,700           --       --           --             --             --     984,700
of stock issuance costs of
$265,300 (Note 5)

Deemed dividend on preferred
stock convertible at a discount          --         --           --       --      416,700      (416,700)             --          --
(Note 5)

Dividends on preferred stock             --         --        8,400      100       11,400       (11,500)             --          --
converted into common shares
(Note 5)

Dividends payable on preferred
stock (Note 5)                           --         --           --       --           --        (7,500)             --      (7,500)

Preferred shares converted into      (9,300)  (732,500)     700,835    7,000       725,500            --             --          --
common stock (Note 5)

Issuance of common stock                 --         --           --       --        10,600            --             --      10,600
options for payment of outside
service fees

Common stock issued for                  --         --      433,000    4,300     1,836,100            --             --   1,840,400
Infotel acquisition (Note 2)

Comprehensive income (loss):
Net loss                                 --         --           --       --            --   (2,473,200)             --  (2,473,200)
Cumulative translation loss              --         --           --       --            --            --      (186,200)    (186,200)
------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss:                --         --           --       --            --   (2,473,200)      (186,200)  (2,659,400)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998           3,200   $252,200    5,579,235  $55,800   $21,020,900 ($16,510,100)     ($174,900)  $4,643,900
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                 SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-7

<PAGE>

                                           Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                               YEAR ENDED                NINE MONTHS ENDED
                                                                               DECEMBER 31,                SEPTEMBER 30,
                                                                                   1997               1997                1998
                                                                                                  (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
 CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                            <C>                <C>                 <C>
Net income (loss)                                                             $(4,591,200)        $230,000           $(2,473,200)
Adjustments to reconcile net (income) loss to net cash used in operating                                                         
activities:                                                                                                                      
  Depreciation and other amortization                                             159,500          108,800               296,000  
  Amortization of excess cost over net assets                                                                                    
  acquired, including impairment loss                                           4,649,100          409,800               797,600  
  Compensation related to grant of stock options and common stock                   3,800            3,800                10,600  
  Other                                                                             8,800               --               (21,200) 
  Loss on sale of Advantis, net of cash of $1,000                                      --               --               367,600  
Changes in operating assets and liabilities:                                                                                     
  Accounts receivable                                                            (265,600)          64,400               (95,400) 
  Income tax receivable                                                          (172,000)              --                31,400  
  Inventory                                                                       653,900          539,100               666,900  
  Prepaid expense and other                                                       (89,300)        (186,000)              (90,100) 
  Other assets                                                                    (48,100)         (36,100)              (89,500) 
  Income tax payable                                                                   --               --                67,800  
  Accounts payable and other current liabilities                               (3,186,200)      (3,136,700)               50,200 
----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES                                          (2,877,300)      (2,002,900)             (481,300)
----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Restricted cash                                                                       --               --               (369,000)
 Deferred acquisition costs                                                      (188,000)         (52,400)                   --
 Advantis acquisition costs                                                            --               --               (196,400)
 Cash acquired from VPI acquisition                                               851,900          851,900                    --
 Cash purchase price of Infotel, net of cash
 acquired of $2,326,000                                                                --               --                (30,300)
 Note receivable from Advantis, preacquisition                                         --         (306,200)                    --
 Note receivable from related party                                               (63,000)         (61,900)                    --
 Proceeds from sale of fixed assets                                                    --               --                 16,200
 Purchases of property and equipment                                             (252,500)        (181,800)              (501,200)
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                               348,400          249,600             (1,080,700)
----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from initial public offering of common
 stock, net of offering costs                                                   6,519,800        6,519,800                    --
 Net borrowing under line of credit                                                    --               --                263,200
 Capital leases                                                                        --               --                113,200
 Proceeds from notes payable                                                           --               --              1,400,000
 Deferred stock offering costs                                                    376,200          376,200                     --
 Principal payment on notes payable                                            (1,814,000)      (1,814,000)              (837,800)
 Principal payment on long-term debt due to stockholders                       (1,250,000)      (1,062,500)                    --
 Proceeds from sale of preferred stock, net of                                         --               --                984,700
 offering costs
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                       3,832,000        4,019,500              1,923,300
----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                                --               --                (47,300)
Net increase in cash and cash equivalents                                       1,303,100        2,266,200                314,000
Cash and cash equivalents, beginning of period                                     60,100           60,100              1,363,200
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                       $1,363,200       $2,326,300             $1,677,200
----------------------------------------------------------------------------------------------------------------------------------
Supplemental data:
Interest paid                                                                    $267,700         $200,700               $119,900
Income taxes paid                                                                $191,200         $191,200                    $--
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                 SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-8
<PAGE>

                                                  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 (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, 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 became a wholly-owned subsidiary of
NHancement. Advantis is a telecommunications systems integrator. The operations
of the entity were 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.

On September 24, 1998, management made a decision to dispose of Advantis. On
September 30, 1998, the Company and three of the former shareholders of Advantis
entered into a guarantee agreement pursuant to which each such shareholder
agreed to guarantee repayment of the outstanding loan (Note 2) made by the
Company to Advantis (together with all the interest accrued to date) pursuant to
that certain loan agreement and related promissory notes dated July 7, 1997. In
exchange, the Company delivered all of the Advantis shares and transferred its
ownership interest in Advantis to the original shareholders in full and final
settlement of any and all damages the Company may have suffered as a result of
the breaches of certain representations and warranties made by such shareholders
pursuant to that certain agreement for the sale of shares in Advantis dated June
20, 1997.

