SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


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

FOR THE FISCAL YEAR ENDED      December 31, 2000
                               -------------------------------------------------

Commission File Number:        0-18267
                               -------------------------------------------------

NCT Group, Inc.
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(Exact name of registrant as specified in its charter)

Delaware                                                         59-2501025
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(State or other jurisdiction of                            (I.R.S. Employer or
incorporation organization)                                 Identification No.)

20 Ketchum Street, Westport,                                         06880
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(Address of principal executive offices)                          (Zip Code)

(203) 226-4447
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(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities  registered pursuant to Section 12 (g) of the Act: Common Stock, $.01
par value.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 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.
          X Yes     /_/ No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /_/

The  aggregate   market  value  of  the   Registrant's   voting  stock  held  by
nonaffiliates of the Registrant was $49.4 million as of April 9, 2001.

The number of shares outstanding of the Registrant's common stock is 358,062,122
as of April 9, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

 Certain information contained in the Proxy Statement for the Annual Meeting of
     Stockholders of Registrant to be filed with the Securities and Exchange
      Commission on or before April 30, 2001, is incorporated by reference
                        into Part III of this Form 10-K.
<PAGE>

                                     PART I

ITEM 1.     BUSINESS

A.    General Development of Business

     NCT  Group,  Inc.  is a  leading  technology  developer  with an  extensive
portfolio of proprietary  algorithms and a wide variety of product offerings for
consumer,  commercial and industrial  applications.  "Company",  "NCT", "we" and
"our"  refer to NCT Group,  Inc.  and its  subsidiaries.  We  specialize  in the
utilization of sound and signal waves to reduce noise,  improve  signal-to-noise
ratio and enhance sound quality.  Commercial  application of our technologies is
comprised of a number of product offerings,  including  NoiseBuster(R)  consumer
and communications active noise reduction headsets,  also known as ANR headsets;
ProActive(R) ANR industrial earmuffs and headsets;  Gekko(TM) flat speakers; and
ClearSpeech(R)  microphones,   speakers  and  other  products.  In  addition  to
products,  the company's  innovative  algorithms  are available for licensing to
manufacturers for use in commercial and consumer products.

     During  2000,   NCT's   efforts  were  devoted  to   consummating   several
acquisitions, including Midcore Software, Inc., known as MSI or Midcore, Theater
Radio Network,  Inc., known as TRN, and Pro Tech Communications,  Inc., known as
Pro Tech,  and continuing  its efforts on the  development  of  DistributedMedia
Corporation  ("DMC")  (formerly known as  DistributedMedia.com,  Inc.). DMC is a
wholly owned  subsidiary of the company,  which was formed in November 1998. DMC
is a microbroadcasting  media company that delivers licensed CD-quality music as
well  as  on-air  and  billboard  advertising  to  out-of-home   commercial  and
professional  venues  via a digital  network  of  place-based  microbroadcasting
stations,  called Sight & Sound(TM).  The Sight & Sound(TM) system consists of a
central control network that communicates to a digital broadcast station,  which
plays music  selections  and  advertisements  through flat panel  speakers.  The
speaker  grilles double as visual  billboards.  The speakers will be provided by
NCT Audio Products,  Inc. (known as NCT Audio),  a majority owned  subsidiary of
the company.

     As of December  31, 2000,  NCT and its business  units held 585 patents and
related  rights  worldwide  and an  extensive  library  of  know-how  and  other
proprietary technology. These patents allow the company to develop major product
lines, which include:

o    NoiseBuster(R) ANR communications headsets
o    NoiseBuster(R) ANR consumer headphones
o    ProActive(R) industrial/commercial ANR headsets
o    Gekko(TM) flat speakers, frames, prints and subwoofers
o    ClearSpeech(R) microphones, speakers and other products
o    ClearSpeech(R) corporate intranet telephone software

     The  company  also  markets its  technologies  through  licensing  to third
parties for fees and royalties.  During 2000,  the company  entered into several
new technology license agreements and continues to receive royalties pursuant to
certain of its technology license agreements.

     The company's operating revenues are comprised of technology licensing fees
and royalties,  product  sales,  advertising  and  engineering  and  development
services.  Historically,  the company  derived the majority of its revenues from
engineering  and  development   services  and  technology   licensing  fees.  As
distribution  channels are established and as product sales,  market  acceptance
and  awareness of the  commercial  applications  of the  company's  technologies
build,  revenues from technology licensing fees, royalties and product sales are
projected  to  fund an  increasing  share  of the  company's  requirements.  The
revenues from these sources, if realized,  will reduce the company's  dependence
on revenues from engineering and development  services.  Total revenues for 2000
consisted of  approximately  15.6% in product  sales,  0.6% in  engineering  and
development services, 6.5% in advertising/media  revenue and 77.3% in technology
licensing fees and royalties

