<PAGE>

                     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 December 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 February 10, 1999, there were 5,717,228 shares of
                            Common Stock outstanding.

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

                                     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 presentation of the information shown. These unaudited
financial statements should be read in conjunction with the audited financial
statements for the nine months ended September 30, 1998. The results for the
three months ended December 31, 1998 are not necessarily indicative of the
results of operations for a full year.








                                     2
<PAGE>

                                                    NHANCEMENT TECHNOLOGIES INC.
                                                                and SUBSIDIARIES

                                                      CONSOLIDATED BALANCE SHEET
                                                                     (Unaudited)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                                               DECEMBER 31,
                                                                                   1998
--------------------------------------------------------------------------------------------
<S>                                                                            <C>
ASSETS
CURRENT
  Cash and cash equivalents                                                    $    612,700
  Restricted cash                                                                 1,080,000
  Accounts receivable, less allowance for doubtful accounts of $268,100           2,763,700
  Inventory                                                                       1,564,000
  Current portion of notes receivable from related parties                          207,900
  Prepaid expenses and other                                                        214,600
--------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                              6,442,900
--------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT                                                            2,181,200
  Less accumulated depreciation                                                    (761,100)
--------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET                                                       1,420,100
--------------------------------------------------------------------------------------------
Excess of cost over net assets acquired of Voice Plus, Inc., net of
 accumulated  amortization of $62,500 (Note 1)                                      687,500
Excess of cost over net assets acquired of Infotel, net of accumulated
 amortization of $95,600 (Note 1)                                                 1,832,400
Long-term portion of notes receivable from related parties                          195,400
Other assets                                                                         29,400
--------------------------------------------------------------------------------------------
                                                                               $ 10,607,700
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Lines of credit                                                              $    222,300
  Accounts payable                                                                2,004,100
  Accrued liabilities                                                             1,539,100
  Deferred revenue                                                                1,633,100
  Income tax payable                                                                182,900
  Notes payable to stockholders                                                   1,577,900
  Capital lease obligations, current portion                                         56,400
--------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                         7,215,800

CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION                                   130,700
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                 7,346,500
--------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
  Convertible preferred stock, $0.01 par value, 2,000,000 shares
   authorized, 2,441 shares issued and outstanding                                  192,300
  Common stock, $0.01 par value, 20,000,000 shares authorized,
   5,771,135 shares issued and outstanding                                           57,700
  Additional paid-in capital                                                     21,084,500
  Accumulated deficit                                                           (17,929,600)
  Cumulative translation loss                                                      (143,700)
--------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                        3,261,200
--------------------------------------------------------------------------------------------
                                                                               $ 10,607,700
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>



                                       3
<PAGE>

                                                    NHANCEMENT TECHNOLOGIES INC.
                                                                and SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                     (Unaudited)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                                     THREE MONTHS ENDED
                                                                        DECEMBER 31,
                                                                    1997            1998
--------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>
NET REVENUES                                                      $2,017,000     $3,261,900
Cost of sales                                                      1,453,900      2,231,300
--------------------------------------------------------------------------------------------
GROSS PROFIT                                                         563,100      1,030,600
--------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative                                1,271,800      2,282,100
Amortization of excess of cost over net assets acquired,
 including impairment loss of $4,084,300 in 1997                   4,235,100        110,500
--------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES                                           5,506,900      2,392,600
--------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS                                              (4,943,800)    (1,362,000)
OTHER INCOME (EXPENSE)
Interest income                                                       33,600          8,400
Interest expense                                                      (6,600)       (65,200)
Other                                                                   ----          2,700
--------------------------------------------------------------------------------------------
Total other income (expense)                                          27,000        (54,100)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES               (4,916,800)    (1,416,100)
INCOME TAX BENEFIT                                                   (92,500)           ---
--------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS                                   (4,824,300)    (1,416,100)
--------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
  Income from operations of Advantis                                   3,100            ---
--------------------------------------------------------------------------------------------
NET LOSS                                                         ($4,821,200)   ($1,416,100)
PREFERRED DIVIDENDS                                                      ---         (3,400)
--------------------------------------------------------------------------------------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS                        ($4,821,200)   ($1,419,500)
--------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE (NOTE 7)                  $(1.13)        $(0.25)
--------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>

                                       4

<PAGE>

                                                    NHANCEMENT TECHNOLOGIES INC.
                                                                and SUBSIDIARIES

                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
                                                                            LOSS
                                                                     (Unaudited)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------  ---------------------------------------
                               PREFERRED STOCK         COMMON STOCK         ADDITIONAL                     CUMULATIVE
                                 PAR VALUE              PAR VALUE             PAID IN      ACCUMULATED    TRANSLATION
                              SHARES     AMOUNT      SHARES      AMOUNT       CAPITAL        DEFICIT          LOSS        TOTAL
-----------------------------------------------------------------------------------------  ---------------------------------------
<S>                           <C>       <C>        <C>           <C>        <C>            <C>             <C>         <C>        
Balance, September 30, 1998   3,200     $252,200   5,579,235     $55,800    $21,020,900    ($16,510,100)   ($174,900)  $4,643,900

Dividends on preferred
stock converted to common
shares                          ---          ---       4,700         100          1,900          (2,000)         ---          ---

Dividends payable on
preferred stock                 ---          ---         ---         ---            ---          (1,400)         ---       (1,400)

Preferred shares
converted into common
stock                          (759)     (59,900)    187,200       1,800         58,100             ---          ---          ---

Issuance of common stock
options for payment of
outside service fees            ---          ---         ---         ---          3,600             ---          ---        3,600

Comprehensive loss:
Net loss                        ---          ---         ---         ---            ---      (1,416,100)         ---   (1,416,100)
Cumulative translation
income (loss)                   ---          ---         ---         ---            ---             ---       31,200       31,200
-----------------------------------------------------------------------------------------  ---------------------------------------
Total comprehensive
income (loss)                   ---          ---         ---         ---            ---      (1,416,100)      31,200   (1,384,900)
-----------------------------------------------------------------------------------------  ---------------------------------------
-----------------------------------------------------------------------------------------  ---------------------------------------
Balance, December 31, 1998    2,441     $192,300   5,771,135     $57,700    $21,084,500    $(17,929,600)   $(143,700)  $3,261,200
-----------------------------------------------------------------------------------------  ---------------------------------------
-----------------------------------------------------------------------------------------  ---------------------------------------
</TABLE>