On June 22, 1998, NHancement purchased one hundred percent (100%) of the
outstanding shares of Infotel Technologies (Pte) Ltd ("Infotel"). As a result of
the acquisition, Infotel became a wholly-owned subsidiary of
NHancement. The operations of the entity are being conducted under the name of 
"Infotel Technologies (Pte) Ltd" which is headquartered in Singapore. The
acquisition was accounted for as a purchase, and, accordingly, the
results of Infotel's operations were included in the Company's consolidated
financial statements commencing June 22, 1998.

The business of NHancement is conducted by its operating company subsidiaries,
Voice Plus, Inc., whose name was recently changed to NHancement Technologies
North America, Inc. and Infotel Technologies (Pte) Ltd.


                                      F-9

<PAGE>

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 68% of total 1998
consolidated net revenues. VPI maintains offices in the states of California,
New York, Georgia, Arizona, Utah and Texas.

Infotel is a provider and integrator of infrastructure communications 
equipment products, providing radar system integration, turnkey project 
management services and test instrumentation, as well as a portfolio of 
communication equipment in Asia. Infotel was acquired on June 22, 1998, and 
represented approximately 32% of total 1998 consolidated net revenues.

In March 1998, the Company formalized a plan to exit from the business 
related to its FACTOR 1000-Registered Trademark- 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 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-Registered Trademark- product at September 
30, 1998 and 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 of the FACTOR 1000-Registered Trademark- product. 
The Company's FACTOR 1000-Registered Trademark- 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 granted an exclusive world-wide 
sublicense for sports and on-field-athletic-performance related users of the 
FACTOR 1000-Registered Trademark- system through November 2008.

CHANGE IN FISCAL YEAR-END

On July 30, 1998, the Board of Directors of NHancement Technologies Inc.
approved a resolution to change the Company and its Subsidiaries fiscal year-end
to September 30. As a result, a transition period for the nine
months ended September 30, 1998, is presented herein. Consequently, the
Consolidated Balance Sheet has been prepared as of September 30, 1998.  The
Consolidated Statements of Operations and Cash Flows present audited
information for the year ended December 31, 1997, and the nine months ended
September 30, 1998 as well as unaudited information for the nine months ended
September 30, 1997.

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
Infotel Technologies (Pte) Ltd. since their respective dates of
acquisition (Note 1). The results of operations related to Advantis have been
reported as discontinued operations. 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


                                     F-10

<PAGE>

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. Revenues under fixed price contracts is
recognized under the percentage-of-completion method of accounting in which the
estimated sales value is determined on the basis of physical completion to date
(the total contract amount multiplied by percent of performance to date less
sales value recognized in previous periods). Claims for extra work are included
in revenues when collection is probable.

CASH AND CASH EQUIVALENTS

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

RESTRICTED CASH

The Company's Infotel subsidiary maintains fixed deposits to secure bankers' 
guarantees of its performance on radar system integration projects. The
restrictions on these funds are released when the projects are completed.
Guaranteed work secured by these deposits is expected to be completed within one
year.

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 Infotel Technologies (Pte) Ltd. is
being amortized over a five to ten year period using the straight-line method.
Effective September 30, 1998 the Company reduced the amortization period on the
Voice Plus, Inc. goodwill from five years to three years based on management s
estimate.

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 issues 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 depreciation or amortization. In determining whether
an impairment exists, the Company compares


                                     F-11

<PAGE>

undiscounted future cash flows to the carrying value of the asset. When
undiscounted future cash flows are less than the carrying value of the asset,
the Company records an impairment loss based on the estimated fair market value
of the impaired asset.

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 for transactions involving employees.

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 1997 and
1998, calculations under SFAS No. 128 were the same as those under the prior
method. Options and warrants to purchase 1,225,200 and 1,154,100 shares were
outstanding during the nine months ended September 30, 1998 and year ended
December 31, 1997 respectively, but were not included in the computation of
diluted loss per common share because the effect would be antidilutive.

NEW ACCOUNTING PRONOUNCEMENTS


                                     F-12

<PAGE>

                                                  Summary of Accounting Policies

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 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. These financial statements reflect the adoption of
this standard, and report comprehensive income (loss) of $(2,659,400) and
($4,579,900) for the nine months ended September 30, 1998 and year ended
December 31, 1997. Results of operations and financial position, however, were
unaffected by the 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 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. These financial statements include the disclosures
required by this statement.

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. The Company's financial statement disclosures did not need to be
modified and the results of operations and financial position were unaffected by
implementation of this standard.

In June 1998, the Financial Accounting Standards Board Issued SFAS No. 133
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes. However,
in light of its recent acquisition of Infotel, management may enter into
derivative contracts to hedge its foreign currency risk in the future. The
Company has not yet evaluated the financial statement impact of adopting this
new standard.

FOREIGN CURRENCY TRANSLATION


                                         F-13
<PAGE>

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 and as a
separate component of comprehensive income (loss).

