<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 September 30, 1997

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

                         Commission file number 0-21999

                             -----------------------
                          NHANCEMENT TECHNOLOGIES INC.

           (NAME OF SMALL BUSINESS ISSUER 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 November 14, 1997, there were 4,228,440 shares of Common Stock, $0.01
par value per share, outstanding.

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

<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.







                                      F-1
<PAGE>   3


                          NHANCEMENT TECHNOLOGIES INC.
                           (FORMERLY BIOFACTORS, INC.)

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                              SEPTEMBER 30, 1997
                                                                              ------------------
<S>                                                                              <C>         
ASSETS
CURRENT
          Cash and cash equivalents                                              $  2,326,300
          Accounts receivable, less allowance for doubtful accounts of $50,000      1,866,700
          Notes receivable from Advantis (note 8)                                     306,200
          Note receivable from stockholder                                             61,900
          Inventory                                                                   438,100
          Prepaid expenses and other                                                  308,100
          Deferred tax assets                                                         119,500
                                                                                 ------------
                Total current assets                                                5,426,800

FURNITURE AND EQUIPMENT                                                               780,100
          Less accumulated depreciation                                              (200,900)
                                                                                 ------------
FURNITURE AND EQUIPMENT, NET                                                          579,200

EXCESS OF COST OVER NET ASSETS ACQUIRED, NET (Note 5)                               5,619,600

OTHER ASSETS                                                                          112,100
                                                                                 ------------
                                                                                 $ 11,737,700
                                                                                 ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
          Accounts payable                                                       $    259,800
          Accrued liabilities                                                         941,100
          Payroll related liabilities                                                 178,100
          Deferred revenue                                                          1,084,500
          Current portion of long-term debt, due stockholder (Note 3)                 375,000
                                                                                 ------------
               Total current liabilities                                            2,838,500

LONG-TERM DEBT, due stockholder (Note 3)                                               62,500
                                                                                 ------------

TOTAL LIABILITIES                                                                   2,901,000

STOCKHOLDERS' EQUITY (Notes 3, 4, 6 and 7)
          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,      
              4,228,500 shares issued and outstanding                                  42,300
          Additional paid-in capital                                               17,574,400
          Accumulated deficit                                                      (8,780,000)
                                                                                 ------------

TOTAL STOCKHOLDERS' EQUITY                                                          8,836,700
                                                                                 ------------
                                                                                 $ 11,737,700
                                                                                 ============
</TABLE>






                                      F-2
<PAGE>   4
                                                    NHANCEMENT TECHNOLOGIES INC.
                                                     (FORMERLY BIOFACTORS, INC.)

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED            NINE MONTHS ENDED
                                                   SEPTEMBER     SEPTEMBER       SEPTEMBER     SEPTEMBER
                                                   30, 1996      30, 1997        30, 1996      30, 1997
----------------------------------------------------------------------------   --------------------------
<S>                                              <C>            <C>            <C>            <C>        
NET SALES                                        $   365,200    $ 2,648,700    $   757,100    $ 6,720,800

COST OF SALES                                         36,500      1,354,100        108,300      3,513,400
                                                 -----------    -----------    -----------    -----------

GROSS PROFIT                                         328,700      1,294,600        648,800      3,207,400
                                                 -----------    -----------    -----------    -----------

OPERATING EXPENSES
Research and development                              26,500         19,400         74,300         62,200
Selling, marketing and administrative                352,900        974,000      1,334,000      2,444,900
Amortization of excess of cost over net assets
 acquired                                               --          150,800           --          409,800
                                                 -----------    -----------    -----------    -----------

TOTAL OPERATING EXPENSES                             379,400      1,144,200      1,408,300      2,916,900
                                                 -----------    -----------    -----------    -----------

INCOME (LOSS) FROM OPERATIONS                        (50,700)       150,400       (759,500)       290,500
                                                 -----------    -----------    -----------    -----------

OTHER INCOME (EXPENSE)
Interest income                                         --           30,800           --          103,300
Interest expense                                     (72,300)        (3,400)      (435,100)       (71,300)
                                                 -----------    -----------    -----------    -----------

                                                     (72,300)        27,400       (435,100)        32,000
                                                 -----------    -----------    -----------    -----------

INCOME (LOSS) BEFORE INCOME TAXES                   (123,000)       177,800     (1,194,600)       322,500
INCOME TAXES                                            --           62,500          --            92,500
                                                 -----------    -----------    -----------    -----------