     The company has entered  into a number of strategic  supply,  manufacturing
and marketing  alliances  with leading  global  companies to  commercialize  its
technology. These strategic alliances historically have funded a majority of the
company's  research and  development  and  provided  the company  with  reliable
sources  of  components,  manufacturing  expertise  and  capacity,  as  well  as
extensive  marketing and distribution  capabilities.  The company has continuing
relationships  with Walker  Manufacturing  Company (a division of Tennessee  Gas
Pipeline  Company,  a wholly owned subsidiary of Tenneco,  Inc.), AB Electrolux,
Ultra Electronics Ltd., The Charles Stark Draper Laboratory,  Inc., Oki Electric
Industry Co., Ltd. and New Transducers Ltd., among others, in order to penetrate
major markets more rapidly and  efficiently,  while minimizing the company's own
capital  expenditures.  See G.  "Strategic  Alliances" and Note 5 - notes to the
consolidated financial statements for further details.

     An important  factor for our  continuing  development  of technology is our
ability to recruit and retain key  personnel.  As of March 31, 2001,  we had 138
employees.

     The company's  executive offices and corporate  headquarters are located at
20 Ketchum Street, Westport, Connecticut 06880; telephone number (203) 226-4447.
Our research and product development facility is located in Linthicum, Maryland;
telephone number (410) 636-8700.  Our European  operations are conducted through
our product  development  and  marketing  facility in  Cambridge,  England.  The
company also  maintains a presence in the Pacific Rim.  DMC's and Advancel Logic
Corporation's   (known  as  Advancel)   operations   are  located  in  Westport,
Connecticut.  The company's  subsidiaries,  Pro Tech,  Midcore,  and DMC Cinema,
Inc.,  known as DMC  Cinema,  conduct  operations  from  offices  located in Ft.
Pierce,  Florida;  Middlebury,  Connecticut  and as of April 1,  2001  Westport,
Connecticut, respectively.

     NCT is organized  into  strategic  business  units which in May 2000,  were
realigned to comprise three groups: media,  communications and technology.  Each
of the strategic business units is targeted to the  commercialization of its own
products in specific markets.  The media group currently  consists of DMC; DMC's
subsidiaries,  DMC  Cinema  and  DMC  HealthMedia,  Inc.;  and  NCT  Audio.  The
communications group currently includes NCT Hearing Products, Inc. (known as NCT
Hearing);  NCT Hearing's  subsidiaries Pro Tech and NCT Medical  Systems,  Inc.;
Midcore and its subsidiary,  Midcore Software Limited;  and  ConnectClearly.com,
Inc. The technology group currently consists of Noise Cancellation  Technologies
(Europe) Ltd.;  Advancel;  and certain other assets and operations held directly
by the company.  (See Note 19 - notes to the consolidated  financial  statements
for further details about our business segments.)

B.    Business Strategy

     Our strategy is to leverage off our existing base of proprietary technology
by expanding  into areas  outside of  traditional  active noise  control such as
communications,  audio and  microbroadcasting  media. Our acquisition of certain
assets  and all of the  intellectual  property  of Active  Noise  and  Vibration
Technologies,  Inc., or ANVT,  in 1994  expanded our  portfolio of  intellectual
property and allowed us to license certain,  formerly  restricted,  jointly-held
patents to unaffiliated third parties.

     We anticipate  that as we establish  distribution  channels and as consumer
awareness of our products  increases,  so, too,  will product sales and revenues
from licensing fees and royalties.  The funds derived from these revenue sources
will  enable us to become less  dependent  on revenues  derived  from  research,
development  and  engineering.  At the same time, we continue to strive to lower
the cost of our products and enhance their technological performance.

C.    Technology

     Active Noise Reduction.  ANR systems are particularly effective at reducing
low  frequency  noise.  ANR creates  sound waves that are equal in frequency but
opposite  in phase  to the  noise.  The  illustration  that  follows  shows  the
relationship,  in time, of a noise signal, an anti-noise signal and the residual
noise that results when they meet.

<PAGE>

                             ACTIVE NOISE REDUCTION

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

                                [GRAPHIC OMITTED]
                  --------------------------------------------


     Signal Enhancement.  The company's technology also can be used to attenuate
unwanted  signals that enter into a communications  network,  as when background
noise enters  telecommunications  or radio systems from a telephone  receiver or
microphone.  We have  developed  patented  technology  that will  attenuate  the
background  noise  in-wire,  so that the signals  carried by the  communications
network  include  less of the unwanted  noise,  allowing the speaker to be heard
more clearly over the network.  An  application  of this  technology  is in-wire
attenuation of siren noise over two-way radio  communications  between emergency
vehicles and dispatchers at hospitals and police or fire stations.

     Silicon  Micromachined  Microphone.  In 1994,  the  company  purchased  the
exclusive  rights  to  manufacture  and  commercialize  a SMM  as a  technically
superior  and  less  expensive   alternative  to  currently  available  electret
microphones. The SMM has potential applications not only in the audible range of
frequencies, but in the ultrasonic range as well.

