<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                ----------------

                                   FORM 10-QSB
          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended March 31, 1998

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
             For the transition period from __________to ___________

                         COMMISSION FILE NUMBER 0-21999

                             -----------------------

                          NHANCEMENT TECHNOLOGIES INC.
           (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED 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)

                                ----------------

     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 [ ]

         As of May 14, 1998, there were 4,436,500 shares of Common Stock
outstanding.

    Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]


<PAGE>   2
                                     PART I
                              FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although the Company believes the
disclosures made are adequate to make the information presented not misleading,
and, in the opinion of management, all adjustments have been reflected which are
necessary for a fair statement of the information shown.




                                       2
<PAGE>   3
                          NHANCEMENT TECHNOLOGIES INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
                                                                                              MARCH 31,
                                                                                                1998
                                                                                            ------------
<S>                                                                                         <C>         
ASSETS
CURRENT
          Cash and cash equivalents                                                         $    935,900
          Accounts receivable, less allowance for doubtful accounts of $515,000                1,601,500
          Notes receivable from stockholders                                                     112,000
          Inventory                                                                              526,400
          Prepaid expenses and other                                                             330,700
          Income tax receivable                                                                  225,600
                                                                                            ------------
 TOTAL CURRENT ASSETS                                                                          3,732,100
                                                                                            ------------

PROPERTY AND EQUIPMENT                                                                         1,289,700
          Less accumulated depreciation                                                          631,500
                                                                                            ------------
PROPERTY AND EQUIPMENT, net                                                                      658,200
                                                                                            ------------

Excess of cost over net assets  acquired  of Voice  Plus,  Inc.,  net of  accumulated          1,425,000
amortization of $75,000
Excess of cost over net assets acquired of Advantis, net of accumulated  amortization            962,300
of $29,000
Long-term portion of notes receivable from stockholders                                          162,600
Deferred acquisition costs                                                                       119,400
Other assets                                                                                     131,200
                                                                                            ------------
                                                                                            $  7,190,800
                                                                                            ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
          Lines of credit                                                                        311,000
          Accounts payable                                                                       839,800
          Accrued liabilities                                                                    436,700
          Payable to affiliates                                                                  440,600
          Deferred revenue                                                                     1,032,800
          Current portion of long-term debt                                                      298,000
                                                                                            ------------
TOTAL CURRENT LIABILITIES                                                                      3,358,900

LONG-TERM DEBT, net of current portion                                                           162,500
                                                                                            ------------

TOTAL LIABILITIES                                                                              3,521,400
                                                                                            ------------

STOCKHOLDERS' EQUITY
          Preferred stock, $0.01 par value, 2,000,000 shares authorized,
              no shares issued and outstanding                                                        --
           Common stock, $0.01 par value, 20,000,000 shares authorized,
            4,437,000 shares issued and outstanding                                               44,400
          Additional paid-in capital                                                          18,020,600
          Accumulated deficit                                                                (14,387,500)
          Cumulative translation adjustment                                                       (8,100)
                                                                                            ------------
TOTAL STOCKHOLDERS' EQUITY                                                                     3,669,400
                                                                                            ------------
                                                                                            $  7,190,800
                                                                                            ============
</TABLE>


                                       3
<PAGE>   4

                          NHANCEMENT TECHNOLOGIES INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                                                 MARCH 31,
                                                       ------------------------------
                                                          1997               1998
                                                       -----------        -----------
<S>                                                    <C>                <C>        
NET SALES                                              $ 1,431,900        $ 1,216,500
Cost of sales                                              636,600            850,000
                                                       -----------        -----------

GROSS PROFIT                                               795,300            366,500
                                                       -----------        -----------

OPERATING EXPENSES
Research and development                                    23,700                 --
Selling, marketing and administrative                      611,900          1,089,300
Amortization of excess of cost over net assets
acquired                                                    98,900             99,800
                                                       -----------        -----------

TOTAL OPERATING EXPENSES                                   734,500          1,189,100
                                                       -----------        -----------