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 debt approximates fair value based upon short-term borrowings at
market rate interest.

RECLASSIFICATION

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


                                         F-14
<PAGE>


                                      Notes To Consolidated Financial Statements

1.   LIQUIDITY

The Company has incurred losses from continuing operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998 of $4.6 million
and $1.5 million and it expects to incur a net loss in excess of $1.0 million
for the quarter ended December 31, 1998.  The losses in 1997 and for the
nine-month period ended September 30, 1998 include non-cash charges for goodwill
impairment of $4.0 million and $525,000.  Working capital at September 30, 1998
was $400,000 and likely will decrease as of December 31, 1998 based on the
expected loss and negative cash flow for the quarter then ended.  Continued
losses could have a material adverse effect on the financial condition of the
Company.


To improve the liquidity and future cash flows, management made the decision to
restructure operations in early January 1999, subject to Board approval, and
expects to implement the plan in the month of January.  Under the plan,
headcount is expected to decrease by 10%, including the President of the
Company, cost reductions will be implemented in corporate overhead, travel,
discretionary sales expenses, outside services and general and administrative
expenses.  Additionally, the Company negotiated an increase in its short- term
credit facility from $1 million to $2 million.  Based on discussions with its
financial advisors, management believes it can raise additional equity. 
Although no assurances can be given that above efforts will be successful,
management believes these measures, together with its cash balances as of
December 31, 1998 of about $1.3 million, will provide sufficient cash flow for
future operations.

2.   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 NHancement Common Stock for every four shares of BFI Common Stock.

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.

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 continued changes occurring in voice processing technology and
continued losses in the Voice Plus subsidiary, 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 September 30, 1998. As such, the Company has
recorded an impairment loss of $525,000, 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. In addition,
the useful life of the $750,000 balance of the goodwill of Voice Plus, Inc. at
September 30, 1998 was reduced from five years to three years.  In addition, the
Company recorded an impairment loss of $4,084,300 at December 31, 1997.  Net
operating losses in 1997 led management to evaluate goodwill related to Voice
Plus, Inc for impairment.  The impairment resulted from voice processing
technology changes and uncertainties regarding the Company's distributor
relationship with its principal supplier, Centigram Communications Corporation. 
These aforementioned factors led management to downgrade its expectations of 
future operating results from those anticipated at the time of the acquisition.

On December 15, 1997, the Company consummated the acquisition of Advantis
Network & System Sdn Bhd, a Malaysian corporation, pursuant to a transaction by
which Advantis merged with NHancement, whereupon Advantis became a wholly-owned
subsidiary of NHancement. The initial consideration payable to the Advantis
shareholders in connection with the acquisition was 208,500 shares of common
stock of NHancement to be paid to each Advantis shareholder pro rata
proportional to his Advantis share ownership. As discussed in the "Organization"
section in the Summary of Accounting Policies, the Company returned all its
Advantis shares to the former Advantis shareholders in exchange for their
personal guarantee of repayment of an outstanding loan made by the Company to
Advantis.

On June 22, 1998, the Company acquired all outstanding shares of common stock of
Infotel Technologies (Pte) Ltd., a Singapore corporation. The consideration paid
to the Infotel shareholders consisted of cash of S$3,780,000 (US$2,356,300 at a
translation rate of 1.62) and 433,000 shares of common stock of NHancement 


                                         F-15
<PAGE>

("Acquisition Shares"). If the price per share of the Company's Common Stock 
is less than $5.00 on the first anniversary of the Infotel acquisition, 50% 
of the initial shares issued to the Infotel shareholders is subject to 
adjustment and the remaining 50% is subject to adjustment on the second 
anniversary if the per share price is less than $5.00. Should the Company's 
Common Stock price be below $5.00 per share on either of these dates, the 
Infotel shareholders would be entitled to receive that number of shares equal 
to the lesser of (i) one-half the initial shares valued at $5.00 per share 
divided by the fair market value per share minus one-half of the initial 
shares or (ii) one-half the initial shares valued at $5.00 per share divided 
by $2.75 (subject to adjustment for stock splits and the like). At the 
September 30, 1998 price per share of the Company's Common Stock, these 
calculations would result in approximately 354,000 of additional shares being 
issued to the Infotel shareholders. Additionally, the Infotel shareholders 
have the opportunity to receive up to a maximum of S$3,200,000 (approximately 
US$1,907,000 at current rates) in additional cash payments if Infotel exceeds 
certain minimum profit levels totaling S$1.6 million (US$953,500) during the 
two year period ending June 30, 1999. Management has recorded as additional 
purchase consideration of $1,390,400 based on Infotel's profits for the year 
ended June 30, 1998. All Acquisition shares were distributed to the Infotel 
shareholders pursuant to the Agreement were issued by NHancement in reliance 
upon Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), 
and are subject to restrictions on transferability under the 1933 Act. In 
addition, the Acquisition Shares are subject to a lock-up provision 
prohibiting transfer of fifty percent (50%) of the shares for one year 
following the effective date of the initial agreement, and prohibiting 
transfer of the remaining fifty percent (50%) until the second anniversary of 
the effective date of the initial agreement.