NET INCOME (LOSS)                                $  (123,000)   $   115,300    $(1,194,600)   $   230,000
                                                 ===========    ===========    ===========    ===========


NET INCOME (LOSS) PER COMMON SHARE
(Note 7)                                         $     (0.12)   $      0.03    $     (1.17)   $      0.06
                                                 ===========    ===========    ===========    ===========

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING                                 1,024,615      4,279,259      1,024,615      3,799,875
                                                 ===========    ===========    ===========    ===========
</TABLE>




                                      F-3
<PAGE>   5



                                                    NHANCEMENT TECHNOLOGIES INC.
                                                     (FORMERLY BIOFACTORS, INC.)

                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                             COMMON STOCK                ADDITIONAL    ACCUMU-
                                              PAR VALUE                    PAID-IN      LATED
                                               SHARES         AMOUNT       CAPITAL      DEFICIT         TOTAL
================================================================================================================
<S>                                           <C>         <C>           <C>          <C>             <C>      
BALANCE, December 31, 1996                      612,800   $     6,100   $ 5,363,900   $(9,010,000)   $(3,640,000)
Issuance of common stock for
acquisition (Notes 1 and 3)                   1,312,500        13,100     4,666,900                    4,680,000

Initial public offering of common stock
at $4.00 per share, net of offering
costs of $1,649,700 (Note 4)                  2,045,000        20,500     6,509,800                    6,530,300

Issuance of common stock for conversion
of notes payable and accrued interest
(Note 4)                                        258,200         2,600     1,030,000                    1,032,600

Compensation related to grant of stock
options to consultant (Note 6)                                                3,800                        3,800


Net income                                                                                230,000        230,000
----------------------------------------------------------------------------------------------------------------

BALANCE, September 30, 1997                   4,228,500   $    42,300   $17,574,400   $(8,780,000)   $ 8,836,700
================================================================================================================
</TABLE>





                                      F-4
<PAGE>   6



                                                    NHANCEMENT TECHNOLOGIES INC.
                                                     (FORMERLY BIOFACTORS, INC.)

                                            CONSOLIDATED STATEMENTS OF CASH FLOW


<TABLE>
<CAPTION>
                                                                            NINE MONTHS ENDED
                                                                   SEPTEMBER 30, 1996  SEPTEMBER 30, 1997
                                                                   ------------------  ------------------
<S>                                                                    <C>                 <C>
Cash flows from operating activities
          Net income (loss)                                            $(1,194,600)        $   230,000
          Adjustments to reconcile net income (loss) to net cash
           used  in operating activities:
          Depreciation                                                      27,000             108,800
          Amortization of deferred revenue                                (684,600)               --
          Amortization of excess cost over net assets acquired                --               409,800
          Amortization of debt issuance costs on notes payable             202,300                --
          Compensation related to grant of stock options and common
           stock                                                            34,100               3,800
          Changes in assets and liabilities:
                 Accounts receivable                                       (13,600)             64,400
                 Notes receivable, related party                           700,000                --
                 Inventory                                                   1,200             539,100
                 Prepaid expenses and other                                 27,700            (186,000)
                 Other assets                                                 --               (46,600)
                 Accounts payable and other current liabilities            445,300          (3,136,700)
                                                                       -----------         -----------

Net cash used in operating activities                                     (455,200)         (2,013,400)

Cash flows from investing activities:
          Prepaid acquisition costs                                           --               (52,400)
          Cash acquired from VPI Acquisition                                  --               851,900
          Note receivable from stockholder                                    --               (61,900)
          Note receivable from Advantis                                       --              (306,200)
          Purchase of furniture and equipment                              (12,500)           (181,800)
                                                                       -----------         -----------

Net cash (used in) provided by investing activities                        (12,500)            249,600

Cash flows from financing activities:
          Proceeds from initial public offering of common stock,
            net of offering costs                                             --             6,906,500
          Prepaid stock offering costs                                    (172,100)               --
          Proceeds from long-term debt                                     670,000                --
          Principal payment of long-term debt                             (117,800)         (1,814,000)
          Principal payment of long-term debt due stockholder                 --            (1,062,500)
                                                                       -----------         -----------
Net cash provided by financing activities                                  380,100           4,030,000

Net increase (decrease) in cash and cash equivalents                       (87,600)          2,266,200

Cash and cash equivalents, beginning of period                             170,500              60,100
                                                                       -----------         -----------
Cash and cash equivalents, end of period                               $    82,900         $ 2,326,300
                                                                       ===========         ===========
</TABLE>






                                      F-5
<PAGE>   7




DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

On February 3, 1997, the Company acquired all outstanding shares of common stock
of Voice Plus, Inc. in exchange for 1,312,500 shares of the Company's Common
Stock with an estimated value of $4,680,000 and two promissory notes in an
aggregate principal amount of $1,500,000. See Notes 1 and 3.