INCOME (LOSS) FROM OPERATIONS                               60,800           (822,600)
                                                       -----------        -----------
OTHER INCOME (EXPENSE)
Interest income                                             38,400             21,600
Interest expense                                           (46,200)           (26,500)
Other                                                           --             41,200
                                                       -----------        -----------
                                                            (7,800)            36,300
                                                       -----------        -----------
INCOME (LOSS) BEFORE INCOME TAXES                           53,000           (786,300)
                                                       -----------        -----------
INCOME TAXES                                                10,400                 --
                                                       -----------        -----------
NET INCOME (LOSS)                                      $    42,600        $  (786,300)
                                                       -----------        -----------
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
SHARE                                                  $      0.02        $      (.18)
                                                       -----------        -----------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                                                         2,682,000          4,436,500
OPTIONS AND WARRANTS                                       125,100                 --
                                                       -----------        -----------
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING                                              2,807,100          4,436,500
                                                       ===========        ===========
</TABLE>





                                       4
<PAGE>   5
                          NHANCEMENT TECHNOLOGIES INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY




<TABLE>
<CAPTION>
                                         COMMON STOCK                                         CUMULATIVE
                                           PAR VALUE          ADDITIONAL      ACCUMULATED     TRANSLATION
                                    SHARES          AMOUNT  PAID-IN-CAPITAL     DEFICIT       GAIN (LOSS)      TOTAL
                                   ----------       ------- ---------------   ------------    ------------   ----------
<S>                                <C>              <C>       <C>             <C>                 <C>        <C>       
BALANCE, December 31, 1997          4,436,500       $44,400   $18,020,600     $(13,601,200)      $11,300     $4,475,100
Cumulative translation loss -
Advantis                                                                                         (19,400)       (19,400)
Net loss                                   --            --            --         (786,300)           --       (786,300)
                                   ----------       -------   -----------     ------------       -------     ----------
BALANCE, March 31,1998              4,436,500       $44,400   $18,020,600     $(14,387,500)      $(8,100)    $3,669,400
                                   ==========       =======   ===========     ============       =======     ==========
</TABLE>




                                       5
<PAGE>   6


                          NHANCEMENT TECHNOLOGIES INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                                  THREE MONTHS ENDED
                                                                           ------------------------------
                                                                                       MARCH 31,
                                                                           ------------------------------
                                                                               1997               1998
                                                                           -----------        -----------
<S>                                                                        <C>                <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
          Net income (loss)                                                $    42,600        $  (786,300)
          Adjustments to reconcile net income (loss) to net cash
           used  in operating
           activities:
          Depreciation and other amortization                                  126,200            153,400
          Other                                                                     --            (19,400)
          Changes in operating assets and liabilities:
                 Accounts receivable                                           420,000          1,403,700
                 Income tax receivable                                              --            (53,600)
                 Inventory                                                      17,400              9,800
                 Prepaid expenses and other                                   (220,300)          (223,700)
                 Other assets                                                   51,700              6,200
                 Accounts payable and other current liabilities             (2,405,000)        (1,032,400)
                                                                           -----------        -----------
NET CASH USED IN OPERATING ACTIVITIES                                       (1,967,400)          (542,300)
                                                                           -----------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
          Cash acquired from VPI Acquisition                                   851,900                 --
          Purchase of property and equipment                                   (35,200)            (9,000)
                                                                           -----------        -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                            816,700             (9,000)
                                                                           -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
          Net borrowing under line of credit                                        --            124,000
          Principal payment of long-term debt                               (1,814,000)                --
          Proceeds from initial public offering of common stock, net
       of offering costs                                                     6,962,200                 --
                                                                           -----------        -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                    5,148,200            124,000
                                                                           -----------        -----------

                                                                           -----------        -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         3,997,500           (427,300)
                                                                           -----------        -----------

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                  60,100          1,363,200
                                                                           -----------        -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                   $ 4,057,600        $   935,900
                                                                           ===========        ===========
</TABLE>






                                       6
<PAGE>   7

DISCLOSURE OF NON-CASH INVESTING AND FINANCING 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, Inc. pursuant to a purchase and plan of merger agreement.