                                        5
<PAGE>

                                                    NHANCEMENT TECHNOLOGIES INC.
                                                                and SUBSIDIARIES

                                            CONSOLIDATED STATEMENTS OF CASH FLOW
                                                                     (Unaudited)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------- -----------------------------
                                                                                       THREE MONTHS ENDED
                                                                                          DECEMBER 31,
                                                                                         1997           1998
---------------------------------------------------------------------------------- -----------------------------
<S>                                                                                <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
          Net loss                                                                  ($4,821,200)    ($1,416,100)
          Adjustments to reconcile net loss to net cash provided by (used  in)
            operating activities:
          Depreciation and other amortization                                            50,700          96,200
          Amortization of excess cost over net assets acquired, including
            impairment loss                                                           4,239,300         110,500
          Compensation related to grant of stock options and common stock                   ---           3,600
          Other                                                                           8,800          (5,300)
          Changes in operating assets and liabilities:
                 Accounts receivable                                                   (330,000)      1,815,600
                 Inventory                                                              114,800        (222,900)
                 Prepaid expenses and other                                              96,700          27,500
                 Other assets                                                           294,200         217,400
                 Income tax payable                                                    (172,000)         (8,500)
                 Accounts payable and other current liabilities                         (49,500)       (127,300)
---------------------------------------------------------------------------------- -----------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                    (568,200)        490,700
---------------------------------------------------------------------------------- -----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
          Restricted cash                                                                   ---        (711,000)
          Deferred acquisition costs                                                   (135,600)            ---
          Note receivable from related party                                             (1,100)            ---
          Purchase of property and equipment                                            (70,700)       (171,600)
---------------------------------------------------------------------------------- -----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                    (207,400)       (882,600)
---------------------------------------------------------------------------------- -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
          Net borrowing under line of credit                                                ---          (8,600)
          Principal payments on capital leases                                              ---         (25,600)
          Principal payment on notes payable                                                ---        (669,600)
          Principal payment on long-term debt due to stockholders                      (187,500)            ---
---------------------------------------------------------------------------------- -----------------------------
NET CASH USED IN FINANCING ACTIVITIES                                                  (187,500)       (703,800)
---------------------------------------------------------------------------------- -----------------------------
         Effect of exchange rate changes on cash                                            ---          31,200
---------------------------------------------------------------------------------- -----------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                              (963,100)     (1,064,500)
---------------------------------------------------------------------------------- -----------------------------

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                        2,326,300       1,677,200
---------------------------------------------------------------------------------- -----------------------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                             $1,363,200        $612,700
---------------------------------------------------------------------------------- -----------------------------
---------------------------------------------------------------------------------- -----------------------------

SUPPLEMENTAL DATA:
        Interest paid                                                                   $67,000         $84,900
        Income taxes paid                                                                   ---          $1,600
</TABLE>

                                        6
<PAGE>


DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

         Property and equipment additions of $99,300 were financed by capital
     lease obligations.

         On December 15,1997, the Company issued 208,500 shares of its Common
     Stock in exchange for all the outstanding shares of Advantis pursuant to a
     purchase and plan of merger agreement. A preacquisition note of $306,200
     due to the Company was assumed in conjunction with the acquisition.

1.   LIQUIDITY

         The Company has incurred losses from continuing operations for the year
     ended December 31, 1997, and the nine months ended September 30, 1998, and
     the three months ended December 31, 1998 of $4.6 million, $1.5 million, and
     $1.4 million. The losses in 1997 and for the nine-month period ended
     September 30, 1998 include non-cash charges for goodwill impairment of $4.0
     million and $525,000. Negative working capital at December 31, 1998 was
     approximately $773,000. Continued losses could have a material adverse
     effect on the financial condition of the Company.

         To improve the liquidity and future cash flows, management made the
     decision to restructure operations in early January 1999, and is currently
     implementing the plan. Under the plan, headcount is expected to decrease by
     10%. Furthermore, cost reductions will be implemented in corporate
     overhead, travel, discretionary sales expenses, outside services and
     general and administrative expenses. Additionally, the Company increased
     its short-term credit facility from $1 million to $2 million. Based on
     discussions with its financial advisors, management believes it can raise
     additional equity. Although no assurance can be given that above efforts
     will be successful, management believes these measures, together with its
     cash balances as of December 31, 1998 of about $0.6 million, will provide
     sufficient cash flow for future operations.

         The Company's current net tangible assets of $741,300, fail to meet the
     requirements for listing on the Nasdaq SmallCap Market system. To stay
     listed the Company is required to maintain (i) net tangible assets of Two
     Million Dollars ($2,000,000); (ii) market capitalization of Thirty-Five
     Million Dollars ($35,000,000); or (iii) net income of Five Hundred Thousand
     Dollars ($500,000) in the most recently completed fiscal year or in two of
     the last three most recently completed fiscal years. Nasdaq is currently
     reviewing our plan to determine the propriety of continuing the Company's
     listing on the Nasdaq Small Cap Market System. The Company does not
     currently meet these requirements, nor can there be any assurance that the
     Company will in fact meet these requirements in any future period.

         The Company is required to pay $1,390,400 to the former Infotel
     shareholders pursuant to the purchase agreement regarding the acquisition
     of Infotel, 30 days after the filing of the 10-KSB which was filed in
     January 1999. The Company does not currently have the cash necessary for
     payment. The Company is renogatiating with the shareholders to defer
     payment. There can be no assurance that the shareholders will agree to any
     delay, and the outcome may have a material adverse effect on the Company's
     financial position and results of operations.

2.   ORGANIZATION

         NHancement Technologies Inc., a Delaware corporation ("NHancement" or
     the "Company"), was incorporated in October 1996 as a holding company. The
     business of NHancement is conducted by its operating company subsidiaries:
     Voice Plus, Inc.("VPI" or "Voice Plus), whose name was recently changed to
     NHancement Technologies North America, Inc. and Infotel Technologies (Pte)
     Ltd ("Infotel"). Voice Plus, a California corporation headquartered in
     Fremont, California, is a

                                        7
<PAGE>

     systems integrator and national distributor of voice processing and
     multimedia messaging equipment. Infotel, a Singapore corporation acquired
     on June 22, 1998 is (1) a systems integrator of (i) infrastructure
     communications equipment, (ii) turnkey project management services, and
     (iii) radar systems; and (2) a provider of test measuring systems.
     Accordingly, the consolidated financial statements include the
     results of operations from NHancement and its Voice Plus subsidiary for
     both periods presented and those of Infotel for the three months ended
     December 31, 1998. Furthermore, the results of operations of Advantis
     Network & Systems Sdn Bhd, which was acquired on December 15, 1997, are
     classified as discontinued as this subsidiary was sold on September 30,
     1998.

3.   FINANCIAL STATEMENT PRESENTATION AND NEW STANDARDS

         The accompanying consolidated financial statements as of December 31,
     1998 and for the three months ended December 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 September
     30, 1998 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.

4.   STOCK OPTIONS

         During the three months ended December 31, 1998, the Company granted
     options to purchase approximately 136,500 shares of the Company's Common
     Stock to employees, and options to purchase 20,000 shares of Common Stock
     to an outside director, with an exercise price of $1.1563 per share.