     ClearSpeech(R) Adaptive Speech Filter. The ClearSpeech(R) algorithm removes
noise from voice transmissions. ASF is effective against a variety of stationary
noises  whose  amplitude  and  pitch  change  slowly  compared  to the  spectral
variations   characteristic   of  human   speech.   ASF   applications   include
teleconferencing systems, cellular telephones and airphones, telephone switches,
echo  cancellers,  and  communications  systems  in  which  background  noise is
predominant.  ASF is currently  available  for use on three  hardware  platforms
including personal computers and fixed and floating digital signal processors.

     ClearSpeech(R)-Acoustic  Echo Cancellation.  AEC removes acoustic echoes in
hands-free   full   duplex   communication   systems.   AEC   is  an   adaptive,
frequency-based  algorithm that  continuously  tracks and updates the changes in
the acoustic path between the  loudspeaker  and the  microphone to eliminate the
acoustic  echo.  The algorithm  can be changed to  accommodate  different  audio
bandwidths and acoustic tail lengths for use in a variety of  applications  such
as cellular  telephony,  audio and video  teleconferencing,  computer telephony,
gaming and voice recognition.

     ClearSpeech(R)-Reference Noise Filter. RNF isolates and removes interfering
signals,  such as  background  radio,  television,  machine and siren noise,  so
communications  can be heard more clearly.  RNF algorithm was designed to remove
interference from a desired signal in applications  where a reference signal for
the interference is available.

     Flat Panel Transducer. The company's patented FPT technology utilizes piezo
electric  drivers  mounted  on flat  rigid  surfaces  to  create a  unique  wide
dispersion sound field. Unlike conventional  speakers that deliver sound through
air in a pistonic fashion,  the FPT design delivers sound throughout the surface
of the panel being  driven.  This  distributed  mode method of  delivering  wide
dispersion sound is what the company has termed Sweet Space(TM),  which floods a
room with sound.  Uses for FPT  technology  include home theatre,  professional,
automotive and aircraft applications.

      Digital  Broadcasting  Station  System  Software.  DBSS  software is being
utilized  by  DMC  to  deliver   customized  music  programming  to  each  site.
Advertising  is  scheduled  and  updated via a  communications  link such as the
Internet.  The software also performs  status  checking,  play log functions and
other diagnostic functions made available to the central control network.

     MidPoint(R)  Software.  MidCore's  Midpoint  Software  manages the Internet
access of any small to medium sized office, educational institution or residence
with usage control and accounting,  faster performance,  greater reliability and
total security.  Its unique  combination of features such as routing,  firewall,
email server, caching, site blocking and more result in unparalleled performance
for  Internet  access,   regardless  of  the  type  of  connections   available.
Development is currently underway to incorporate  office-to-office  connectivity
(such  as VPN and  secure  email),  audio  and  speech  technologies  (including
Voice-Over-IP,   POTS   gateways,   and  NCT's   proprietary   speech-processing
algorithms), and unique performance-enhancing capabilities for large enterprises
and ISP's.

     Telephone  Amplifier  Technology.  Pro  Tech  has  been  awarded  a  patent
entitled, "Linearization of FET Channel Impedence for Small Signal Applications"
which covers the  semiconductor  technology used in the Pro Tech's two-prong and
tabletop telephone  amplifiers for call centers.  This technology  facilitates a
higher level of signal  processing  quality at a significantly  lower price than
conventional semiconductor solutions.

<PAGE>
D.    NCT Proprietary Rights and Protection

     The company  holds a large number of patents and patent  applications.  Our
intellectual  property  strategy  has  been  to  build  upon  our  base  of core
technology  patents  with  newer  advanced   technology  patents  developed  by,
purchased  by or  exclusively  licensed  to  us.  In  many  instances,  we  have
incorporated  the technology  embodied in our core patents into patents covering
specific product applications,  including the products' design and packaging. We
believe this  building-block  approach  provides  greater  protection to us than
relying solely on the original core patents. As its patent holdings increase, we
believe the  importance  of our core patents will  diminish  from a  competitive
viewpoint.

     We purchased  certain assets of ANVT in 1994,  which included all of ANVT's
intellectual  property rights. Among the ANVT intellectual  property rights were
ANVT's  interest in the ten basic Chaplin  Patents which are now solely owned by
the  company as the sole  shareholder  of Chaplin  Patents  Holding  Co.,  Inc.,
formerly a joint  venture with ANVT.  These  patents  cover  inventions  made by
Professor G.B.B.  Chaplin in the late 1970s and early 1980s,  some of which have
now expired.