<TABLE>
           Total Consideration:
<S>                                                              <C>       
                   1,312,500 shares of Common Stock              $4,680,000
                   Promissory notes                               1,500,000
                                                                 ----------
                                                                  6,180,000
                   Cost of acquisition                              270,100
                                                                 ----------
                                                                 $6,450,100
                                                                 ==========

           Consideration was used for:
                   Net assets acquired                           $  697,100
                   Excess of cost over net assets acquired        5,753,000
                                                                 ----------
                                                                 $6,450,100
                                                                 ==========
</TABLE>


On February 4, 1997, the Company completed its initial public offering (see Note
4). In connection therewith, the Company converted certain notes and related
accrued interest in an aggregate amount of $1,032,600 into shares of its Common
Stock.




                                      F-6
<PAGE>   8

1.    ORGANIZATION

         NHancement Technologies Inc., a Delaware corporation (the "Company"),
         was incorporated in October 1996 as a holding company and successor to
         the business of BioFactors, Inc. ("BFI"), a Delaware corporation. On
         February 3, 1997, prior to the February 4, 1997 consummation of the
         initial public offering (the "IPO") of the Company's common stock (see
         Note 4), BFI merged with a subsidiary of the Company whereupon BFI, as
         the surviving corporation, became a wholly owned subsidiary of the
         Company (the "BFI Merger"). Also on February 3, 1997, the Company
         acquired Voice Plus, Inc. ("VPI"), a California corporation, a systems
         integrator and national distributor of voice processing equipment,
         pursuant to a transaction by which VPI merged with a subsidiary of the
         Company, whereupon VPI, as the surviving corporation, became a wholly
         owned subsidiary of the Company (the "VPI Acquisition"). The business
         of the Company is conducted by its operating company subsidiaries, BFI
         and VPI (see Note 3).

2.    FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS

         The accompanying consolidated financial statements as of September 30,
         1997 and for the three and nine months ended September 30, 1997 and
         1996 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, 1996 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.

         On March 3, 1997, the Financial Accounting Standards Board issued SFAS
         No. 128, "Earnings per Share." This pronouncement provides a different
         method of calculating earnings per share than is currently used in
         accordance with APB No. 15, "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 shareholders by the weighted average number
         of common shares outstanding for the period. Diluted earnings per share
         reflect the potential dilution of securities that could share in the
         earnings of an entity, similar to fully diluted earnings per share.
         Calculations under the new standard, which will be adopted in the
         fourth quarter of 1997, are not expected to result in a significant
         difference from those under the current method.

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 130, Reporting Comprehensive
         Income (SFAS 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 



                                      F-7
<PAGE>   9
         disclosures, SFAS 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 130 is effective for financial statements for periods 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 Statement
         of Financial Accounting Standards No. 131, Disclosures about Segments
         of an Enterprise and Related Information (SFAS 131), which supersedes
         SFAS No. 14, Financial Reporting for Segments of a Business Enterprise.
         SFAS 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 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 131 is effective for financial statements for periods 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.

3.    ACQUISITION AND MERGER TRANSACTIONS

         Pursuant to the BFI Merger agreement, shares of the Company's common
         stock ("Common Stock") were exchanged for all the issued and
         outstanding common stock of BFI, in a ratio of three shares of Common
         Stock for every four shares of BFI common stock. In addition, the
         Company assumed (i) the obligations of BFI's outstanding stock options,
         by which assumption the optionee has the right to purchase 5.625 shares
         of the Company's Common Stock for every 10 shares of BFI common stock
         the optionee could have purchased prior to the BFI Merger at an
         exercise price per share equal to 80% of the IPO Price, (ii) the
         obligations of BFI's issued and outstanding warrants in accordance with
         their terms, and (iii) the obligations of the Registration Rights
         Agreement dated as of September 1, 1996. The Company also undertook to
         issue to certain holders of BFI notes, warrants to purchase an
         aggregate of 109,900 shares of the Company's Common Stock, exercisable
         one year from the close of the IPO at an exercise price of 120% of the
         IPO Price.