       On February 4, 1997, the Company issued 258,200 shares of its Common
    Stock as repayment of certain notes payable and accrued interest thereon.




                                       7
<PAGE>   8
1.   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, 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.(TM) ("VPI" or "Voice Plus"), a California corporation, a systems
     integrator and national distributor of voice processing equipment. 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 re-organization under Section 368 of the Internal
     Revenue Code of 1986, as amended. Voice Plus is the surviving corporation
     in the merger transaction with BioFactors, and the separate existence of
     BioFactors ceased on the effective date of the merger. The operations of
     the combined entity are being conducted under the name of "Voice Plus,"
     which is headquartered in Fremont, California. Voice Plus remains a
     wholly-owned subsidiary of NHancement.

         On December 15, 1997, NHancement purchased one hundred percent (100%)
     of the outstanding shares of Advantis Network & System Sdn Bhd
     ("Advantis"). As a result of the acquisition, Advantis has become a
     wholly-owned subsidiary of NHancement. Advantis is a telecommunications
     systems integrator. The operations of the entity are being conducted under
     the name of "Advantis Network & System Sdn Bhd," which is headquartered in
     Kuala Lumpur, Malaysia. The acquisition was accounted for as a purchase,
     and, accordingly, the results of Advantis' operations were included in the
     Company's consolidated financial statements commencing December 15, 1997.

         The business of  NHancement is conducted by its operating company 
     subsidiaries,  Voice Plus,  Inc. and Advantis Network & System Sdn Bhd.

2.   FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS

         The accompanying consolidated financial statements as of March 31, 1998
     and for the three months ended March 31, 1998 and 1997 are unaudited.
     Certain information and footnote disclosures normally included in the
     financial statements prepared in accordance with generally accepted
     accounting principles ("GAAP") have been omitted. These consolidated
     financial statements should be read in conjunction with the audited
     financial statements and accompanying notes for the year ended December 31,
     1997 presented in the Company's latest annual report on Form 10-KSB.

         The preparation of financial statements in conformity with GAAP
     requires management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities, disclosure of contingent assets
     and liabilities at the date of the financial statements, and the reported
     amounts of revenues and expenses during the reported period. Actual results
     could differ from those estimates.

         The consolidated financial statements presented herein reflect all
     adjustments which are, in the opinion of management, necessary for a fair
     presentation of the financial condition and results of operations for the
     periods presented.





                                       8
<PAGE>   9
         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 a net loss during the three months ended
     March 31, 1998 options and warrants to purchase 1,116,600 shares of common
     stock were outstanding but were not included in the computation of diluted
     loss per common share because the effect would be antidilutive.

         In June 1997, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
     Income, 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 accounting standards as components of
     comprehensive income be reported in a financial statement that is displayed
     with the same prominence as other financial statements.

         SFAS No. 130 is effective for financial statements for fiscal years
     beginning after December 15, 1997 and requires comparative information for
     earlier periods to be restated. Because of the recent issuance of this
     standard, management has been unable to fully evaluate the impact, if any,
     the standard may have on future statement disclosures. Results of
     operations and financial position, however, will be unaffected by
     implementation of this standard.

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
     131, Disclosures about Segments of an Enterprise and Related Information.
     SFAS No. 131 establishes standards for the way that public companies report
     information about operating segments in annual financial statements and
     requires reporting of selected information about operating segments in
     interim financial statements issued to the public. It also establishes
     standards for disclosures regarding products and services, geographic areas
     and major customers. SFAS No. 131 defines operating segments as components
     of a company about which separate financial information is available that
     is evaluated regularly by the chief operating decision maker in deciding
     how to allocate resources and in assessing performance.

         SFAS No. 131 is effective for financial statements for fiscal years
     beginning after December 15, 1997 and requires comparative information for
     earlier years to be restated. Because of the recent issuance of this
     standard, management has been unable to fully evaluate the impact, if any,
     it may have on future financial statement disclosure. Results of operations
     and financial position, however, will be unaffected by implementation of
     this standard.