     The  Chaplin  Patents  form only one group of core  patents  upon which the
company's technology is based. In March 1990, we acquired exclusive ownership of
10 patents  developed  under the auspices of the National  Research  Development
Corporation,  also  known as NRDC,  an  organization  sponsored  by the  British
Government.  Among other things,  the NRDC  patents,  of which the Swinbanks and
Ross patents are the most important,  utilize the adaptive feed forward approach
to active noise  control.  The  Swinbanks  patent  covers an improved  method of
analyzing  the  incoming  noise or  vibration  through  the use of a  "frequency
domain" adaptive filter that splits the incoming noise into different  frequency
bands for analysis and recombines  the data to generate the  anti-noise  signal.
The Ross patent covers the use of a "time domain"  filter,  which uses input and
error  signals to enhance a system's  ability to  compensate  for feedback  from
actuators  to sensors.  Without  this  filter,  the system will detect and begin
canceling its own self-generated anti-noise.

     As part of the purchase of certain ANVT assets,  we acquired all the rights
to nine inventions  previously  belonging to the Topexpress  Group in the United
Kingdom.  The  international  patent coverage of these inventions varies but all
nine have been granted patent protection in various  countries.  Among the other
intellectual  property  acquired  from ANVT are patents  relating to active auto
mufflers  and  noise  suppression  headrests,  several  patent  applications  on
advanced  algorithms,  active noise  headsets and many related  disclosures  and
various disclosures in other areas of active attenuation of noise and vibration.
In  addition,  we  acquired  the rights to three basic  inventions  known as the
Warnaka patents.

     The  company  has built upon these core  patents  with a number of advanced
patents and patent applications. These include the Digital Virtual Earth patent,
which  covers  digital  feedback  control,  and patents on  multi-channel  noise
control.  We have also has  applied  for  patents on  combined  feedforward  and
feedback control, control using harmonic filters, filters for signal enhancement
and speech filtering, control systems for noise shaping and others.

     In  1994,  we  obtained  a  license  for the  exclusive  rights  to the SMM
technology developed by Draper in Cambridge,  Massachusetts.  At this time, four
patents describing the basic technology have been issued.

     In 1995, we acquired  several U.S.  patents dealing with ASF which are used
in our ClearSpeech(R) product line.

     Since 1996, we have been granted 409 new patents.

     We hold or have rights to 318  inventions  as of March 31, 2001,  including
121 United States patents and over 483 corresponding foreign patents for a total
of 604 patents and related  rights.  We have pending 130 U.S. and foreign patent
applications.  The company's  engineers have made 156 invention  disclosures for
which we are in the process of preparing patent  applications.  Our patents have
expiration  dates  ranging from 2000 through 2016,  with the majority  occurring
during or after 2009.

     The company has been granted the following trademarks:

         Mark                       Field of Use
        ------                      -------------
      NCT logo                      Company logo
      NoiseBuster(R)                headsets
      NoiseEater(R)                 HVAC systems
      ClearSpeech(R)                adaptive speech filter products
      VariActive(R)                 headsets
      ProActive(R)                  headsets
      Noisebuster Extreme!(R)       headsets

     The company has also applied for 12 trademarks including:

         Mark                       Field of Use
        ------                      -------------
      Gekko(TM)                     flat audio speakers
      ArtGekko(TM)                  flat audio speakers
      Sweet Space(TM)               flat audio speakers
      Sight & Sound(TM)             microbroadcasting

     The Gekko(TM) and Art Gekko(TM) trademark applications have been challenged
by another  trademark  holder on the grounds of  similarity  and  confusion in a
proceeding currently pending before the U.S. Trademark Office.

     No  assurance  can be given as to the  range or degree  of  protection  any
patent or  trademark  issued to, or licensed by, the company will afford or that
such patents, trademarks or licenses will provide protection that has commercial
significance  or  will  provide  competitive  advantages  for our  products.  No
assurance  can be  given  that  the  company's  owned  or  licensed  patents  or
trademarks will afford  protection  against  competitors  with similar  patents,
products or trademarks. No assurance exists that the company's owned or licensed
patents or trademarks will not be challenged by third parties,  invalidated,  or
rendered unenforceable.  Furthermore, there can be no assurance that any pending
patent or trademark applications or applications filed in the future will result
in the  issuance of a patent or  trademark.  The  invalidation,  abandonment  or
expiration of patents or trademarks  owned or licensed by us which we believe to
be commercially  significant could permit increased competition,  with potential
adverse effects on the company and its business prospects.

     We have  conducted  only  limited  patent  and  trademark  searches  and no
assurances  can be given that patents or  trademarks do not exist or will not be
issued in the future that would have an adverse  effect on our ability to market
our products or maintain our competitive  position with respect to our products.
Substantial  resources may be required to obtain and defend patent and trademark
rights of the company.

     Our  policy is to enter  into  confidentiality  agreements  with all of our
executive officers,  key technical personnel and advisors, but no assurances can
be made that the company  know-how,  inventions  and other secret or unprotected
intellectual property will not be disclosed to third parties by such persons.