As of September 30, 1998, the purchase price of Infotel and excess of cost over
net assets acquired ("goodwill") recorded in connection with the Infotel
acquisition are summarized as follows:

<TABLE>

       <S>                                                                    <C>
       CONSIDERATION                                                                      
           Common stock - 433,000 shares subject to a share price guarantee     $1,840,400
           Cash                                                                  2,356,300
           Accrued purchase consideration                                        1,390,400
                                                                              ------------
       Total consideration                                                       5,587,100
                                                                              ------------
                                                                              ------------

           Net assets acquired (1)                                               3,849,000
           Cost of acquisition                                                    (190,000)
                                                                              ------------
                                                                                 3,659,000
                                                                              ------------
       Excess of cost over net assets acquired                                  $1,928,100
                                                                              ------------
                                                                              ------------
           
       (1) Consists principally of the following:                                         
           Cash and cash equivalents                                            $2,326,000
           Accounts receivable                                                   2,050,000
           Inventories                                                           1,651,000
           Property and equipment                                                  374,000
           Other assets                                                            101,000     
           Accounts payable and accrued expenses                                (2,014,000)
           Other liabilities                                                      (639,000)
                                                                              ------------
                                                                                $3,849,000
                                                                              ------------
                                                                              ------------
</TABLE>

(1)    The Company is in the process of valuing the net assets acquired from
Infotel. Accordingly, the allocation of purchase price may be adjusted in future
periods.

The following unaudited pro forma financial data consolidates the results of
operations of the Company, Voice Plus and Infotel as if the acquisitions had
occurred January 1, 1997 and January 1, 1998. The pro forma 


                                         F-16

<PAGE>

information gives effect to certain adjustments, including the amortization of
excess cost over net assets acquired, the effect resulting from the
renegotiation of employment agreements with key management employees of VPI, and
additional interest expense on notes payable.  This pro forma summary does not
necessarily reflect results of operations as they would have been if the
Company, Voice Plus and Infotel had constituted a single entity during such
periods and is not necessarily indicative of results which may be obtained in
the future.  These proforma results exclude the loss from discontinued
operations.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                               YEAR ENDED          NINE MONTHS ENDED 
                                           DECEMBER 31, 1997       SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
  <S>                                      <C>                     <C>
  Net revenues                                   $20,142,900              $15,788,200
  Loss before income taxes                        (4,534,000)                (895,600)
  Net loss                                        (4,724,400)              (1,150,400)
  Preferred dividends                                     --                 (435,700)
  Loss available to common stockholders           (4,724,400)              (1,586,100)
-------------------------------------------------------------------------------------
  Basic and diluted loss per share:
  Net loss per common share                           ($1.07)                  ($0.33)
  Weighted average shares                          4,433,400                4,867,000
-------------------------------------------------------------------------------------
</TABLE>

3.   NOTES RECEIVABLE FROM RELATED PARTIES

At September 30, 1998, notes receivable from related parties consist of the
following:

<TABLE>
     <S>                                                           <C>     
     ----------------------------------------------------------------------
     Note receivable from Advantis guaranteed by 
     shareholders of Advantis, principal and interest due
     in monthly payments beginning January 1, 1999 through
     June 1, 2001 interest at 7%                                   $333,200

     Note receivable from an officer of the Company, 
     interest at 7% with principal and unpaid interest due
     April 1999                                                      66,100
     ----------------------------------------------------------------------
                                                                    399,300
     Less current portion                                           171,400
     ----------------------------------------------------------------------
                                                                   $227,900
     ----------------------------------------------------------------------
</TABLE>

4.   DUE TO FACTOR, STOCKHOLDERS AND OTHER OBLIGATIONS

Due to factor and other obligations consists of the following at September 30,
1998:

<TABLE>
     <S>                                                          <C>
     ----------------------------------------------------------------------
     Due to factor with recourse, interest of 2% every 15 
     days that the amount remains unpaid, collateralized 
     by accounts receivable. This agreement provides for 
     borrowings up to 80 % of eligible accounts receivable
     not to exceed $1,000,000.  The outstanding balance was
     repaid in October 1998.                                       $231,000
     ----------------------------------------------------------------------

     DUE TO STOCKHOLDERS                                                   
     Additional purchase consideration to former Infotel 
     stockholders pursuant to the terms of the acquisition
     agreement of Infotel in June 22, 1998, due in February
     1999 (1)                                                    $1,390,400
                                                                           


                                         F-17
<PAGE>
     Note payable to certain management stockholders, 
     interest at 10% principal and interest originally due
     September 30, 1998, repaid on November 5, 1998 without
     penalty.                                                       669,600
     
     Note payable to former sole stockholder of Voice Plus
     pursuant to the terms of the acquisition of Voice Plus
     in February 1997, interest at medium term T-bill rate
     (5.3% at September 30, 1998). (2)                              187,500
     ----------------------------------------------------------------------
     Total due to stockholders                                   $2,247,500
     ----------------------------------------------------------------------
     Capital lease obligations to various institutions 
     interest at 12.25% - 14.56% payable over 2-3 years, 
     commencing April 1998 through June 2001. (3)                  $113,300

     Less current portion                                            45,000
     ----------------------------------------------------------------------
     Long term portion                                              $68,300
     ----------------------------------------------------------------------
     ----------------------------------------------------------------------
</TABLE>

(1)  The purchase agreement allows for the former Infotel stockholders to
receive up to a maximum of S$3,200,000 (approximately US$1,907,000 at current
rates) in additional cash if Infotel exceeds certain minimum profit levels
totaling S$1.6 million (US$953,500) during the two year period ending June 30,
1999. The Company has recorded additional purchase consideration on Infotel's
profits for the year ended June 30, 1998.