         In February 1998, the Financial Accounting Standard Board issued SFAS
     No. 132, Employers' Disclosures about Pensions and Other Post Retirement
     Benefits. 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 fiscal years
     beginning after December 15, 1997 and requires comparative information for
     earlier years to be restated unless the information is not readily
     available, in which case the notes to the financial statements should
     include all available information and a description of the information not
     available. Management believes that the Company's current financial
     statement disclosures will not need to be modified based upon current
     operations. Results of operations and financial position will be unaffected
     by implementation of this standard.



                                       9
<PAGE>   10
3.   ACQUISITION AND MERGER TRANSACTIONS

         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.

         On December 15, 1997, the Company consummated the acquisition of
     Advantis Network & System Sdn Bhd, a Malaysian corporation and systems
     integrator and distributor of communication equipment, pursuant to a
     transaction by which Advantis became a wholly-owned subsidiary of 
     NHancement.

4.   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.

5.   STOCK OPTIONS

         During the three months ended March 31, 1998, no additional options of
     the Company's Common Stock were granted.




                                       10
<PAGE>   11
6.   PENDING ACQUISITION  AND FINANCING

         On January 16, 1998, the Company entered into a definitive agreement to
     acquire all of the issued and outstanding shares of capital stock of
     Infotel Technologies Pte Ltd ("Infotel"), a Singapore company which
     provides radar system integration, turnkey project management services,
     test instrumentation, as well as a wide portfolio of communication
     equipment. Consummation of the transaction is contingent upon the Company
     obtaining third party financing necessary to complete the acquisition, the
     closing of which must occur, if at all, by no later than June 24, 1998. The
     basic terms of the acquisition agreement require an initial cash payment of
     about $2.3 million, notes payable of approximately $2.0 million (with
     payment subject to Infotel achieving certain 1998 and 1999 profitability
     targets), and the issuance of 431,000 shares of NHancement's Common Stock.
     In the event that the transaction fails to close by June 24, 1998, the
     Company is obligated to pay a termination fee in the amount of $300,000
     plus interest.

         On April 13, 1998, the Company signed a $3.0 million Convertible
     Preferred Stock financing agreement. Under the terms of the agreement, the
     Company had been paid $1,250,000 as of the date of filing of this quarterly
     report on Form 10QSB (less commissions and certain other costs and expenses
     of approximately $162,500), and, subject to satisfaction of certain
     conditions specified in the stock purchase agreement documentation, will
     receive $500,000 sixty days after the effective date of an S-3 registration
     statement, $500,000 thirty days thereafter and the final $750,000 thirty
     days thereafter. The Preferred Stock bears a 5% cumulative dividend and has
     a liquidation preference equal to the original purchase price plus
     cumulative but unpaid dividends. If the Company's common stock trades for a
     thirty day average below $2.00 or the average daily volume for a thirty day
     period falls below 20,000 shares, the investors are not required to fund
     any remaining portion of the $3.0 million in excess of the first $1,250,000
     investment. Further, if the five day average closing bid price of the
     Company's common stock falls below $2.00 per share, the Company has the
     option to redeem the Preferred Stock at 118% of the original purchase price
     plus cumulative but unpaid dividends. Any shares of Preferred Stock
     tendered for conversion prior to delivery of the Company's notice of
     redemption shall not be affected by the redemption notice and shall be
     converted into shares of Common Stock. As to any shares with respect to
     which such conversion rights have not been timely exercised, such
     conversion rights shall terminate upon delivery by the Company of its
     notice of redemption. The Preferred Stock is convertible into common at the
     lesser of the five day average closing bid price at the time of signing or
     75% of the five day average closing bid price at the time of each
     conversion. The Company intends to utilize the proceeds of this financing
     to pay a portion of the initial cash payment on the pending Infotel
     acquisition and for working capital.

7.   SUBSEQUENT EVENTS

         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 or about April 16, 1998, Nasdaq
     informed the Company 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) in
     the most recently completed fiscal year or in two of the last three most
     recently completed fiscal years. The Company has notified Nasdaq of the
     steps it has taken and proposes to take in order to remedy the above
     deficiency. The propriety of continuing the Company's listing on the Nasdaq
     SmallCap Market System is currently being reviewed by Nasdaq. While the
     Company believes that it will be in position to meet these listing
     requirements in the near-term future, such belief is dependent in part upon
     the Company completing the Infotel acquisition, the financing for which had
     not been completed as of the date of this Prospectus. There can be no
     assurance that the Company will in fact meet these requirements in any
     future period. (See "Liquidity and Capital Resource").