     Finally,  it should be noted that  annuities and  maintenance  fees for our
extensive patent portfolio are a significant portion of our annual expenses. If,
for the reasons  described in Item 7.  "Management's  Discussion and Analysis of
Financial   Condition  and  Results  of  Operations  --  Liquidity  and  Capital
Resources,"  it  becomes  necessary  for the  company  to  reduce  its  level of
operations,  we will  not be able to  continue  to meet the  extensive  monetary
outlay  for  annuities  and  maintenance  fees  to  keep  all  the  patents  and
applications from becoming  abandoned,  the company then will have to prioritize
its portfolio accordingly.

E.    Existing Products

     NCT Hearing Products

     NoiseBuster(R).  NCT is currently  marketing  its  NoiseBuster(R)  personal
active noise  reduction  headphone for consumers at a suggested  retail price of
$39. This active  headphone  selectively  reduces  unwanted  noise  generated by
aircraft engines,  lawnmowers,  street traffic,  household  appliances and other
annoying noise sources,  while permitting the user to hear desired sounds,  such
as human  conversation,  warning signals or music.  The product can also be used
with an aircraft's  in-flight  entertainment  system or a portable audio device.
NCT is marketing the NoiseBuster(R)  through  distribution  channels,  including
electronics retail stores, specialty catalogues and directly through a toll-free
"800"  number and on the  Internet.  Initial  product  shipments of the original
NoiseBuster(R)  were made in September  1993.  Product  shipments of the current
NoiseBuster(R) began during the first quarter of 1997.

     The  NoiseBuster(R)  line  has  been  expanded  to  include  communications
headsets for cellular,  multimedia and telephony. The products are the first ANR
offerings  for these  applications  and improve  speech  intelligibility  in the
presence of background  noise.  Product shipments began during the first quarter
of 1998.

     NB-PCU.  NCT along with a leading  manufacturer  and  supplier  of aircraft
cabin  products  has  integrated  NCT's  active noise  control  technology  into
in-flight  passenger  entertainment  systems.  As a component of the system, NCT
also has developed a low-cost headset  specifically for in-flight use to be used
in conjunction with the integrated electronics.  NCT's technology electronically
reduces  aircraft  engine noise while enhancing the audibility of desired sounds
like speech, music and warning signals.  Lowering the engine drone also can help
alleviate the anxiety and fatigue often associated with flying. While the system
is in use,  passengers  inside an aircraft cabin can carry on conversations at a
comfortable level or hear in-flight movies and music without over  amplification
and  distortion.  The system is currently  being installed in first and business
class  cabins on new  United  Airlines  aircraft  and in  cabins  of five  other
airlines.

     Pro Tech Communications, Inc.

     In September 2000, NCT Hearing licensed certain technologies to Pro Tech in
exchange for approximately an 83% interest in Pro Tech. Pro Tech currently sells
high quality,  lightweight  headsets to high-profile  users, among them the NASA
space program and  McDonald's.  Pro Tech,  with its current  innovative  product
offerings and planned products  incorporating  NCT's advanced  technologies,  is
targeting the call center and wireless communications markets. The following are
products sold by Pro Tech:

     The ProCom. Pro Tech's initial entry into the lightweight fast-food headset
market is the "ProCom." Weighing less than 2 ounces, the ProCom is worn by users
over the head by means of a springsteel wire headband and a cushioned  earphone.
Attached to the  earphone,  which may be worn over either ear, is an  adjustable
boom, which connects to the ProCom's microphone.  The ProCom headset connects to
the wireless  belt-pack system with the use of various plug types offered by the
wireless belt-pack providers sold in many fast-food franchises around the world.
The ProCom is presently selling to distributors at prices ranging from $20.00 to
$49.00 per headset,  and the product is sold by Pro Tech to retailers for $54.00
per headset.

     The Freedom.  The Freedom is an adaptation  of the ProCom  headset to allow
for it to be  worn  without  a  headband  and is  currently  being  sold  in the
fast-food  market.  Through the use of Pro Tech's  engineered clip, this headset
attaches to the standard hat or visor being worn in the fast-food franchise. The
electronics  in the  Freedom  are  virtually  the  same  as the  ProCom  headset
providing the same market acceptance.  Through its own research,  Pro Tech found
the need for user comfort from the use of headsets  over very long time periods.
Pro Tech introduced this product in April 1998.

     The Manager's Headset. The manager's headset is a lightweight  over-the-ear
fast-food  headset,  which  provides  improved  comfort to the  fast-food  store
manager monitoring drive-thru activity. It was introduced and favorably received
in  February  of 2000 and Pro Tech will  continue  to offer this  headset in its
fast-food  product line for the year 2001.  This product is sold in a range from
$24.50 to $46.00 depending on volumes purchased.