5.   FINANCING ACTIVITIES

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

           In June 1998, funds were loaned to the Company by certain management
     stockholders totaling $650,000. Of this amount, $125,000, $225,000 and
     $300,000 were loaned to NHancement by Esmond T. Goei, Former Chairman of
     the Board and Chief Executive Officer of the Company, Douglas S. Zorn,
     current President and Chief Executive Officer of the Company, and James S.
     Gillespie, currently a member of the Board of Directors of the Company,
     respectively. The total principal and interest originally due September 30,
     1998, was repaid on November 5, 1998 without penalty.

                                        8

<PAGE>
6.   UNAUDITED PRO FORMA FINANCIAL DATA

         The unaudited pro forma statements of operations combine the results of
     operations of the Company and Infotel for the three months ended December
     31, 1997, as if the acquisition had occurred at the beginning of the
     period, after giving effect to certain adjustments, including the
     amortization of excess of costs over net assets acquired and interest
     expense on notes payable to related parties. The following unaudited pro
     forma summary does not necessarily reflect the results of operations as
     they would have been had the Infotel acquisition occurred at the beginning
     of the period presented and is not necessarily indicative of the results of
     operations for any future period. These proforma results exclude the income
     from discontinued operations.

<TABLE>
<CAPTION>
          ------------------------------------------------------------- ----------------------------------
                                                                                    UNAUDITED
                                                                                    PRO FORMA
                                                                               THREE MONTHS ENDED
                                                                               ------------------
                                                                                  DECEMBER 31,
                                                                                  ------------

                                                                                      1997
          ------------------------------------------------------------- ----------------------------------
          <S>                                                                     <C>
          Net revenues                                                             $4,166,200
          Net loss                                                                ($4,595,200)

          Net loss per common share                                                    ($0.98)

          Weighted average common and common equivalent shares
          outstanding                                                               4,661,500
          ------------------------------------------------------------- ----------------------------------
</TABLE>

7.   EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED
                                                                                        DECEMBER 31,
                 NET LOSS - NUMERATOR                                               1997            1998
                 --------------------                                               ----            ----
        -------------------------------------------------------------------------------------------------------
        <S>                                                                       <C>              <C>
        Net income (loss)                                                         ($4,821,200)     ($1,416,100)
        Preferred stock dividends                                                                       (3,400)
        -------------------------------------------------------------------------------------------------------
        Basic and diluted net loss applicable
        to common stock                                                           ($4,821,200)     ($1,419,100)
        -------------------------------------------------------------------------------------------------------

        COMMON SHARES - DENOMINATOR
        ---------------------------

        Basic weighted average common shares
        outstanding                                                                 4,264,700        5,739,400
        Options and warrants                                                              ---              ---
        -------------------------------------------------------------------------------------------------------
        Diluted weighted average common
        shares outstanding                                                          4,264,700        5,739,400
        -------------------------------------------------------------------------------------------------------
</TABLE>

         Options and warrants to purchase 1,359,625 shares of Common Stock and
     Preferred Stock convertible into 337,100 shares of Common Stock were
     outstanding during the three months ended December 31, 1998 and options and
     warrants to purchase 1,154,100 shares at December 31, 1997 were outstanding
     but were not included in the computation of diluted loss per common share
     because the effect would be antidilutive.


                                      9
<PAGE>
8.   SEGMENT REPORTING

         NHancement's reportable operating segments include Voice Plus and
     Infotel. Infotel is based in Singapore and derives substantially all of its
     revenue from sales in Asia.

         Financial information for these segments includes the following:

<TABLE>
<CAPTION>
         December 31, 1998
       --------------------------------------- ----------------- ---------------- --------------- -----------------
                                                     VPI             INFOTEL         OTHER(1)          TOTAL
       --------------------------------------- ----------------- ---------------- --------------- -----------------
       <S>                                     <C>               <C>              <C>             <C>
       Net Sales to external customers               $1,396,900       $1,865,000             ---        $3,261,900
       Loss from continuing operations                 (543,200)         189,000     ($1,061,900)      ($1,416,100)
       Total assets                                   3,596,700        5,853,900       1,291,200        10,741,800
       --------------------------------------- ----------------- ---------------- --------------- -----------------
</TABLE>

     (1) Other includes corporate expenses.  Management's reports include
          goodwill for Infotel in total assets.

<TABLE>
<CAPTION>
         December 31, 1997
       --------------------------------------- ----------------- ----------------- -------------- -------------------
                                                   VPI (1)           INFOTEL         OTHER(2)           TOTAL
       --------------------------------------- ----------------- ----------------- -------------- -------------------
       <S>                                     <C>               <C>               <C>            <C>
       Net Sales to external customers               $2,016,000               ---         $1,000          $2,017,000
       Loss from continuing operations               (4,247,900)              ---       (576,400)         (4,824,300)
       Total assets                                   3,584,100               ---      3,713,200           7,297,300
       --------------------------------------- ----------------- ----------------- -------------- -------------------
</TABLE>

     (1) VPI loss includes an impairment loss of $4,084,300 and amortization of
          the excess of costs over net assets acquired of $150,900.
     (2) Other includes corporate expenses.  Management reports include goodwill
          for Infotel in total assets.

9.   SUBSEQUENT EVENTS

      On January 6, 1999, Mr. James S. Gillespie was reappointed as a director
of the Company, subsequently at the same meeting, Messrs. Boyle, Das and Nemetz
resigned from the Board, and on January 13, 1999, Thomas J. Lawrence resigned as
a director. On January 6, 1999, Mr. Goei resigned his positions as President and
CEO pursuant to the terms of a Separation Agreement approved by the Board of
Directors, which modifies the terms of his Employment Agreement. Subsequently,
Mr. Goei also resigned both from his position as Chairman of the Board and as a
Board member. In exchange for Mr. Goei's resignation, the Company has agreed to
a severance package with the following principal terms (i) six and one-half
months of regular pay at his current rate, (ii) Mr. Goei will continue to
receive benefits under the Company's medical and group insurance plans through
May 5, 1999, (iii) Mr. Goei will have use of the Company paid, leased automobile
through the end of the lease term in July 1999, (iv) the Company will reimburse
moving expenses of approximately $70,000, (v) the Company will issue warrants to
purchase 50,000 shares of NHancement Common Stock at the current fair market
price, and (vi) Mr. Goei and the Company agree to a mutual waiver of all claims
related to Mr. Goei's employment. On January 6, 1999, Mr. Douglas S. Zorn was
appointed President and CEO.

      On February 2, 1999 the Board approved the appointment of Mr. Gillespie as
a consultant to the Company. Messers. Robers J. Schmier and N. Bruce Walko were
also elected to the Board of Directors to fill the vacancies created by the
resignations of Messers. Boyle, Das and Nemetz. Subsequently at the same meeting
the Board of Directors reduced the number of Board members from seven (7) to
five (5). As of the date of this filing, there is still one (1) vacancy on the
Board of Directors. Mr. Walko is serving as the Chairman of the Board.