                                       11
<PAGE>   12

8.   UNAUDITED PRO FORMA FINANCIAL DATA

         The unaudited pro forma statements of operations combine the results of
     operations of BioFactors, VPI and Advantis, for the three months ended
     March 31, 1998 and 1997, as if the VPI and Advantis acquisitions had
     occurred at the beginning of the respective periods, after giving effect to
     certain adjustments, including the amortization of excess of costs over
     assets acquired, interest expense on notes payable to stockholder,
     additional salaries, and recalculation of estimated income taxes. The
     following unaudited pro forma summary does not necessarily reflect the
     results of operations as they would have been had the VPI and Advantis
     acquisitions occurred at the beginning of the periods presented and is not
     necessarily indicative of the results of operations for any future period.

<TABLE>
<CAPTION>
                                                                                         PRO FORMA
                                                                                    THREE MONTHS ENDED
                                                                             ------------------------------
                                                                                        MARCH. 31,
                                                                             ------------------------------
                                                                                1997               1998
                                                                             -----------        -----------
<S>                                                                          <C>                <C>        
                  Net sales                                                  $ 4,981,400        $ 1,216,500
                  Cost of  sales                                               3,350,100            850,000
                  Gross profit                                                 1,431,300            366,500
                  Total operating expenses (includes amortization of
                  excess of cost over net assets acquired)                     1,242,600          1,189,100
                  Income (loss) from operations                                  188,700           (822,600)
                  Other income (expense)                                          (4,100)            41,200
                  Income (loss) before income taxes                              184,600           (786,300)
                  Income taxes                                                     9,500                 --
                  Net income (loss)                                          $   175,100        $  (786,300)

                  Net income (loss) per common share                         $      0.05        $      (.18)

                  Weighted average common and common equivalent shares
                  outstanding                                                  3,563,200          4,436,500
                                                                             ===========        ===========
</TABLE>


                                      -12-
<PAGE>   13


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

    THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997

    The following contains forward-looking statements regarding future events or
the future financial performance of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth herein.

    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"). On February 3,
1997, prior to the February 4, 1997 consummation of the initial public offering
("IPO") of the Company's Common Stock, BFI merged with a subsidiary of
NHancement whereupon BFI, as the surviving corporation, became a wholly-owned
subsidiary of NHancement. The BFI merger was accounted for in a manner similar
to a pooling-of-interests. Also, on February 3, 1997, the Company acquired Voice
Plus, Inc. ("VPI" or "Voice Plus"), a California corporation, and a systems
integrator and national distributor of voice processing equipment, pursuant to a
transaction by which VPI merged with a subsidiary of NHancement, whereupon VPI,
as the surviving corporation, became a wholly-owned subsidiary of NHancement.
The VPI acquisition was accounted for as a purchase, and, accordingly, the
results of VPI's operations were included in the Company's financial statements
commencing February 3, 1997.

    For financial accounting purposes, BFI was deemed to be the acquiror of VPI.
However, NHancement is considered to be the successor in interest of BFI and
references herein to the Company signify BFI and its successor NHancement.

    Effective as of November 12, 1997, BioFactors, Inc., 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 was the surviving corporation in
the merger transaction with BioFactors, and the separate existence of BioFactors
ceased on the effective date of the merger. The operations of the combined
entity are being conducted under the name of Voice Plus,(R)which is
headquartered in Fremont, California. Voice Plus remains a wholly-owned
subsidiary of NHancement.

    On December 15, 1997, NHancement purchased one hundred percent (100%) of the
shares of Advantis Network & System Sdn Bhd, a Malaysian corporation
("Advantis"). As a result of the acquisition, Advantis became a wholly-owned
subsidiary of NHancement. Advantis is a telecommunications systems integrator
located in Malaysia. The operations of the entity are being conducted under the
name of "Advantis Network & System Sdn Bhd," which is headquartered in Kuala
Lumpur, Malaysia. The acquisition was accounted for as a purchase, and,
accordingly, the results of Advantis' operations were included in the Company's
financial statements commencing December 15, 1997.