     The APEX.  Pro Tech  introduced  the APEX  headset for sale in 1999.  After
conducting its own market research, it was determined that there is a demand for
a headset which combines both  over-the-head  and  over-the-ear  features.  As a
result the APEX was designed to incorporate both of these features, which should
enhance Pro Tech's ability to market the product to cellular,  personal computer
and small office  telephone  users.  The APEX is a commercial  adaptation of the
headset that Pro Tech has designed for use by the National Aeronautics and Space
Administration  ("NASA").  Boeing Defense and Space Group  ("Boeing") is a prime
contractor  for  NASA,  and as such has the  responsibility  to  choose  certain
components  and  products  used in NASA's space  program.  The APEX is a smaller
design  of the  Trinity,  with  components  reduced  by 20% in order to create a
lightweight  headset.  The  speaker  and  microphone  positioning  can be easily
adjusted  by the  user for the  headset  thereby  allowing  the  product  to fit
numerous  head and ear sizes.  In addition,  the APEX has a detachable  headband
allowing  the users the choice of wearing the headset  over the head or over the
ear. The APEX is presently sold to distributors at prices ranging from $40.00 to
$62.00 per headset.  The APEX is being sold by distributors  and directly by Pro
Tech to end-users for $99.00 per headset.

     The ASTRA.  The Astra headset is a variation of the Apex headset in that it
has been adapted for use directly in non-amplified phone systems. A preamplifier
circuit has been  inserted  inside the headset to allow for a direct  connection
into an automatic  call  distributor  (ACD) or phone system that  provides  this
required configuration headset.

     The  A-10  Amplifier.  The A-10  amplifier  is the  first  in a  series  of
multi-line  amplifiers  being  offered with each of Pro Tech's  headsets.  It is
designed for the SOHO market (small office/home  office) and has been engineered
to work with over 90% of all existing  phone  systems in the world.  The size is
very small and engineered to plug and play with most phone systems.

     The  A-27  Amplifier.  The A-27  amplifier  is the  first  in a  series  of
amplifiers  specifically  designed for automatic control  distributors  (ACD) or
phone systems  which use the standard  PJ-237  2-prong plug as their  interface.
This amplifier will employ noise  suppression  technology  designed by Pro Tech.
Three patent  applications  were filed in 2000. The A-27 was introduced into the
call-center  market in the 2000. Pro Tech presently  sells the A-27 Amplifier to
distributors  at prices  ranging from $67.00 to $89.00 per  amplifier.  The A-27
Amplifier  is being sold by  distributors  and directly by Pro Tech to end-users
for $127.00 per amplifier.

     The Active  Series  Headset.  The Active Series  Headset was  introduced in
2000.  These headsets are designed for the mobile  headset user.  Cellular phone
users and  automobile  hands-free  kits will be the primary market focus of this
product.  Pro Tech presently  sells the Active Series Headset to distributors at
prices  ranging from $8.00 to $20.00 per headset.  The Active Series  headset is
being sold by distributors  and directly by Pro Tech to end-users for $25.00 per
headset.

     The Trinity. The Trinity has been designed for users in noisy environments.
Pro Tech completed the  development of this product early in 2000.  Unlike other
headsets  currently  available,  the  Trinity  will  employ a light  (1/2-ounce)
"acoustical ear cup" which completely surrounds the user's ear. The perimeter of
this cup rests  lightly in a broad area of contact  around the ear,  rather than
against or in the ear  itself,  which will allow the user to wear the Trinity in
comfort for extended periods. Moreover, by enclosing the ear, the acoustical ear
cup reduces background noise,  thereby  significantly  improving the clarity and
strength of  reception  from the  earphone.  The Trinity has been  designed as a
comfortable  and  lightweight   alternative  to  the  bulky   commercial   sound
suppressant  headsets,  which are presently the only headsets available to users
operating in noisy  office  environments.  The Trinity  headset can be worn in a
single ear cup version or dual ear cup  version.  Like the  ProCom,  the Trinity
will be  produced  with a choice of  adapters  capable of  interfacing  with the
electronic  amplifiers and telephone  systems of most major  manufacturers.  Pro
Tech presently  sells the Trinity to  distributors at prices ranging from $42.00
to $54.00 per  headset,  and sells the  product to  retailers  for  $118.00  per
headset.

     The disparity in price between the cost to  distributors  and retailers for
each  product  described  in this section is primarily a result of a shifting of
direct selling  expenses from Pro Tech to  distributors.  Distributors in return
for a lower average  purchase  price have  accepted  these  expenses,  averaging
approximately  $11.23 of the individual unit retail price. Pro Tech offers lower
prices for its products to  distributors  who  purchase  certain  quantities  of
products to increase sales and gain market share for its products.

     NCT Communications Products

     ClearSpeech(R)-Mic.  This is the first digital noise  reduction  microphone
system for use with  hands-free  car kits.  The  product  substantially  reduces
background  road, tire,  wind,  engine and traffic noise from hands-free  calls,
allowing the person  receiving the call to hear voice more clearly and with less
frustration and anxiety.

     ClearSpeech(R)-Speaker.  This  product  cleans  background  noise  from the
incoming  speech  signal  over a  two-way  or  mobile  radio  for the  utmost in
intelligibility.  The  system is  suitable  for use with  mobile  radios,  fleet
communication systems, marine radios and many other communication systems.