(2)  The Company issued an unsecured promissory note in a principal amount of
$500,000, bearing interest at the medium term T-bill rate to the former 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 September 30, 1998, a principal balance of
$187,500 remained unpaid.

(3)  In 1998, the Company capitalized computer equipment with an original cost
basis of $133,200 financed through capital leases. Accumulated depreciation for
the assets at September 30, 1998 was $12,900.

Future minimum annual principal payments on these obligations are as follows:

<TABLE>
<CAPTION>
                   ---------------------------------------------
                   YEARS ENDING SEPTEMBER 30              AMOUNT
                   ---------------------------------------------
                   <S>                                <C>
                             1999                     $2,523,500
                             2000                         43,200
                             2001                         25,100
                   ---------------------------------------------
                                                      $2,591,800
                   ---------------------------------------------
                   ---------------------------------------------
</TABLE>

5.   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. However, all equity issuances that result in dilution to stockholders 
of over 20% requires a vote of the existing stockholders, pursuant to Nasdaq 
rules.  

On April 13, 1998, the Company issued 12,500 shares of Preferred Stock. Under 
the terms of the Securities Purchase Agreement, the Company received 
$1,250,000 (less commissions and certain other costs and expenses of 
approximately $265,300). The preferred stock is convertible into common stock 
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 
conversion.  The 25% conversion discount has been reflected as a preferred 
stock dividend and has resulted in an increase in the loss applicable to 
common stockholders in computing net income (loss) per share.  For the nine 
months ended September 30, 1998, the Company has recorded a deemed dividend 
of $416,700. 

                                         F-18

<PAGE>

As of September 30, 1998, 9,300 preferred shares were converted into common
stock.  Additionally, the Company amended the agreement in September of 1998
limiting further dilutive issuances under the financing agreement, except by
mutual consent of the Preferred Stockholders and the Company.

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 (Note 2).
Accordingly, all references in the consolidated financial statement to share
amounts and per share amounts have been adjusted to reflect the BFI Merger
exchange. 

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.

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 (Note 12).

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 (Note 12).

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
Shd. Bhd.  Effective September 30, 1998, the Advantis common shares were
transferred from the Company to the former shareholders of Advantis in exchange
for a guarantee of repayment of a loan made by the Company to Advantis (Notes 3
and 15).

Effective June 22, 1998, the Company issued 433,000 shares of its common stock,
paid cash of $2,356,300 and recorded a payable of $1,390,400, which reflects
performance payments due to the former Infotel shareholders based on Infotel's
fiscal 1998 earnings results, in exchange for all of the outstanding shares of
Infotel, and Infotel became a wholly-owned subsidiary of the Company. (Note 2)

From June 22, 1998, through September 30, 1998, 9,300 preferred shares plus
dividends earned of $11,500 were converted into 709,235 shares of common stock.

6.   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 (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 Company's
Board of Directors administers the Equity Incentive Plan. 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 


                                         F-19

<PAGE>

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 compensation expense related to grants and exercise of stock
options of $3,800 in 1997 and $10,600 in 1998.

The following table summarizes transactions pursuant to the Company's Plan:

<TABLE>
<CAPTION>
                                                                                                                          Weighted 
                                          Weighted                                                                         Average 
                                           Average                                                                        Remaining
                                      Option Price                                                Available for         Contractual
                                         Per Share         Outstanding          Exercisable               Grant                Life
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                  <C>                  <C>               <C>                   <C>
 JANUARY 1, 1997                             $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
-----------------------------------------------------------------------------------------------------------------------------------
 Granted                                      2.05             258,000                  --             (258,000)           10 years
 Canceled                                     2.69            (186,900)             (98,400)            186,900
 Became Exercisable                           3.68                   --             161,300                  --

-----------------------------------------------------------------------------------------------------------------------------------
 SEPTEMBER 30, 1998                          $3.00           1,225,200              503,500             251,300           8.5 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
assumption used for grants in nine months ended September 30, 1998 and the year
ended December 31,1997, respectively: no dividend yield for any year; expected
volatility of 42% and 20%; risk-free interest rates of 6.6% in both periods; and
expected lives of approximately three to five years. The weighted average fair
value of options granted in nine months ended September 30, 1998 and the year
ended December 31,1997 was $0.96 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:


                                         F-20

<PAGE>

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------
                                                YEAR ENDED    NINE MONTHS ENDED
                                         DECEMBER 31, 1997   SEPTEMBER 30, 1998
     --------------------------------------------------------------------------
     <S>                                 <C>                 <C>
       Net loss
            As reported                       $(4,591,200)         $(2,473,200)
            Pro forma                         $(4,749,100)         $(2,647,600)
            Per share as reported                  $(1.18)              $(0.61)
            Per share pro forma                    $(1.22)              $(0.64)
     --------------------------------------------------------------------------
</TABLE>