    The business of NHancement is conducted by its operating company
subsidiaries, Voice Plus, Inc. and Advantis Network & System Sdn Bhd. The
financial data presented for the three months ended March 31, 1997 includes
results of operations for only three months of BFI, two months of VPI and none
of Advantis. The financial data presented for the three months ended March 31,
1998 includes three months' operating results of BFI, VPI and Advantis.





                                      -13-
<PAGE>   14

                          NHANCEMENT TECHNOLOGIES INC.

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                      -----------------------------
                                                                                 MARCH 31
                                                                      -----------------------------
                                                                         1997               1998
                                                                      ----------         ----------
<S>                                                                      <C>                <C>    
                 Net sales                                               100.0 %            100.0 %
                 Cost of sales                                            44.5 %             69.9 %
                 Gross profit                                             55.5 %             30.1 %
                 Research, selling and administrative expenses            44.4 %             89.5 %
                 Amortization of excess of cost over net assets            6.9 %              8.2 %
                 acquired
                        Income (loss) from operations                      4.2 %            (67.2)%
                 Other income (expense)                                   (0.5)%              2.6 %
                 Income (loss) before income taxes                         3.7 %            (64.6)%
                 Income taxes                                               .7 %               --
                 Net income (loss)                                         3.0 %            (64.6)%
                                                                      ----------         ----------
</TABLE>

    The Company's primary focus in the first quarter of 1998 was as an
integrator and distributor of voice processing and telecommunications systems
for businesses, which operations were conducted through the Company's VPI and
Advantis subsidiaries. Only two months of VPI's revenues were recorded in the
Company's financial statements during 1997. VPI's net revenues as a stand-alone
business decreased 67% from $2.3 million for the three months ended March 31,
1997 to $1.0 million for the three months ended March 31, 1998. The decrease in
revenue was anticipated as the backlog had eroded during 1997 and at year-end
was well below $1 million. The Company's revenues historically are almost
exclusively derived from the sale of Centigram products and in the fourth
quarter of 1997 persistent rumors of Centigram's intention to sell its Customer
Premise Equipment ("CPE") business were wide-spread in the marketplace. In early
March 1998 Centigram made a public announcement that it had signed a letter of
intent with Mitel for the sale of its CPE business (the closing of which
occurred in early May). As a result of the uncertainty in the marketplace
concerning the Centigram product, customers for large Centigram systems delayed
making buying decisions. This accounted for most of the shortfall in the first
quarter revenue, as the Company did not record any revenues from large system
orders in the period. Management believes that much of the uncertainty
surrounding the Centigram product has been resolved with our major customers and
that this issue will not have a significant adverse impact on VPI's business
after the second quarter of 1998. Revenues from maintenance, parts and small
systems during the first quarter were at or above historical levels and are
expected to remain strong.

    In addition, during April the Company announced that James B. Linkous
accepted the position of General Manager of VPI and that James Gillespie, who
was previously in that position, became a part-time consultant to the Company.
Mr. Linkous has been tasked with strengthening the sales infrastructure and
expanding VPI's product offering. He is also expected to be a key player in
integrating Voice Plus with NHancement's growing operations in the U.S. and
overseas.

    The Company's Advantis subsidiary, a telecommunications system integrator
located in Malaysia was acquired on December 15, 1997. Net sales include three
months of Advantis' results in 1998 but are not included in 1997 first quarter
data. On a stand-alone basis, net sales decreased from $2.7 million to $0.3
million for the first quarter 1998 versus the first quarter 1997. Over 50% of
Advantis' net sales in 1997 were earned during the first quarter of 1997, which
was due to the completion of several one-time large projects. Due to the current
instability of the Malaysian currency, any new implementation projects were
delayed.

    The Company has decided to pursue a buyer for its FACTOR 1000(R) technology
and products, as no 




                                      -14-
<PAGE>   15

significant FACTOR 1000 revenue was generated in 1997 or 1998.