         The VPI Acquisition agreement 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, due on the
         third anniversary of the consummation of the VPI Acquisition, (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 VPI Acquisition, and (iii)
         shares of the Company's Common Stock with an estimated fair market
         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 





                                      F-8
<PAGE>   10

         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. As of September 30, 1997, $1,062,500 of the $1,500,000
         unsecured promissory notes was paid based on the promissory note terms
         which provide for accelerated payments to be made if certain profit
         targets are met by VPI. In connection with the VPI Acquisition, the
         Company entered into a three-year employment agreement with the
         president and sole stockholder of VPI, pursuant to which the Company
         agreed to pay a base salary of $150,000 per year, commissions of
         approximately $200,000 per year and an annual performance based bonus.
         The employment agreement provides that, if the Company materially
         breaches the agreement or terminates the employee without "cause," the
         Company will continue to pay base salary and 50% of the commissions
         for the duration of the term and, in the event of a material breach by
         the Company, the two promissory notes will be accelerated and
         immediately become due and payable. In addition, the Company committed
         to pay signing bonuses in the aggregate amount of $170,000 to three
         employees of VPI. The bonuses, of which 50% was paid upon consummation
         of the IPO and the remainder paid in August 1997, were not contingent
         upon continued employment.


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 $1,649,700, from the offering (including the
         over-allotment shares) and did not receive any of the proceeds from the
         sale of shares by the stockholder. The Company's Common Stock is quoted
         on The Nasdaq Stock Market SmallCap System.

         In connection with the closing of the IPO, the Company repaid principal
         amounts and the related accrued interest of various notes in an
         aggregate amount of approximately $2,027,000. In addition, the Company
         converted to its Common Stock certain notes and related accrued
         interest in an aggregate amount of $1,032,600.

5.    EXCESS OF COST OVER NET ASSETS ACQUIRED, NET

         The excess of cost over net assets acquired is amortized over a 10-year
         period using the straight-line method. The carrying value is
         periodically evaluated for impairment by the Company based on the
         expected future undiscounted cash flows of the related business. As of
         September 30, 1997, the excess of cost over net assets acquired
         consisted of the following:

<TABLE>
<CAPTION>
                                                                Excess of Costs
                                                                 ver Net Assets       Accumulated
                                                                   Acquired          Amortization           Net
         ========================================================================================================
<S>                                                                <C>               <C>               <C>        
         Acquisition of Phonetics, Inc. by VPI
             in October 1996                                       $ 280,900        $ (24,200)         $ 256,700
         VPI Acquisition                                           5,753,000         (390,100)         5,362,900
         --------------------------------------------------------------------------------------------------------
                                                                 $ 6,033,900       $ (414,300)       $ 5,619,600
         ========================================================================================================
</TABLE>





                                      F-9
<PAGE>   11
         The Company is continuing its process of valuing the net assets
         acquired from VPI. Accordingly, the allocation of purchase price may be
         adjusted in future periods.

6.    STOCK OPTIONS

         During the nine months ended September 30, 1997, the Company granted
         options to purchase approximately 510,000 shares of the Company's
         Common Stock principally to employees, directors and consultants,
         including option grants to purchase 100,000 shares made in connection
         with the VPI Acquisition, with exercise prices ranging from $3.20 to
         $4.00 per share.

7.    NET INCOME (LOSS) PER SHARE

         Net income (loss) per common and common equivalent share using the
         weighted average of common and common equivalent shares outstanding was
         computed by applying Securities and Exchange Commission Staff
         Accounting Bulletin No. 83 (SAB 83) for the three and nine months ended
         September 30, 1996. Pursuant to SAB 83, common and common equivalent
         shares issued by the Company during the 12 months immediately preceding
         its initial public offering at a price below the initial public
         offering price, together with common share equivalents which result
         from the grant of common stock options having exercise prices below the
         initial public offering price during the same period, have been
         included in the calculation of the shares used in computing net loss
         per share as if they were outstanding for all periods prior to the
         initial public offering. Net income per share for periods subsequent to
         the initial public offering have been computed using the treasury stock
         method, under which the number of shares outstanding includes an
         assumed use of the proceeds from the issuance of such shares and from
         the assumed exercise of such options and warrants to repurchase shares
         of the Company's Common Stock at current market prices.