                                      10
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     Fremont-based NHancement Technologies Inc. (the "Company") is an integrator
and distributor of voice processing equipment and telecommunications systems in
the United States and Asia.

     The Company's consolidated financial statements include the accounts of the
Company and its two operating segments: Voice Plus, Inc. ("VPI" or "Voice Plus")
now named NHancement Technologies North America, Inc. and Infotel Technologies
(Pte) Ltd ("Infotel").

     During 1998, the Company changed its fiscal year end from December 31 to
September 30. As a result of this change the Company's 1998 fiscal year ended on
September 30, 1998 and its 1999 fiscal year began on October 1, 1998.

     The following contains forward-looking statements regarding future events
or the future financial performance of the Company that involve risks and
uncertainties. Certain statements included in this Form 10-QSB, including,
without limitation, statements related to anticipated cash flow sources and uses
under "Liquidity and Capital Resources", the mitigation of the Year 2000 issue
under "Impact of the Year 2000 Issue" and other statements contained in 
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financing alternatives, financial position,
business strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Any
forward-looking statements herein are subject to certain risks and uncertainties
in the Company's business, including but not limited to, reliance on key
customers and competition in its markets, market demand, business strategy,
product performance, technological developments, maintenance of relationships
with key suppliers, difficulties of hiring and retaining key personnel and the
effect of the Company's accounting policies, all of which may be beyond the
control of the Company. In addition, the Company's Nasdaq SmallCap Market System
listing is in jeopardy. 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

     This is the Company's Quarterly Report on Form 10-QSB for the first 
quarter of fiscal 1999. Management's Discussion and Analysis of Financial 
Condition and Results of Operations should be read in conjunction with the 
consolidated financial statements included herein. Further, this quarterly 
report should be read in conjunction with the Company's Consolidated 
Financial Statements and Notes to Consolidated Financial Statements included 
in its 1998 Annual Report on Form 10-KSB. In addition, you are urged to read 
this report in conjunction with the risk factors described herein.

     In this MD&A, the Company explains its results of operations for the three
month periods ended December 31, 1998, as compared to the corresponding period
in 1997, and discusses its financial condition. The discussion of financial
condition includes: (1) changes in the voice processing and telecommunications
industry and how the Company expects these changes to influence future results
of operations; and (2) liquidity and capital resources, including discussions of
capital financing activities, and uncertainties that could affect future
results.

     On November 20, 1998, the Company informed Nasdaq that, due to continued
losses, 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 


                                       11
<PAGE>

($500,000) in the most recently completed fiscal year or in two of the last 
three most recently completed fiscal years.

     The Company continues not to meet these requirements and recently received
correspondence from Nasdaq stating that Nasdaq plans to delist the Company's
Common Stock. The Company is in discussions with Nasdaq regarding continued
listing of its Common Stock, but there can be no assurance that the Company's
Common Stock will not be delisted. Further, there can be no assurance that if
the Company's stock is delisted that the Company will in the future meet the
listing requirements for the Nasdaq SmallCap Market System. Continued losses
from operations will have a material adverse effect on the financial condition
of the Company. However, the Company believes that the changes management
implemented in January 1999 and the corresponding cost reduction measures
expected to be implemented primarily through a 10% headcount reduction and
certain operating expense cutbacks in travel, outside services, discretionary
sales costs, corporate overhead, and administrative costs will return the
Company to profitability during fiscal 1999, despite first quarter sales that
were well below recent historical run rate, and a one time restructuring charge
related to severance benefits to be incurred in the second fiscal quarter of
1999. As a mitigating factor, sales in the second fiscal quarter of 1999 are
expected to equal or exceed historical run rates. Currently management believes
that this anticipated return to profitability coupled with an increased credit
facility and planned financing activities will provide adequate cash flow for
future operations, although no assurances can be given that current efforts will
be successful.

RESULTS OF OPERATIONS

In this section, the Company provides the components of its earnings for the
three-month periods ended December 31, 1998 and 1997. The Company then explains
why revenues and expenses varied from 1998 to 1997.

The following table shows results of operations, as a percentage of net sales,
for the three-month periods ended December 31, 1998 and 1997.

                  NHANCEMENT TECHNOLOGIES INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
       --------------------------------------------------------- --------------------------
                                                                     THREE MONTHS ENDED
                                                                     ------------------
                                                                         DECEMBER 31
                                                                     1997         1998
       --------------------------------------------------------- ------------- ------------
       <S>                                                         <C>          <C>
       Net sales                                                      100.0%       100.0%
       Cost of sales                                                   72.1%        68.4%

       Gross profit                                                    27.9%        31.6%
       Selling , general and administrative expenses                   63.1%        70.0%
       Loss on impairment and amortization of excess of cost         (210.0)%        3.4%
           over net assets acquired
       Loss from operations                                          (245.1)%      (41.8)%
       Other income (expense)                                           1.3%        (1.7)%
       Loss from continuing operations before income taxes           (243.8)%      (43.4)%
       Income tax benefit                                               4.6%         0.0%
       Loss from continuing operations                               (239.2)%      (43.4)%
       Discontinued operations                                          0.2%        ---
       Net loss                                                      (239.0)%      (43.4)%
       --------------------------------------------------------- -------------- ------------
</TABLE>

    The Company's primary focus in the three months ended December 31, 1998 was
as an integrator and distributor of voice processing and telecommunications
systems. These operations were conducted through the Company's VPI and Infotel
subsidiaries. VPI's net sales for the first quarter of 1999 as a 


                                       12

<PAGE>

stand-alone business decreased 31% from $2.0 million for the three months 
ended December 31, 1997 to $1.4 million for the three months ended December 
31, 1998. The decrease in VPI net revenues between 1998 and 1997 was due 
primarily to a slow down in voice processing systems and parts sales. However 
VPI's order backlog at December 31, 1998 increased to $1.6 million from $1.0 
million the previous quarter. Consequently, management believes that VPI 
sales for the second fiscal quarter will return to near historical levels. 
VPI's revenues continue to be almost exclusively derived from the sale of 
Centigram products, and any adverse change in the Company's distributor 
relationship with Centigram and Baypoint Innovations, the successor in 
interest to the Centigram CPE business, would have a material adverse impact 
upon the Company's voice processing business.

    VPI was acquired by the Company in February 1997. Based on the estimated
future undiscounted operating cash flows of its related business, the Company
periodically evaluates the carrying value of goodwill for VPI and its other
subsidiaries. Due to issues not known by management at the time of the VPI
acquisition, the estimated future undiscounted operating cash flows of VPI were
calculated to be less than those estimated at the time of its acquisition and
less than the carrying amount of the excess of cost over net assets acquired. On
December 31, 1997 and September 30, 1998, the Company recorded impairment losses
of $4,084,300 and $525,000, representing the difference between the carrying
amount of goodwill over its estimated fair value. As a result of these changes,
the remaining balance of the VPI goodwill was reduced to $750,000 and the useful
life was reduced to three years. Management believes that after 1999, revenues
for legacy systems will decline and that VPI revenues will come increasingly
from new technologies and products that are just now being introduced to the
marketplace. The Company is in the process of repositioning its VPI subsidiary
to take advantage of the new trends in the voice processing industry,
specifically the migration from legacy systems to the new NT computer-based
systems of the future. This transition required the addition of several new
management members and new technological capabilities within the VPI subsidiary
resulting in significant expense to the Company in the first quarter of 1999.