    Gross margins in 1998 decreased to 30.1% from 55.5% in 1997, about 10% of
the decrease was attributable to Advantis, the remainder to VPI. VPI's gross
margin on a stand-alone basis decreased from 57.0% to 39.8% as the fixed cost
component of cost of sales was spread over a smaller revenue base for the
quarter. VPI's variable cost of goods sold as a percentage of sales is
comparable in 1998 to 1997 cost of goods sold. Based on anticipated VPI's
revenue increases over the next several quarters, the gross margin is expected
to improve.

    Company-wide research, selling, and administrative ("RS&A") expenses as a
percentage of net sales were up to 89.5% for 1998 versus 44.4% for 1997, however
on a standalone basis, the 1998 and 1997 RS&A expense was approximately $1.2
million in both periods. The increase in RS&A expense as a percentage of net
sales is due to the same level of RS&A expenses for 1998 as compared to 1997
being spread over a smaller revenue base.

LIQUIDITY AND CAPITAL RESOURCES

    Although the acquisition of complimentary businesses and products is an
element of the Company's business strategy, none of the proceeds of the IPO were
reserved specifically for the funding of future acquisitions. If a cash payment
in excess of available working capital is required to make an acquisition, the
Company will need to obtain additional debt or equity financing. Debt financing
may require the Company to pay significant amounts of interest and principal
payments, thus reducing the resources available to expand its existing
businesses. Equity financing may dilute the Company's existing stockholders'
interest in the assets or earnings of the Company. There can be no assurance
that the Company will be able to obtain either debt or equity financing if and
when it is needed for acquisitions or general working capital purposes or that,
if available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing will likely
have a material adverse effect on the Company's growth and acquisition strategy.
The Company recently negotiated an equity financing for $3.0 million, of which
$1,250,000 (less $162,500 of cost and expenses) had been received as of the date
of filing of this quarterly report on Form 10-QSB with the remainder to be
received subject to the terms of the Preferred Stock financing.

    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 or about April 16, 1998, Nasdaq informed the Company
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. The Company has notified Nasdaq of the steps it has taken and proposes to
take in order to remedy the above deficiency. The propriety of continuing the
Company's listing on the Nasdaq SmallCap Market System is currently being
reviewed by Nasdaq. While the Company believes that it will be in position to
meet these listing requirements in the near-term future, such belief is
dependent in part upon the Company completing the Infotel acquisition, the
financing for which had not been completed as of the date of this Prospectus.
There can be no assurance that the Company will in fact meet these requirements
in any 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.

    During the first quarter of 1998, net cash used in operating activities was
$0.5 million, consisting primarily of the net loss for the period and cash used
to pay accounts payable and accrued liabilities, which was partially offset by
accounts receivable collections. Net cash provided by investing and financing
activities totaled $0.1 million consisting principally of additional borrowings
made under Advantis' line of credit. At March 31, 1998, the Company's working
capital was $0.4 million, and cash and cash equivalents totaled $0.9 million.
The current ratio decreased from 1.3 to 1 at December 31, 1997 to 1.1 to 1 at
March 31, 1998, primarily due to reduced revenues for VPI.

    As of March 31, 1998, the Company had outstanding debt of approximately $0.8
million inclusive of associated accrued interest. The Company had been offered a
$2.0 million credit line with a U.S. major bank with an advance rate of 80% of
eligible accounts receivable, but has chosen not to finalize the agreement at
this time.

    The Company's management estimates that it will incur about $500,000 in
capital expenditures during the next 12 months, about $300,000 of which
represents company-wide business systems software. It is anticipated that all
major capital expenditures will be financed through equipment leases and will
not require significant direct outlays of cash.




                                      -15-
<PAGE>   16
    Based upon its present plans, management believes that operating cash flow,
available cash and available credit, are adequate to meet the working capital
cash needs of the Company and to meet anticipated capital needs during the next
12 months. Although the Company intends to issue shares of Common Stock as its
primary method of financing acquisitions, it anticipates that additional funds
will be required to successfully implement its acquisition program, and it will
use various methods to finance acquisitions, including the payment of cash, for
this purpose. The completion of the pending Infotel transaction requires a
substantial payment.