8.    PENDING ACQUISITION  AND LEASE  COMMITMENTS

         In June 1997, the Company signed an agreement to acquire Advantis
         Network & Systems, Sdn Bhd ("Advantis"), a Malaysian company providing
         commercial data communications solutions by offering leading edge
         networking products. Under the terms of the agreement, as proposed to
         be amended, the Company would acquire all of the outstanding Common
         Stock of Advantis in exchange for 300,000 shares of the Company's
         Common Stock which would be issued to Advantis at the close of the
         transaction, currently expected to occur in November 1997, with an
         additional 230,000 shares, the issuance of which would be contingent on
         the future profitability of Advantis over a two year period. All shares
         of the Company's Common Stock issued to Advantis in connection with the
         transaction would be subject to restrictions on transferability,
         including restrictions under the Securities Act of 1933, as amended.
         The agreement to acquire Advantis is contingent upon several issues
         being resolved in a manner acceptable to the Company, including the
         completion of the proposed amendment documentation and the Company's
         due diligence investigation. The Company has obtained approval from a
         Malaysian quasi-governmental authority for the acquisition of Advantis.
         In July 1997, the Company loaned Advantis $300,000 for its operations
         subject to a promissory note secured by the assets of Advantis and
         certain personal guarantees.

         The Company has signed a three-year lease on a new 7,200 square foot
         facility located at 39420 Liberty Street, Fremont, California 94538.
         The Company relocated its headquarters from Golden, Colorado and
         consolidated its VPI and BFI subsidiaries into this facility that also
         serves as its new corporate headquarters. The move was completed in
         August 1997. The Company




                                      F-10
<PAGE>   12

         believes that the new facility will be adequate for its current needs
         and that additional space will be available in the future at
         commercially reasonable rates. Under the terms of the lease, annual
         minimum lease payments range from $138,200 to $147,700 through August
         31, 2000.

9.   UNAUDITED PRO FORMA FINANCIAL DATA

         The unaudited pro forma statements of operations combine the results of
         operations of BioFactors and VPI for the nine months ended September
         30, 1997 and 1996, as if the VPI Acquisition 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 result of
         operations as they would have been had the VPI Acquisition 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
                                                                      ------------------------------
                                                                             NINE MONTHS ENDED
                                                                      -------------------------------
                                                                      SEPT. 30, 1996   SEPT. 30, 1997
                                                                      --------------   --------------
<S>                                                                      <C>            <C>        
Net sales                                                                $ 6,950,400    $ 7,572,000
Cost of  sales                                                             3,864,700      4,105,700
                                                                         -----------    -----------
Gross profit                                                               3,085,700      3,466,300
Total operating expenses (includes amortization of
excess of cost over net assets acquired)                                   3,840,000      3,211,800
                                                                         -----------    -----------
Income (loss) from operations                                               (754,300)       254,500
Other income (expense)                                                       (25,500)        35,600
                                                                         -----------    -----------
Income (loss) before income taxes                                           (779,800)       290,100
Income taxes                                                                    --           91,500
                                                                         -----------    -----------
Net income (loss)                                                           (779,800)       198,600
                                                                         ===========    ===========

Net income (loss) per common share                                       $     (0.38)   $      0.05
                                                                         ===========    ===========

Weighted average common and common equivalent shares
outstanding                                                                2,074,615      3,965,153
                                                                         ===========    ===========
</TABLE>




                                      F-11
<PAGE>   13



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS SEPTEMBER 30, 1996

         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.

GENERAL

         NHancement Technologies Inc. ("NHAN" or the "Company") was formed in
1996 as a holding company. On February 4, 1997, NHAN completed the initial
public offering of its common stock pursuant to a registration statement filed
with the Securities and Exchange Commission. Immediately prior to the closing of
the IPO, through two separate mergers, BFI and VPI became wholly owned
subsidiaries of NHAN. The VPI merger was accounted for as a purchase, and the
BFI merger was accounted for in a manner similar to a pooling-of-interests.
Prior to these business combinations, each of BFI and VPI had been operating as
an independent entity. For accounting purposes, BFI is considered the acquiror;
accordingly, the financial data presented for the nine months ended September
30, 1996 include only BFI results of operations. The financial data presented
for the nine months ended September 30, 1997 include nine months' operating
results of BFI and also includes eight months (February through September)
operating results of VPI (VPI was a separate company until February 4, 1997).