    The Company's Infotel subsidiary located in Singapore, was acquired on June
22, 1998. Therefore no sales or income were recorded for the three months ended
December 31, 1997. On a stand-alone pro forma basis, net sales for the first
quarter decreased slightly from $2.1 million in 1997 to $2.0 million for the
same period in 1998. Although Singapore is forecasting zero growth for its
economy for 1999, management expects the operations of Infotel to continue to be
profitable due to its blue chip customer base and position in the local
Singapore communications markets.

    Gross margins in the three months ended December 31, 1998 improved to 
31.6% from 27.9% in the same period in 1997. VPI's gross margin on a 
stand-alone basis decreased slightly in the three months ended December 31, 
1998 as compared to the same period of 1997 from 29.7% to 28.2%. Gross 
margins in both 1998 and 1997 were below historical levels as fixed costs 
were absorbed over a smaller revenue base. VPI's product costs as a 
percentage of revenues decreased during the three months ended December 31, 
1998 to 40.1% versus 50.9% in the same quarter in 1997. This decrease was due 
primarily to low system sales for the quarter ended December 31, 1998 which 
resulted in higher maintenance and support revenue with no offsetting product 
cost. Infotel's gross margin on a stand-alone basis improved to 34.1% of 
sales versus 28.4% of sales for the quarter ended December 31, 1997. This was 
primarily due to commission revenue of $0.2 million in the first quarter of 
fiscal 1999, with no offsetting cost, while no commission revenues were 
recorded in the same three month period of 1997. Infotel earns commissions 
when its vendors (Motorola and Rhode & Schwart) sell directly to its end-user 
customers.

    Company-wide selling, general and administrative ("SG&A") expenses as a
percentage of net sales increased to 70.0% for the three months ended December
31, 1998 versus 63.1% for the same period in 1997. VPI on a stand-alone basis
increased to 58.9% for the first fiscal quarter of 1999 compared to 42.6% for
the same three month period in 1997, due primarily to (i) a 10.6% increase in
salary expenses as a percentage of revenue associated with the hiring of
additional sales and marketing personnel during the first fiscal quarter quarter
of 1999; (ii) a 2.6% increase in travel costs as a percentage of


                                      13
<PAGE>

revenue associated with training sales and operations personnel on new NT
based communication products currently marketed by VPI; and (iii) a 3.0%
increase in general and administrative expenses related to increases in short
term facility rents and depreciation expense related to systems upgrades to
support the Company's growth plans. On a stand-alone basis, Infotel's SG&A as
a percent of revenues decreased to 20.5% for the three months ended
December 31, 1998 compared to 21.4% for the three months ended December 31,
1997. The reduction in Infotel's SG&A was due primarily to delays in hiring
personnel, and lower travel and training costs. Corporate overhead costs
increased for the three months ended December 31, 1998 due to the following
services: (i) increased outside services costs as a result of an aborted
financing; (ii) increased costs for audit and legal related to the additional
reporting requirements of a public company, including a special proxy
statement; and (iii) relocation fees related to the former CEO.

    At December 31, 1998 the Company provided a 100% reserve against its
deferred tax assets. The Company believes sufficient uncertainty exists
regarding the realizability of the deferred tax assets, such that a full
valuation allowance is required. The federal net operating loss carryforwards
are subject to an annual limit of approximately $250,000.

LIQUIDITY AND CAPITAL RESOURCES

    Although the acquisition of complimentary businesses and products has been
an element of the Company's business strategy, the Company's ability to engage
in acquisitions is subject to severe limitations given the Company's current
financial condition. To engage in such activity, the Company will need to obtain
additional debt or equity financing, neither of which may be available or, if
available, available on terms acceptable to the Company. Debt financing may
require the Company to pay significant amounts of interest and principal
payments, thus reducing the resources available to expand its existing
businesses. Equity financing may dilute the Company's existing stockholders'
interest in the assets or earnings of the Company. There can be no assurance
that the Company will be able to obtain either debt or equity financing if and
when it is needed for acquisitions or general working capital purposes or that,
if available, such financing will be available on terms the Company deems
acceptable. In April of 1998, the Company negotiated an equity financing for
$3.0 million, of which $1,250,000 was received, with substantially all of the
proceeds having been used for the acquisition of Infotel. The Company amended
the agreement in September of 1998 limiting the aggregate financing amount to
$1,250,000, (approximately $985,000 net of expenses).

    During the three months ended December 31, 1998, net cash provided by
operating activities was $0.5 million, consisting primarily of the collection of
accounts receivable offset by cash used to fund the net operating loss. Net cash
used by investing and financing activities totaled $1.6 million consisting of
(i) purchases of property and equipment for the Company's internal computer
system, and (ii) payment of the notes payable to management. At December 31,
1998, the Company's working capital deficit was ($0.8) million and cash and cash
equivalents totaled $0.6 million. The current ratio decreased slightly from 1.1
to 1 at September 30, 1998 to 0.9 to 1.0 at December 31, 1998. Management
believes that available cash reserves coupled with additional available credit
and the implementation of cost reductions will provide adequate funds for future
operations, although no assurance can be given that current efforts will be
successful.

    During 1998, the Company obtained a $1.0 million accounts receivable credit
line with a U.S. finance company with an advance rate of 80% of eligible
receivables at an interest rate of 2.0% every 15 days. In October 1998, the
terms of the revolving credit line were re-negotiated to a maximum of $1.0
million at an interest rate of 2.75% per month. In January 1999, the Company's
lender increased the credit line from $1.0 million to $2.0 million and
restrictions were eased on the receivables eligible for inclusion in the
Company's borrowing base. The Company, through its Infotel subsidiary, is
attempting to complete a credit line with a major Singapore bank for S$3.5
million with interest at 1.25% above bank prime to 

                                     14
<PAGE>

be used for Infotel's overdraft protection, letters of credit, letters of 
guarantee, foreign exchange and revolving credit. The Company hopes to 
complete this facility early in calendar 1999.

    The Company's management estimates that it will incur about $200,000 in
capital expenditures during the next 12 months, representing mostly company-wide
business systems hardware and communication systems. It is anticipated that all
major capital expenditures will be financed through equipment leases and will
not require significant direct outlays of cash.