     ClearSpeech(R)-PCB  Boards.  These  boards  are  currently  being  sold for
incorporation into communication systems at drive through fast food restaurants.
They  allow the  system to  filter  background  car noise so that only the voice
comes through, cutting down on errors in the order process.

     NCT Audio Products

     Gekko(TM)  flat speaker.  In 1998,  NCT Audio  launched the Gekko(TM)  flat
speakers and ArtGekko(TM) printed grille collection.  This was the first product
launched by NCT Audio to the consumer  audio market  utilizing  our patented FPT
technology.  With this technology,  these products deliver Sweet Space(TM) sound
that  floods  the room with  sound as opposed  to  conventional  speakers  which
deliver  sound like a  spotlight.  The  Gekko(TM)  flat  speakers  are thin wall
hanging  speakers that are designed to accept high quality  reproductions of the
world's most popular  artwork,  which is the  ArtGekko(TM)  line of  replacement
prints and decorative  frames.  The art is printed on  acoustically  transparent
material, which allows all sound from the flat speaker to pass freely. NCT Audio
also  provides  flat  speakers  for  Distributed  Media  Corporation's  Sight  &
Sound(TM)  microbroadcasting  system.  Sight & Sound is a new advertising medium
that delivers  place-based audio and billboard  advertising  messages integrated
with CD-quality music.

     NCT Internet Protocol Products

     MidPoint(R)  Software.  In September 2000, NCT acquired  MidCore  Software,
Inc., the maker of MidPoint(R) Internet connectivity software.  MidPoint(R) is a
cost-effective,   feature-packed  Internet  connection  solution  for  small  to
medium-sized organizations. With one installation of MidPoint, any network of up
to 250 users can share a single  Internet  connection and ISP account,  offering
tremendous  long-term  savings over the cost of multiple phone lines and monthly
ISP charges or expensive  high-speed  dedicated  connections.  In addition,  the
package  includes  many  features to make  Internet  access more  efficient  and
productive; such as high-performance shared cache, scheduled retrievals, content
control  and usage  accounting.  Midpoint  also  features a powerful  integrated
e-mail server and management  function,  which allows  complete local control of
e-mail.

Revenues

     Product Revenues

     The following table sets forth the percentage  contribution of the separate
classes of NCT's products to NCT's product  revenues for the year ended December
31, 2000 (in thousands).

                              Year ended
                          December 31, 2000
                         ---------------------
                                       As a %
            Products       Amount    of Total
                         ---------   ---------
      Hearing Products   $  1,125       56.2%
      Communications          462       23.1%
      Audio Products          318       15.9%
      Software Products        96        4.8%
                         ---------   ---------
            Total         $ 2,001      100.0%
                         =========   =========

     Product  revenues were  approximately  15.6% of total revenues for the year
ended December 31, 2000.
<PAGE>

     Technology Licensing Fees and Royalty Revenues

     The following table sets forth the percentage  contribution of the separate
business segments of NCT's technology to NCT's technology  licensing and royalty
revenue for the year ended December 31, 2000 (in thousands).

                              Year ended
                           December 31, 2000
                        ------------------------
                                        As a %
                          Amount       of Total
                        -----------  -----------
       Technology        $   3,550        35.8%
       Communications        2,988        30.1%
       Media                 2,065        20.8%
       Other                 1,325        13.3%
                        -----------  -----------
            Total        $   9,928       100.0%
                        ===========  ===========

     Technology  licensing fees and royalties were approximately  77.3% of total
revenues  for  the  year  ended  December  31,  2000.   Such  2000  revenue  was
predominantly  due to the  revenue  recognized  from  the  license  to  Infinite
Technology  Corporation  of $3.6  million,  license to Pro Tech of $2.4 million,
license to  Vidikron of  America,  Inc.,  known as  Vidikron,  of $2.0  million,
license to Teltran  International  Group,  Inc. of $0.4 million and site license
revenue of approximately  $1.1 million as explained in "Management's  Discussion
and Analysis of Financial Conditions and Results of Operations."

     Advertising Revenues

     Advertising  revenues totaling $0.8 million represented  approximately 6.5%
of total  revenues for the year ended  December 31, 2000.  Such 2000 revenue was
comprised  of $0.7  million  recognized  from  entertainment  audio  programming
supplied to multiplex  cinemas and $0.1 million  generated  from  broadcast  and
billboard advertising through its network of Sight and Sound(TM) systems.

F.    Products Under Development

     SMM

     Silicon  Micromachined  Microphone.  The  ability to  integrate  additional
circuitry on the SMM chip has proven  attractive to potential  users.  The SMM's
low noise floor and  adjustable  sensitivity  improve voice  recognition in high
ambient noise  environments.  NCT is working with voice  processing and computer
hardware  companies  to utilize  the SMM to  enhance  the  performance  of their
systems.  In the first quarter of 1996, NCT released  initial  prototypes of the
devices.  In December 1997, we announced that Siemens  Semiconductors of Siemens
AG, now  Infineon,  had  licensed our SMM  technology  and that  Infineon  would
develop,  manufacture and market the SMM. Prototype samples were received.  Full
production is scheduled to commence in 2001.