                          NHANCEMENT TECHNOLOGIES INC.
                           (FORMERLY BIOFACTORS, INC.)

<TABLE>
<CAPTION>
                                                                        NINE MONTHS ENDED
                                                                          SEPTEMBER 30
                                                                      ---------------------
                                                                        1996         1997
                                                                      --------      -------
<S>                                                                    <C>          <C>    
                 Net sales                                             100.0 %      100.0 %
                 Cost of sales                                          14.3 %       52.3 %
                 Gross profit                                           85.7 %       47.7 %
                 Research, selling and administrative expenses         186.0 %       37.3 %
                 Amortization of excess of cost over net assets          0.0 %        6.1 %
                 acquired
                        Income (loss) from operations                 (100.3)%        4.3 %
                 Other income (expense)                                (57.5)%        0.5 %
                 Income (loss) before income taxes                    (157.8)%        4.8 %
                 Income taxes                                            0.0 %        1.4 %
                 Net income (loss)                                    (157.8)%        3.4 %
</TABLE>


         BFI is completing development of its technology relating to employee
impairment testing systems and had almost no revenues during the first nine
months of 1997. VPI is an integrator and distributor of voice processing and
telecommunications systems for businesses and had significant revenues during
the first nine months of 1997. Increased NHAN revenue for the first nine months
of 1997 of $5,941,700 was exclusively due to the acquisition of VPI and the
recording of $6,698,800 of VPI revenues for February through 



                                      F-12
<PAGE>   14

September 1997; no such revenues were included in the first nine months of 1996.
NHAN's gross margin for the first nine months of 1997 decreased to 47.7% from
85.7% for the comparable period in 1996 as a result of recording VPI revenues
for February through September of 1997 with an associated gross margin of 48.4%.
VPI's gross margin for February through September is unusually high due to the
recording of $250,000 in extremely high gross margin revenues during the period
as well as sales of refurbished systems with higher than normal gross margins.
Management expects a gross margin percentage in the low to mid-40% range on
future VPI sales, which is slightly higher than historical gross margin
percentages, due to favorable pricing adjustments from a key supplier. In the
first nine months of 1996, BFI's net sales and gross margins were attributable
to a $700,000 royalty fee with significantly high gross margin, and to early
"beta" type customer installations of the FACTOR 1000 system with significant
negative gross margins and high engineering and customer installation costs. In
the first nine months of 1997, BFI's gross margins on revenues were negative, as
revenues were negligible with no royalty fees collected.

         Research, selling and administrative ("RS&A") expenses as a percentage
of net sales decreased during the first nine months of 1997 versus the first
nine months of 1996 (186.0% versus 37.3%) due to the acquisition of VPI, whose
significant revenues materially altered operating percentages. RS&A expenses
increased from $1,408,300, in the first nine months of 1996 to $2,507,100 in the
first nine months of 1997, due to the recording of eight months of VPI operating
expenses offset by a reduction in BFI's RS&A expenses, which decreased from
$1,406,300 in the first nine months of 1996 to $488,300 for the first nine
months of 1997 due to expense reductions and the allocation of certain
administrative expenses to the VPI operation.

         Amortization of the excess of cost over net assets acquired related to
the Voice Plus, Inc. acquisition amounted to $409,800 for the eight month period
ended September 30, 1997 or 6.1% of net sales for the period. No such charges
were recorded in 1996, as the VPI acquisition was completed February 3, 1997.
The goodwill amount recorded and the associated amortization of goodwill may be
adjusted in future periods as management continues to assess the proper
valuation of the net assets acquired for the purpose of allocating the purchase
price of VPI. Management is required to finalize the allocation of the purchase
price within twelve months of the date of acquisition.

         Other expense decreased from $(435,100) in the first nine months of
1996 to a net other income of $32,000 in the first nine months of 1997,
primarily due to a decrease in interest expense on bridge financings which were
repaid or converted into shares of NHAN Common Stock upon consummation of the
IPO. After the application of proceeds from the IPO, the Company had only
$437,500 remaining as of September 30, 1997 in promissory notes payable in
connection with the VPI merger, after payment of $1,062,500 of such notes in the
first three-quarters of 1997. The reduction in interest expense amounted to
$363,800, and the increase in interest income totaled $103,300 during the
period.