    The Company is required to pay $1,390,400 to the former Infotel shareholders
pursuant to the purchase agreement regarding the acquisition of Infotel, 30 days
after the filing of the 10-KSB. The Company's 10-KSB was filed on January 13,
1999, approximately 30 days prior to the date of this report. The Company does
not currently have the cash necessary for payment. The Company is renegotiating
with the shareholders to defer payment. There can be no assurance that the
shareholders will agree to any delay, and the outcome may have a material
adverse effect on the Company's financial position and results of operations.

    Based upon its present cost reduction 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.

RISK FACTORS

    The following risk factors, in addition to the risks described elsewhere in
the description of the Company's business in this report on Form 10-QSB may
cause actual results to differ materially from those in any forward-looking
statements contained in the business description, management's discussion and
analysis or elsewhere in this report or made in the future by the Company or is
representatives. Such forward-looking statements involve known risks,
uncertainties and other factors which may cause the actual results, performance
or achievements expressed or implied by such forward-looking statements.

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

    Although the Common Stock was approved for quotation on the Nasdaq SmallCap
Market System in connection with the Company's IPO, there can be no assurance
that it will remain eligible to be included on the Nasdaq SmallCap Market
System. In this regard, on November 20, 1998, the Company informed Nasdaq that
it no longer met the requirements for continued listing on the Nasdaq SmallCap
Market System. Specifically, the Company failed to meet the requirements of
Nasdaq Marketplace Rule 4310(c)(2) which requires that an issuer maintain (i)
net tangible assets of Two Million Dollars ($2,000,000); (ii) market
capitalization of Thirty-Five Million Dollars ($35,000,000); or (iii) net income
of Five Hundred Thousand Dollars ($500,000) in the most recently completed
fiscal year or in two of the last three most recently completed fiscal years.
Nasdaq is currently reviewing the propriety of continuing the Company's listing
on the Nasdaq Small Cap Market System. The Company has submitted a plan to 
correct its listing deficiency with Nasdaq and has not yet received a reply 
regarding continued listing of its Common Stock and there can be no 
assurance, that the Common Stock will remain listed.

    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 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 

                                     15
<PAGE>

stock" rules, and as a result, an investor will find it more difficult to 
dispose of, or to obtain accurate quotations as to the price of, the Company's 
Common Stock.

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

PRIOR LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY.

    For the three months ended December 31, 1998, the Company incurred a net
loss in the amount of $1.4 million on net revenues of $3.3 million. The failure
of the Company to produce positive operating results may affect the future value
of the Common Stock, may contribute to the Company losing its eligibility for
listing of the Common Stock on the Nasdaq SmallCap Market System, may adversely
affect the Company's ability to obtain debt or equity financing on terms
acceptable to the Company, and may prevent the Company from completing future
acquisitions.

VOLATILITY OF STOCK PRICES.

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

FINANCING RISKS.

    The acquisition of complementary businesses although currently
de-emphasized, is still an element of the Company's business strategy. If a cash
payment in excess of available working capital is required to make an
acquisition, the Company will need to obtain additional debt or equity
financing. Debt financing may require the Company to pay significant amounts as
interest and principal payments, thus reducing the resources available to expand
its existing businesses. Equity financing may be dilutive to the Company's
existing stockholders' interest in the assets or earnings of the Company. There
can be no assurance that the Company will be able to obtain either debt or
equity financing if and when it is needed for acquisitions or that, if
available, such financing will be available on terms the Company deems
acceptable. The inability of the Company to obtain such financing would have a
material adverse effect on the Company's acquisition strategy. Further, the
refusal of potential acquisition candidates to accept Common Stock in payment of
the Company's purchase price obligations, in whole or in part, could require the
Company to reduce or curtail its acquisition strategy. To the extent that Common
Stock is used as consideration in an acquisition transaction, such stock
issuance may be dilutive to the Company's existing stockholders. Even if the
Company is able to obtain financing needed for an acquisition, the 

                                     16
<PAGE>

terms of such financing may involve considerable costs to the Company. In this 
regard, as of December 31, 1998, 10,059 shares of Preferred Stock and accrued 
dividends were converted into 901,160 shares of Common Stock at an average 
price per share of about $0.90.

VPI'S STRATEGIC RELATIONSHIP WITH CENTIGRAM COMMUNICATIONS CORPORATION.

    VPI's business is based upon the integration of hardware and software and
telecommunications and data processing equipment manufactured by others into
integrated systems designed to meet the needs of its customers. Although VPI has
distributor agreements with a number of equipment manufacturers, substantially
all of its revenue is based upon products manufactured by Centigram
Communications Corporation ("Centigram"). The Company depends upon Centigram to
offer products that are competitive with products offered by other manufacturers
as to technological advancement, reliability and price. If Centigram's
competitors should surpass Centigram in any of these qualities, the Company may
be required to establish alternative strategic relationships. Any such
development, or any other adverse change in the Company's distributor
relationship with Centigram, would adversely affect the Company's business for
an indeterminate period of time until new supplier relationships could be
established. In this regard, Centigram recently sold to its customer premises
equipment ("CPE") business to Mitel Corporation ("Mitel") and is now known as
Baypoint Innovations ("Baypoint"). The distributor agreement entered into with
Centigram may be canceled by either party upon ninety (90) days' notice and is
subject to termination in the event that the Company defaults on or is otherwise
in breach of various of its obligations under the agreement. Baypoint has
continued to distribute the CPE products and honor the VPI distribution
agreement. Any disruption to product supplied by Centigram or Baypoint would
have a significant adverse impact upon the Company's business for an
indeterminate period of time until new supplier relationships could be
established.

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

    VPI has distributor agreements with a number of equipment manufacturers in
addition to Centigram. In accordance with the terms of these distributor
agreements, a manufacturer may discontinue the distributor relationship because
of factors related to a particular distributor or because of a manufacturer's
decision to change its method of distributing its products to all or parts of
its markets. In making such a change, a manufacturer of key products sold by a
distributor may effectively become a direct competitor of its former
distributor. Moreover, a manufacturer may reduce its dealer discounts, eliminate
any exclusive distribution rights, and/or reduce the manufacturer's support of a
distributor or otherwise adversely affect the competitive environment in which
the distributor sells the manufacturer's products. Any material change in VPI's
distributor relationships with its key suppliers or any interruption of the
delivery of equipment to VPI by any of its key suppliers would have a material
adverse effect upon the Company.

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

    The voice processing and customer premises equipment markets are highly
competitive and competition in this industry is expected to intensify with the
introduction of new product enhancements and new competitors. VPI competes with
a number of larger integrated companies that provide competitive voice
processing products and services as subsets of larger product offerings,
including all the former regional Bell operating companies and major PBX
equipment manufacturers, such as Fujitsu Limited and Lucent Technologies Inc.
("Lucent"), formerly a division of AT&T. These integrated public company
competitors are substantially larger than the Company and have substantially
greater revenues than the Company, and, as a result, may encroach on the
Company's voice processing equipment and service markets. Additionally, in the
CPE markets, VPI competes with two types of equipment companies: (i)
interconnects (PBX providers), including Lucent, Northern Telecom Limited,
Fujitsu Limited and NEC Corporation, and (ii) independent voice processing
manufacturers, such as Octel 

                                     17
<PAGE>

Communications Corporation (now owned by Lucent). Digital Sound Corporation, 
Active Voice Corporation, Applied Voice Technology, Inc., Glenayre 
Technologies, Inc. and Comverse Technology, Inc., among others, also compete 
with the Company in the service provider market. VPI's competitors have better 
name recognition in the market, a larger installed base of customers and 
greater financial, marketing and technical resources than the Company.