ACCOUNTING STANDARDS

    During 1997, the Financial Accounting Standards Board released its 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. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS No. 130 does not address issues of
recognition or measurement for comprehensive income and its components, and
therefore, it will not have an impact on the financial condition or results of
operations of the Company upon adoption.

    The Financial Accounting Standards Board also recently released SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
Statement, which is also effective for fiscal years beginning after December 15,
1997, requires reporting of financial and descriptive information about
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Because of the recent issuance
of this standard, management has been unable to fully evaluate the impact, if
any, it may have on future financial statement disclosure. Results of operations
and financial position, however, will be unaffected by implementations of this
standard.

    In February 1998, the Financial Accounting Standards Board issued SFAS No.
132 Employer's Disclosures about Pensions and Other Post Retirement Benefits.
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 fiscal years
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated unless the information is not readily available, in
which case the notes to the financial statements should include all available
information and a description of the information not available. Management
believes that the Company's current financial statement disclosures will not
need to be modified based upon current operations. Results of operations and
financial position will be unaffected by implementation of this standard.





                                      -16-
<PAGE>   17
                                     PART II
                                OTHER INFORMATION

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)    Not applicable.

(b)    Not applicable.

(c)    Not applicable.

(d)    On February 4, 1997, the Company and Chatfield Dean & Company, its
       underwriter, completed an initial public offering of 2,300,000 shares of
       $0.01 par value Common Stock, of which 1,700,000 shares were sold by the
       Company and 600,000 shares, representing a portion of the consideration
       for the outstanding shares of VPI, were sold by a stockholder of the
       Company (Commission file number 333-15563). On February 11, 1997, the
       underwriters exercised an option to purchase from the Company an
       additional 345,000 shares of Common Stock to cover over-allotments. The
       use of proceeds by the Company through March 31, 1998 was as follows
       (amounts are actual unless indicated as estimates):

<TABLE>
<S>                                                                  <C>       
                       Gross Proceeds to the Company                 $8,180,000
                       Underwriters Discounts and Commissions           572,600
                       Underwriters Non-accountable Expenses            245,400
                       Other Expenses                                   831,700
                                                                     ----------
                       Total Expenses                                 1,649,700
                                                                     ----------
                       Net Offering Proceeds to the Company          $6,530,300
                                                                     ==========

                       Use of Net Offering Proceeds:
                       Purchase and installation of equipment        $  220,000
                       Repayment of Indebtedness                      2,485,400
                       Repayment of Indebtedness to Affiliates          391,100
                       Bonuses to Officers                              250,000
                       Secured Loans ($60,000 to Officer)               360,000
                       Working Capital (estimated)                    1,887,900
                       Cash in Banks                                    935,900
</TABLE>


                                      -17-
<PAGE>   18


    ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      The following Exhibits are filed as part of the Quarterly Report on 
         Form 10-QSB

             EXHIBIT
              NUMBER                        DESCRIPTION OF EXHIBIT
             --------                       ----------------------

              27      --   Financial Data Schedule

(b)      Reports on Form 8-K

         A Report on Form 8-K/A was filed with the Commission on 
         February 11, 1998.


                  [Rest of this page intentionally left blank]




                                      -18-
<PAGE>   19
                                   SIGNATURES

    In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                             NHANCEMENT TECHNOLOGIES INC.



                             By:  /s/ Esmond T. Goei
                                 -----------------------------------------------
Date: May 14, 1998               Esmond T. Goei
                                 Chairman of the Board, Chief Executive Officer,
                                 and President



                             By:  /s/ Douglas S. Zorn
                                 -----------------------------------------------
Date: May 14, 1998               Douglas S. Zorn
                                 Executive Vice President-Finance,
                                 Treasurer and Chief
                                 Financial Officer






                                      -19-
<PAGE>   20


                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
      EXHIBIT NUMBER                  DESCRIPTION OF EXHIBITS
      --------------                  -----------------------
<S>       <C>                                    
          27              Financial Data Schedule
</TABLE>