         The effective income tax rate of 28.7% in the first nine months of 1997
was substantially different from the blended federal and state statutory income
tax rate of approximately 40% principally due to the application of BFI's
current losses and the net operating loss carryforward, limited due to change of
ownership, which offset the profits of VPI on a consolidated tax return basis.
The Company has recorded a 100% valuation allowance against the BFI gross
deferred tax assets, which principally relate to net operating loss
carryforwards, as realization is presently evaluated as uncertain. The zero
effective income tax rate for the first nine months of 1996 reflects only BFI
which operated at a significant loss during the period and thus recorded no
income tax expense. VPI operated as a Subchapter S corporation during 1996 and
the first month of 1997. NHAN will file consolidated tax returns as a C
corporation in future periods.





                                      F-13
<PAGE>   15

LIQUIDITY AND CAPITAL RESOURCES

         During the first nine months of 1997, net cash used in the operating
activities of NHAN was $2,013,400 primarily due to the payment of accounts
payable and other current liabilities. Net cash provided by investing and
financing activities totaled $4,279,600 due primarily to NHAN's completion of
the acquisition of VPI, which had $851,900 in cash, and to the completion of the
IPO with net proceeds of about $6.5 million to the Company of which $1.8 million
was used to repay long-term debt and $1,062,500 was used to pay down the debt
due stockholder which was incurred in connection with the acquisition of VPI. As
a result of the above, there was a net increase in cash of about $2.3 million
during the period. NHAN's working capital at September 30, 1997 was
approximately $2.6 million. The current ratio at September 30, 1997 was 1.9 to
1, primarily due to the completion of the IPO and the acquisition of Voice Plus,
Inc.

         As of September 30, 1997, NHAN had outstanding debt of $437,500 payable
to its largest stockholder (the former owner of VPI). The Company utilized
proceeds from its IPO to repay about $2.0 million of debt and interest accrued
at rates between 10% and 12% per annum and $1,062,500 of the principal due on
the stockholder notes issued in connection with the VPI Acquisition. The Company
intends to spend remaining IPO proceeds to fund approximately $500,000 of
product and market development costs for the FACTOR 1000 system and for general
corporate purposes, including future acquisitions.

         Management estimates that it will incur minimal capital expenditures
during the remainder of 1997. However, the Company recently relocated and
consolidated its corporate offices in California and, in connection with that
move and consolidation, incurred certain costs of approximately $75,000
associated with new leasehold improvements. It is anticipated that all other
capital expenditures will be financed through equipment leases and will not
require significant direct outlays of cash.

         Based upon its present plans, management believes that operating cash
flow, available cash and available credit resources are adequate to make the
repayments of indebtedness described herein, 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 implement successfully its acquisition program in the United
States and Southeast Asia, and it will use various methods to finance
acquisitions, including the payment of cash, for this purpose.

ACCOUNTING STANDARDS

         On March 3, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with APB No.
15, "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 shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. Calculations
under the new standard, which will be adopted in the fourth quarter of 1997, are
not expected to result in a significant difference from those under the current
method.

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
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 130 requires
that all 





                                      F-14
<PAGE>   16

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 130 is effective for financial statements for periods 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 Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 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 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 131 is effective for financial statements for periods 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.








                                      F-15
<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 September 30, 1997 was as follows
       (amounts are actual unless indicated as estimates):

<TABLE>
<S>                                                                                      <C>       
                       Gross Proceeds to the Company                                     $8,180,000
                       Underwriters Discounts and Commissions                               572,600
                       Underwriters Non-accountable Expenses                                245,400
                       Other Expenses                                                       831,700
                                                                                         ----------
                       Total Expenses                                                     1,649,700
                                                                                         ----------
                       Net Offering Proceeds to the Company                              $6,530,300
                                                                                         ==========
                       Use of Net Offering Proceeds:
                       Purchase and installation of equipment                            $  199,000
                       Repayment of Indebtedness                                          2,485,400
                       Repayment of Indebtedness to Affiliates                              391,100
                       Bonuses to Officers                                                  250,000
                       Secured Loans ($60,000 to Officer)                                   360,000
                       Working Capital (estimated)                                        1,490,000
                       Cash in Banks                                                      1,354,800
</TABLE>