COMPETITION IN INFOTEL'S INFRASTRUCTURE COMMUNICATIONS EQUIPMENT BUSINESSES.

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

RISKS IN INTEGRATING ACQUIRED COMPANIES.

    Acquisitions may involve a number of special risks, including adverse
short-term effects on the Company's operating results, diversion of management's
attention from the operations of the Company, dependence on retention, hiring
and training of key personnel, risks associated with unanticipated problems or
legal liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's operations and
financial performance. Successfully integrating the operations of additional
companies into those of the Company will require the cooperative efforts of the
managers and employees of the respective business entities, including the
integration of the owners or managers of smaller companies into roles that
require them to report to supervisors. Significant costs and management time may
be required to integrate management control systems. Furthermore, to manage its
operations effectively, the Company must continue to improve its operational,
financial and management controls and information systems, to accurately
forecast sales demand, to control its overhead and to manage its marketing
programs. As discussed in previous sections, the acquisition of Voice Plus and
Advantis have yielded operating results that were significantly lower than
expected. Other acquisitions could generate results different from our
expectations. Accordingly, no assurance can be given that the future performance
of the Company's subsidiaries will be commensurate with the consideration paid
to acquire such companies. If management fails to establish the needed controls
and to manage growth effectively, the Company's operating results, cash flows
and overall financial condition will be adversely affected.

RISKS INVOLVED IN CHANGES OF MANAGEMENT.

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

YEAR 2000 COMPLIANCE

    The Company has developed an implementation plan to correct any internal
computer systems that could be affected by the "Year 2000" issue. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Software programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to or
replacement of existing software, the Year 2000 problems will not pose
significant operational problems for the Company's domestic computer systems.
The Company believes that the costs associated with any such upgrade or
replacement of software will not be material, and that

                                     18

<PAGE>

all such changes will be implemented by the end of calendar year 1999.
However, if such modifications are not made in a timely manner, or are not
made properly, the Company may be unable to implement appropriate Year 2000
solutions, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

    The Company distributes products from third party product voice product
equipment manufacturers in North America, some of which are susceptible to Year
2000 problems. During fiscal year 1997, the Company initiated a review of the
products its domestic subsidiary, VPI, distributes to determine which, if any,
are not capable of recognizing the year 2000. Communications were initiated with
all of the manufacturers of such products to determine the nature and extent of
any Year 2000 problems. Where potential Year 2000 computer problems contained in
the products used or distributed by the Company have been identified, the
manufacturers have stated that they have committed resources to resolve such
problems prior to year 2000. However, there can be no assurance that these
manufacturers will, in fact, timely complete the resolution of their Year 2000
problems or, even if timely completed, that those solutions will be acceptable
in the marketplace. The solution to be provided by some manufacturers will
involve a significant upgrade cost to the end user, which may give rise to
disputes and/or litigation between the end user and the manufacturer, which may
also involve the Company. The costs of such possible disputes or litigation
could be significant, thereby resulting in a material adverse effect on the
Company's business, financial condition and results of operations.

    As for Asian operations, the Company has not completed its review of
third-party products distributed by Infotel to determine the nature and extent
of Year 2000 problems, if any, with such products. As a result, the Company is
currently unable to determine whether there are any Year 2000 problems
associated with such third-party products, and if so, whether the manufacturers
will be able to timely resolve any such problems. The Company also has not been
able to determine whether the legal systems of Singapore would result in more or
less litigation exposure to the Company and its subsidiaries if there were
disputes between the end user of a product installed by Infotel, and the
manufacturer.

    The Company's internal computer systems for North American operations were
purchased in 1998 from well recognized companies and are stipulated by the
manufacturers to be Year 2000 compliant. As for Asian operations, the Company
recently completed its review of the internal computer systems of Infotel and
discovered that Infotel's systems are not Year 2000 compliant. A plan has been
established to convert Infotel to the Company's internal business system during
spring 1999. The estimated cost of the new business systems for all locations
combined is $400,000; but also to maintain proper controls for management of the
Company.


                                       19
<PAGE>

                                     PART II
                                OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

    On July 30, 1998, a case entitled C.C.& Associates, et al. V. NHancement 
Technologies, Inc., et al. was filed in Santa Clara County Superior Court. 
The compliant was allegedly served in September 1998. The dispute arises out 
of the payment of legal expenses pursuant to a non-binding letter of intent. 
On December 19, 1998, plaintiff filed with the court a Request for Entry of 
Default and Clerk's Judgement ("Request") against the Company in the amount 
of $54,722.00. On January 30, 1999, plaintiff agreed to withdraw the Request 
and allow the Company to answer the complaint. The Company is contesting the 
allegations, in particular, the amount allegedly owing. The Company cannot 
presently make any determination regarding the probable outcome of the 
litigation; however, the parties have agreed to mediate the dispute within 
the next thirty (30) days and it is not anticipated that the resolution will 
have a material adverse effect on the financial condition and operations of 
the Company.

                      OPTION GRANTS IN LAST FISCAL QUARTER

<TABLE>
<CAPTION>
             CLASS OF                  DATE OF       TITLE OF       NUMBER OF    AGGREGATE    FORM OF
           PURCHASERS(1)                SALE        NHANCEMENT        SHARES      PRUCHASE    CONSIDER
                                                    SECURITIES                     PRICE        ATION
------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>              <C>          <C>          <C>
Options granted to seven                           Shares of
 employees(2)                        11/01/98      Common Stock      136,500        (2)         (2)
                                                   Shares of
Options granted to one director(3)   11/01/98      Common Stock       20,000        (3)         (3)
</TABLE>

     (1) The grant of options to the individuals identified in the table above
         were made in reliance on Section 4(2) of the Securities Act of 1933, as
         amended (the "1933 Act"), and /or Regulation D promulgated thereunder.

     (2) The options were granted to employees of NHancement under the Company's
         Equity Incentive Plan.  The options are incentive stock options,
         generally expire ten years from the date of grant and become
         exercisable for twenty-five percent of the shares on the first year
         anniversary of the date of grant, with the balance vesting 1/36 per
         month thereafter.  The exercise price on the date of grant was equal to
         or greater than 100% of the fair market value as determined on the date
         of grant.