The above pro forma information includes only the effects of 1997 and 1998
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                    WEIGHTED AVERAGE
                                                          AVERAGE                        REMAINING
                                                       WARRANT PRICE                  CONTRACTUAL LIFE
                                                         PER SHARE      OUTSTANDING
------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>           <C>
JANUARY 1, 1997                                                 $5.18        617,100         3.0 years
------------------------------------------------------------------------------------------------------
Warrants issued to Underwriter in connection with               $4.80        230,000
Initial Public Offering
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997                                               $5.08        847,100         2.6 years
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998                                              $5.08        847,100         1.9 years
------------------------------------------------------------------------------------------------------
</TABLE>

7.   COMMITMENT AND CONTINGENCIES

The Company's impairment testing business exposes it to potential litigation (i)
by employees of companies using the FACTOR 1000-Registered Trademark- 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 September 30, 1998, the Company maintained general
liability insurance in the amount of $1.0 million per occurrence and $2.0
million in the aggregate, and an umbrella policy with a $5.0 million limit. The
Company maintains product liability insurance of $2.0 million per occurrence and
$2.0 million in the aggregate.

The Company's FACTOR 1000-Registered Trademark- 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 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-Registered Trademark- product.  The Company has not
currently met their minimum aggregate payment.  If the Company does not make the
payment they will loose 


                                         F-21
<PAGE>

exclusivity of the licensed technology.  At this time, the Company will allow
the exclusivity of the technology to lapse if necessary.  

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>
              ---------------------------------------------------
                YEAR ENDING SEPTEMBER 30, 1998            AMOUNT
              ---------------------------------------------------
                <S>                                     <C>
                                1999                    $417,800
                                2000                     229,600
              ---------------------------------------------------
                                                        $647,400
              ---------------------------------------------------
</TABLE>

Rent expense for the years ended December 31, 1997 and nine months ended
September 30, 1998 was $287,500 and $271,200.

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. The Company also had an employment
agreement with the former president of the Voice Plus subsidiary (Mr.
Gillespie). Mr. Gillespie decided to terminate his employment in April 1998 and
to provide consulting services to the Company with annual payments of $115,000. 
Additionally, the agreement also contains provisions for confidentiality and
convenants not to compete, solicit customers or hire employees for two years
after the expiration of this consulting agreement.

8.   RELATED PARTY TRANSACTIONS

During 1998, the Company paid notes payable from certain management stockholders
totaling $669,600 in principal and interest (Note 4).

At September 30, 1998, the Company had additional purchase consideration to the
former Infotel stockholders pursuant to the terms of the acquisition totaling
$1,390,400 (Note 4).

At September 30, 1998, the Company had notes receivable from stockholders and
former subsidiary totaling $399,300 (Note 3). As of December 31, 1997 there was
a $204,000 note receivable from Advantis stockholders to Advantis that was
included in the consolidated financial statements of the Company.  This
receivable was returned to Advantis in conjunction with the disposal of Advantis
(Note 2).  

At September 30, 1998, the Company owed $187,500 to a stockholder of the Company
in connection with the acquisition of Voice Plus (Note 4). During 1998, the
Company paid $62,500 in principal and $10,100 in interest to this stockholder.
During 1997 the Company paid $1,250,000 in principal and $36,100 in interest to
this stockholder.

9.   CONCENTRATION RISK

Revenues from two customers accounted for approximately 19% and 7% of total net
revenues during the year ended December 31, 1997, and 26% and 12% of total net
revenues during the year ended September 30, 1998. 


                                         F-22
<PAGE>

Included in accounts receivable at September 30, 1998 is $988,700 and $579,400
due from these two customers.

Trade accounts receivable are due from numerous customers located in many
geographic regions throughout the United States and Singapore. 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").  In May 1998, Centigram sold its Customer Premise 
Equipment ("CPE") to Mitel Corporation which now markets certain Centigram's 
products through a newly formed subsidiary, Baypoint Innovations. Any 
termination or adverse change in the Company's distributor relationship with 
Centigram or Baypoint Innovations would have a material adverse impact upon 
the Company's voice processing business.

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.

10.  INCOME TAXES

From its inception, the Company has generated losses for both financial
reporting and tax purposes. For the year ended December 31 1997, substantially
all of the loss was attributable to domestic operations. For the nine months
ended September 30, 1998, $1,615,800 of the pretax loss was attributable to U.S.
operations, $414,200 was attributable to foreign operations and a loss of
$368,600 was incurred for the disposal of Advantis. As of September 30, 1998,
the Company's net operating losses for federal income tax purposes were
approximately $9 million, and expire between the years 2008 and 2013. For state
income tax purposes, as of September 30, 1998, the Company had net operating
loss carryforwards of approximately $811,000, which expire in 2003. The use of
Federal net operating loss caryforwards is subject to an annual limit of
approximately $250,000 as the Company has incurred an ""ownership change".
Deferred tax assets, the majority of which are noncurrent, at September 30, 1998
consist primarily of following:

<TABLE>
<CAPTION>
      ---------------------------------------------------------------
     <S>                                                     <C>
     Cash to accrual change for tax purposes                  $297,800
     Reserves and accrued liabilities                          426,400
     Depreciation and amortization                            (109,900)
     Net operating loss carryforwards                        3,013,100
     -----------------------------------------------------------------
     Gross deferred tax asset                                3,627,400
     Less valuation allowance                               (3,627,400)
     -----------------------------------------------------------------
     Net deferred tax asset                                        $--
     -----------------------------------------------------------------
</TABLE>

Income taxes for the nine months ended September 30, 1998 consist primarily of:

<TABLE>
<CAPTION>
     ----------------------------------------------------------------------
                                       CURRENT        DEFERRED    EXPENSE
     ----------------------------------------------------------------------
     <S>                               <C>            <C>           <C>
     Continued Operations:
     Federal                             $ --           $ --           $ --
     State                              1,800             --          1,800
     Singapore                         71,000         (2,000)        69,000
      ---------------------------------------------------------------------
                                       72,800         (2,000)        70,800
      ---------------------------------------------------------------------
     Discontinued Operations:
     Malaysia                           3,800             --          3,800
     ----------------------------------------------------------------------
                                      $76,600        ($2,000)       $74,600
     ----------------------------------------------------------------------
</TABLE>


                                         F-23
<PAGE>

There was no income tax expense for the year ended December 31, 1997.

The differences between income taxes and amounts determined by applying the
federal statutory rate to income before income taxes were:

<TABLE>
<CAPTION>
          ------------------------------------------------------------------------
                                            Year Ended         Nine Months Ended
                                         December 31, 1997     September 30, 1998
          ------------------------------------------------------------------------
          <S>                            <C>                   <C>
          Federal Tax                       $(1,561,000)            $(904,200)
          State Tax                            (282,000)             (162,200)
          Foreign Taxes                              --                73,000
          Goodwill                            1,865,000               300,700
          Loss on Sale of Subsidiary                 --                30,000
          Other                                $(22,000)                   --
          Tax benefits from losses not recognized    --               737,300
          ------------------------------------------------------------------------
                                                    $--               $74,600
          ------------------------------------------------------------------------
          ------------------------------------------------------------------------
</TABLE>

The valuation reserve increased by $870,300 during the nine months ended
September 30, 1998 and decreased by $342,900 during the year ended December 31,
1997. At September 30, 1998, the Company established a 100% valuation allowance
for the gross deferred tax asset in the U.S. since management could not
determine that it was more likely than not that the deferred tax asset can be
realized.

11.  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. There were no matching contributions during the year ended December 31,
1997, or the nine-month period ended September 30, 1998.

12.  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
Small Cap 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.

13.  EARNINGS PER SHARE

Earnings per share were computed under the provisions of SFAS 128, EARNINGS PER
SHARE. The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:


                                         F-24
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                     YEAR ENDED             9 MONTHS ENDED
                                                                     DECEMBER 31,           SEPTEMBER 30,
NET INCOME (LOSS) - NUMERATOR                                            1997            1997          1998
---------------------------------------------------------------------------------------------------------------
                                                                                     (UNAUDITED)
<S>                                                                 <C>                <C>        <C>     
Net income (loss)                                                   ($4,591,200)       $230,000    ($2,473,200)
Preferred stock dividends (1)                                                --              --       (435,700)
---------------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) applicable to common stock      ($4,591,200)       $230,000    ($2,908,900)
---------------------------------------------------------------------------------------------------------------
COMMON SHARES - DENOMINATOR
     Basic weighted average common shares outstanding                 3,883,300       3,713,000      4,802,300
     Options and warrants                                                    --          77,900             --
---------------------------------------------------------------------------------------------------------------
     Diluted weighted average common shares outstanding               3,883,300       3,790,900      4,802,300
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>

  (1)     Includes deemed dividend on preferred stock convertible at a discount
          of $416,700

14.  SEGMENT REPORTING

NHancement adopted SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, during 1998. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. It also established standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers different products and serves different markets.

NHancement's reportable operating segments include Voice Plus and Infotel. Voice
Plus a systems integrator and distributor of voice processing equipment
operating in the U.S., provides equipment installation, technical support and
ongoing maintenance. Voice Plus derives substantially all of its revenue from
sales in the U.S. Infotel, a provider and integrator of infrastructure
communications equipment products, operating in Asia, provides radar system
integration, turnkey project management services and test instrumentation,
Infidel derives substantially all of its revenue from sales in Asia.

The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.

<TABLE>
<CAPTION>
September 30, 1998(1)
------------------------------------------------------------------------------------------------------------------------------
                                                              VPI             INFOTEL             OTHER(2)            TOTAL(4)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>                  <C>               <C>
     Net Sales to external customers                   $6,391,700          $3,036,000             $14,500          $9,442,200
     Income (loss) from continuing operations          (1,100,000)             94,400            (517,600)         (1,523,200)
     Interest Income                                       37,300              15,000              24,600              76,900
     Interest Expense                                     (97,900)                 --             (41,000)           (138,900)
     Tax expense                                            1,800              69,000                  --              70,800
     Total assets                                       4,165,400           5,488,600           3,217,300          12,871,300
     Depreciation and Amortization (3)                    884,700              88,600              10,300             983,600
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                         F-25
<PAGE>

(1)  The data presented for 1998 represents the nine-month period from January
     1, 1998 through September 30, 1998, except for the Infotel data that
     represents the period from acquisition on June 22, 1998 through September
     30, 1998.