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On August 19, 1997 the Annual Meeting of the Stockholders of NHancement
Technologies Inc. was held in Denver, Colorado. At the meeting, the following
directors were elected to serve as directors until the next Annual Meeting of
Stockholders:


<TABLE>
<CAPTION>
                               NOMINEES                 FOR            WITHHELD
                               --------                 ---            --------
<S>                                                  <C>                <C>   
                      Esmond T. Goei, Chairman       3,613,494          11,357
                      James H. Boyle                 3,609,994          14,857
                      Santanu Das                    3,610,474          14,377
                      James S. Gillespie             3,613,494          11,357
                      Gary L. Nemetz                 3,601,059          23,792
                      Douglas S. Zorn                3,613,494          11,357
</TABLE>





                                      F-16
<PAGE>   18

         In addition the stockholders approved the following proposals:

<TABLE>
<CAPTION>
                                                           FOR          AGAINST       ABSTAIN      NOT VOTING
                                                           ---          -------       -------      ----------
<S>                                                     <C>             <C>            <C>          <C>      
             (1)  Amendment to the Company's  Equity    1,696,204       76,416         28,560       1,823,671
             Incentive Plan to increase the
             aggregate maximum number of shares
             issuable thereunder to 1,476,500, and
             to amend certain eligibility, vesting
             and other provisions of the Plan.

              (2)  Ratify the appointment of BDO           FOR          AGAINST       ABSTAIN      NOT VOTING
                                                           ---          -------       -------      ----------
             Seidman, LLP, as the Company's             3,611,211        4,640         9,000            0
             independent auditors for the fiscal
             year ending December 31, 1997.
</TABLE>


         The foregoing matters are described in the Company's definitive proxy
statement dated June 20, 1997.





                                      F-17
<PAGE>   19




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

           3.1      --      Certificate of Incorporation with the Amended
                            and Restated Certificate of Incorporation(1)

           3.2      --      Amended and Restated Bylaws(1)
 
          10.1      --      Formation Agreement, dated as of October 15, 
                            1996, between BFI and VPI(1)

          10.2      --      Agreement and Plan of Merger, dated as of 
                            October 30, 1996, between the Company, BFI 
                            Acquisition Corporation and BFI(1)

          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(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(1)

          10.15     --      Employment Agreement, dated as of October 30,
                            1996, between Esmond T. Goei and the Company(1)

          10.21     --      Stockholder Agreement, dated October 25, 1996, 
                            between the Company and James S. Gillespie(1)

          10.22     --      1997 Management and Company Performance Bonus
                            Plan(1)

          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)

          10.27     --      Registration Rights Agreement, dated October 25, 
                            1996, between the Company and James S. Gillespie(1)

          10.28     --      Agreement for the Sale of Shares in Advantis  
                            Network & System Sdn. Bhd. Dated June 20, 1997, 
                            between the Company and the shareholders of 
                            Advantis(2)

          10.29     --      Building Lease dated June 9, 1997 by and between 
                            the Company, as Tenant and El Dorado Holding 
                            Company, Inc., as Landlord(2)

             11     --      Statement regarding computation of per share 
                            earnings

             27     --      Financial Data Schedule

     (1)  Incorporated by reference to the Registration Statement on Form SB-2,
          File Number 333-15563, as filed with the Securities and Exchange
          Commission on January 30, 1997.
     (2)  Incorporated by reference to the Form 10Q SB for the quarter ended 
          June 30, 1997 (Commission File No. 0-21999).

(b)      Reports on Form 8-K

         None



                  [Rest of this page intentionally left blank]




                                      F-18
<PAGE>   20




                                   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: November 14, 1997                       ----------------------------------
                                              Esmond T. Goei
                                              Chairman of the Board, 
                                              Chief Executive Officer,
                                              And President



                                           By:   /s/ Douglas S. Zorn
                                              ----------------------------------
Date: November 14, 1997                       Douglas S. Zorn
                                              Executive Vice President-Finance,
                                              Secretary, Treasurer and Chief
                                              Financial Officer
                                              







                                      F-19
<PAGE>   21


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT 
NUMBER         DESCRIPTION OF EXHIBITS
--------       -----------------------

<S>            <C>
  11           Statement Regarding Computation of Per Share Earnings
  27           Financial Data Schedule
</TABLE>









                                      F-20