     (3) The options were granted to a director who resigned his position as a
         director in January 1999.  The terms of the option, a non-statutory
         stock option, provided for expiration of the option ten years from the
         date of grant and for the option to become exercisable for fifty
         percent of the shares on the first year anniversary of the date of
         grant, with the balance vesting on the second year anniversary of the
         date of grant.  The exercise price on the date of grant was equal to or
         greater than 100% of the fair market value as determined on the date of
         grant.  None of the director's options had vested at the time of his
         resignation.

  ITEM 5.  OTHER INFORMATION

       CHANGES IN MANAGEMENT

           On January 6, 1999, Mr. Goei resigned his position as President and 
       CEO pursuant to the terms of a Separation Agreement approved by the 
       Board of Directors, which modifies the terms of his Employment 
       Agreement. In exchange for Mr. Goei's resignation, the Company has 
       agreed to a severance package with the following principal terms: (i) 
       six and one-half months of regular pay at his current rate, (ii) 
       continued benefits under the Company's medical and group insurance plan 
       through May 15, 1999, (iii) use of the Company paid leased automobile 
       through the end of the lease term in July 1999, (iv) the Company will 
       reimburse Mr. Goei for certain accrued moving expenses totaling 
       $70,000, (v) the Company will issue warrants to purchase 50,000 shares 
       of NHancement Common Stock at the fair market price effective as of the 

                                     20
<PAGE>

       date of his resignation at $1.00 per share, and (vi) Mr. Goei and the 
       Company agree to a mutual waiver of all claims related to Mr. Goei's 
       employment. Mr. Goei continued to serve as Chairman of the Board and 
       Director of the Company until January 13, 1999 when he resigned from 
       these positions.

            Effective January 6, 1999, Douglas S. Zorn became interim President 
       and Chief Executive Officer to fill the vacancies created by Mr. Goei's 
       resignation. On February 2, 1999, the Board of Directors elected Mr. 
       Zorn to the offices of Chief Executive Officer and President. Mr. Zorn 
       continues to serve as Chief Financial Officer, Treasurer and Secretary 
       of the Company.

            Messers. James Boyle, Santanu Das and Gary Nemetz resigned as 
       Directors of the Company on January 6, 1999. Thomas J. Lawrence 
       resigned as a Director on January 13, 1999.

            On January 6, 1999, James S. Gillespie was  reappointed as a 
       Director of the Company.  Mr.  Gillespie had  previously  served as 
       Vice President of Sales and a Director of the Company since its  
       incorporation  in 1996. He resigned  his  position as Vice  President  
       of Sales in April  1998,  and resigned as a Director of the Company on 
       September 22, 1998. On February 2, 1999, the Board approved a consulting
       arrangement between Mr. Gillespie and the Company. 

            Messers. Robert J. Schmier and N. Bruce Walko were also elected to 
       the Board of Directors on January 6, 1999 to fill vacancies created by 
       the resignations of Messers. Boyle, Das and Nemetz.

            On February 2, 1999, the Board of Directors reduced the number of 
       Board members from seven (7) to five (5). As of the date of this 
       filing, there is still one (1) vacancy on the Board of Directors. Mr 
       Walko serves as the Chairman of the Board of Directors.

       AGREEMENT WITH JWGENESIS

            Effective February 2, 1999, the Company entered into an exclusive 
       one-year agreement with JWGenesis Capital Markets to assist the 
       Company as financial advisors in connection with the possible sale, 
       merger, consolidation, recapitalization, business combination, 
       exchange offer or purchase or sale of securities or assets of the 
       Company. The agreement includes the payment of a non-refundable fee of 
       $25,000, the reimbursement of out-of-pocket expenses of $25,000, 
       warrants to purchase 300,000 shares of the Company's Common Stock at a 
       per share exercise price of 110% of the fair market value as of the 
       date of the agreement and transaction fees due upon the successful 
       closing of any such transaction of (i) ten percent (10%) if equity 
       (five percent (5%) if merger, acquisition or debt of the first ten 
       million dollars of the aggregate consideration), (ii) seven percent 
       (7%) if equity (three and one-half percent (3.5%) if merger, 
       acquisition or debt of the next ten million dollars of the aggregate 
       consideration), (iii) five percent (5%) if equity (two and one-half 
       percent (2.5%) if merger, acquisition or debt of the next ten million 
       dollars of the aggregate consideration), and (iv) four percent (4%) if 
       equity (two percent (2%) if merger, acquisition or debt of the balance 
       of the aggregate consideration) subject to a minimum transaction fee 
       of $500,000 on each transaction. A seller's remorse fee of $250,000 is 
       payable to JWGenesis on any bona fide transaction proposal with 
       aggregate consideration of over $5,000,000 which is accepted by the 
       Company for which the Company fails to complete the transaction except 
       due to a breach by or failure of condition under the control of the 
       third party to the transaction.

                                     21
<PAGE>

  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

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                            DESCRIPTION OF EXHIBIT
    ------------  --------------------------------------------------------------
    <S>           <C>
        4.7       Warrant Agreement dated February 2, 1999 between the Company
                  and JWGenesis Capital Markets LLC.

        4.8       Warrant Agreement dated February 2, 1999 between the Company
                  and Kenneth L. Greenberg.

        4.9       Warrant Agreement dated February 2, 1999 between the Company
                  and Mark Goldberg.

       10.47      Separation Agreement dated January 13, 1999 between Esmond T.
                  Goei and the Company.(1)

       10.48      Letter Agreement dated February 2, 1999 between the Company
                  and JWGenesis Capital Markets LLC.

        27.0      Financial Data  Schedule
</TABLE>

(b)      Reports on Form 8-K:  None




-------------
(1)  Incorporated by reference to the document bearing the same exhibit number
as contained in the Company's Form 8-K, as filed with the Securities and
Exchange Commission on February 12, 1999.

                                     22
<PAGE>

                                   SIGNATURES

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


                                       NHANCEMENT TECHNOLOGIES INC.



                                       By:  /s/ Douglas S. Zorn
                                          -------------------------------------
Date: February 15, 1999                   Douglas S. Zorn
                                          Chief Executive Officer, President
                                          Chief Financial Officer and Treasurer






                                     23
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER                          DESCRIPTION OF EXHIBIT
    ------------  --------------------------------------------------------------
    <S>           <C>
        4.7       Warrant Agreement dated February 2, 1999 between the Company
                  and JWGenesis Capital Markets LLC.

        4.8       Warrant Agreement dated February 2, 1999 between the Company
                  and Kenneth L. Greenberg.

        4.9       Warrant Agreement dated February 2, 1999 between the Company
                  and Mark Goldberg.

       10.47      Separation Agreement dated January 13, 1999 between Esmond T.
                  Goei and the Company.(1)

       10.48      Letter Agreement dated February 2, 1999 between the Company
                  and JWGenesis Capital Markets LLC.

        27.0      Financial Data Schedule
</TABLE>



(1) Incorporated by reference to the document bearing the same exhibit number as
contained in the Company's Form 8-K, as filed with the Securities and Exchange
Commission on February 12, 1999.

                                     24