(2)  Other includes corporate expenses.  Additionally, management's reports
     include goodwill for Infotel in total assets.

(3)  VPI includes goodwill impairment loss of $525,000 and amortization of the
     excess of costs over net assets acquired of $225,000.

(4)  The data presented does not include the loss on the sale of Advantis or the
     loss from its Advantis' operations.

<TABLE>
<CAPTION>

December 31, 1997
------------------------------------------------------------------------------------------------------------------------------
                                                              VPI             INFOTEL             OTHER(2)            TOTAL(4)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>                  <C>               <C>
Net Sales to external customers                        $8,714,800                $ --             $23,000          $8,737,800
Income (loss) from continuing operations               (3,694,300)                 --            (900,000)         (4,594,300)
Interest Income                                            37,700                  --              99,200             136,900
Interest Expense                                          (43,900)                 --             (34,000)            (77,900)
Total assets                                            3,584,100                  --           2,726,100           6,310,200
Depreciation and Amortization(1)                        4,794,100                  --              14,500           4,808,600
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  VPI loss includes an impairment loss $4,084,300 and amortization of the
     excess of costs over net assets acquired of $564,800.
(2)  Other includes corporate expenses.
(3)  The data presented does not include the operations and assets of Advantis.

15.  DISPOSAL OF ADVANTIS

On September 30, 1998 the Company sold its Advantis operations. The measurement
date is September 24, 1998 and the disposal date is September 30, 1998, The loss
from operations as of the measurement date to the disposal date was immaterial.
Three of the former stockholders of Advantis entered into a guarantee agreement
pursuant to which each such stockholders agreed to guarantee repayment of the
outstanding loan of $300,000 made by the Company to Advantis (together with all
the interest accrued to date) pursuant to a loan agreement and related
promissory notes dated July 7, 1997 (Note 2). In exchange, the Company delivered
all of the Advantis shares and transferred its ownership interest in Advantis to
the original stockholders in full and final settlement of any and all damages
the Company may have suffered as a result of the breaches of certain
representations and warranties made by the three former Advantis stockholders
who signed the guarantee pursuant to that certain agreement for the sale of
shares in Advantis dated June 20, 1997. Revenues from Advantis were $569,500 and
$245,200 for the nine months ended September 30, 1998 and the year ended
December 31, 1997.

16.  DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES

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
pursuant to a purchase and plan of merger agreement (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 (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 (Note 1).

On April 13, 1998, the Company issued 12,500 shares of preferred stock with a
25% conversion discount (Note 5).  The 25% conversion discount has been
reflected as a preferred stock dividend and has resulted in a


                                         F-26

<PAGE>

$416,700 increase in the loss applicable to common stockholders.  From April 13,
1998 through September 30, 1998, $732,500 of preferred stock (9,300 preferred
shares) and $11,500 of dividends on preferred stock were converted into 7,100
shares of common stock.

On June 22, 1998, the Company acquired all outstanding shares of Common Stock of
Infotel Technologies (Pte) Ltd. In exchange for approximately 433,000 shares of
the Company's Common Stock with an estimated value of $1,840,400 and $2,356,300
in cash. Additionally, management accrued additional purchase consideration of
$1,390,400 based on Infotel's profits through June 30, 1998.

During the nine months ended September 30, 1998, the Company financed the
purchase of $133,200 of computer equipment through capital leases.

17   SUBSEQUENT EVENTS:

On January 6, 1999, Mr. James S. Gillespie was appointed to fill a newly 
created vacancy on the Board of Directors of NHancement.  Subsequently at the 
same meeting, Messrs. Boyle, Das and Nemetz resigned from the Board.  On 
January 6, 1999, Mr. Goei resigned his positions as President and CEO 
pursuant to the terms of Separation Agreement approved by the Board of 
Directors, which modifies the terms of his Employment Agreement.  
Subsequently, Mr. Goei also resigned both from his position as Chairman of 
the Board and as a Board member.  In exchange for Mr. Goei's resignation, the 
Company has agreed to a severance package with the following principal terms 
(i) six and one-half months of regular pay at his current rate, (ii) Mr. Goei 
will continue to receive benefits under the Company's medical and group 
insurance plans through May 15, 1999, (iii) Mr. Goei to have use of the 
Company paid leased automobile through the end of the lease term in July 
1999, (iv) the Company will reimburse moving expenses of approximately 
$70,000, (v) the Company will issue warrants to purchase 50,000 shares of 
NHancement Common Stock at the current fair market price, and (vi) Mr. Goei 
and the Company agree to a mutual waiver of all claims related to Mr. Goei's 
employment.  On January 6, 1999,  Mr. Douglas S. Zorn was appointed Interim 
President and CEO.

In October 1998, the Company secured a line of credit, with a monthly rate of 
2.75%, providing for borrowings of up to 80% of eligible accounts receivable 
not to exceed $1 million, expiring in March 1999, with the option to renew 
for an aditional year.  In January 1999, the Company's available line of 
credit was increased to $2 million and restrictions were eased on the types 
of receivables eligible for inclusion in the Company's borrowing base.


                                         F-27