     NCT Communications

     ClearSpeech(R)  Product Line. NCT is continuously improving the quality and
functionality  of  the  ClearSpeech(R)  Microphone  and  ClearSpeech(R)  Speaker
products to improve market penetration. NCT has both noise and echo cancellation
on a variety of DSPs including  Analog-Devices'  and Texas Instruments'  general
purpose DSPs so that third party  developers may integrate the  technology  into
their  applications.  NCT also has extended the  availability  of PC development
tools by creating software  developer's kits for noise and echo cancellation and
speech compression.

G.    Strategic Alliances

     The  company's  transition  from a firm  primarily  engaged in research and
development to one engaged in the licensing,  production,  marketing and sale of
technologies  and applications  has been  facilitated by the  establishment  and
maintenance  of  strategic  alliances  with  major  domestic  and  international
business  concerns.  In exchange for the benefits to such concerns' own products
offered  by our  technology,  these  alliances  under the  terms of their  joint
venture agreements or licenses provide marketing, distribution and manufacturing
capabilities  for our  products  and  enable us to limit the  expense of our own
research and development  activities.  In order to ensure dependable  sources of
supply and to maintain quality control and cost effectiveness for components and
integrated circuits  incorporated in our applications and products, an important
element of our  strategy  has been to  identify  and enter into  alliances  with
integrated circuit manufacturers that will develop and produce custom-made chips
for NCT product  applications,  and with  manufacturers  of components that will
supply and integrate  components for NCT technologies.  The following summarizes
NCT's key alliances:

-------------------------------------------------------------------------------
                                   Date Initial
                                   Relationship
     Key Strategic Alliances       Established            Applications
--------------------------------- --------------- -----------------------------

  Walker Manufacturing Company      Nov. 1989     Mufflers, Industrial
  (a division of Tennessee Gas                    Silencers and Other
  Pipeline Company)                               Vehicular Applications

  AB Electrolux                     Oct. 1990     Consumer Appliances

  Ultra Electronics Ltd.            June 1991     Aircraft Cabin Quieting
                                                  Systems

  The Charles Stark Draper          July 1994     Microphones
  Laboratory, Inc.

  New Transducers Ltd.              Mar. 1997     Flat Panel Transducers

  Oki Electric Industry Co.,        Oct. 1997     Communications
  Ltd.

  Infineon Technologies AG I Gr.    Dec. 1997     Microphones
  (formerly Siemens AG)

  VLSI Technology, Inc.             Feb. 1998     Communications

  STMicroelectronics SA &           Nov. 1998     Java(TM)platform
  STMicroelectronics S.r.l.

  Lernout & Hauspie Speech          Mar. 1999     Communications
  Products N.V.

  Delphi Automotive Systems         May  2000     Communications
-------------------------------------------------------------------------------
<PAGE>


     Walker Manufacturing Company (a division of Tennessee Gas Pipeline Company,
     a wholly-owned  subsidiary of Tenneco,  Inc.) (U.S.) and Walker  Electronic
     Mufflers,  Inc.  (a  wholly-owned  subsidiary  of  Tennessee  Gas  Pipeline
     Company, a wholly-owned subsidiary of Tenneco, Inc.) (U.S.)

     In  November  1989,  NCT signed  its  strategic  alliance  with  Walker,  a
world-leading  manufacturer  of  automotive  parts and  mufflers.  The  alliance
consisted of a Joint Venture and  Partnership  Agreement  with  ownership in the
resulting joint venture, Walker Noise Cancellation Technologies, or WNCT, shared
equally between NCT Muffler, Inc., a wholly-owned  subsidiary of the company and
WEM.  On  November  15,  1995,  NCT and  Walker  executed  a series  of  related
agreements  (the  "Restructuring  Agreements")  regarding our commitment to help
fund $4.0 million of product and technology development work and the transfer of
our 50% interest in WNCT to Walker.  The Restructuring  Agreements  provided for
the  transfer  of our  interest  in  WNCT  to  Walker,  the  elimination  of our
previously expensed obligation to fund the remaining $2.4 million of product and
technology  development  work,  the transfer to Walker of certain  company owned
tangible  assets  related to the  business  of WNCT,  the  expansion  of certain
existing  technology licenses and our performance of certain future research and
development activities for Walker at Walker's expense.

     AB Electrolux (Sweden)

     NCT's relationship with Electrolux, one of the world's leading producers of
white goods,  was  initiated in October 1990.  NCT signed its current  agreement
with Electrolux,  a Joint Development and Supply  Agreement,  in June 1991. This
agreement  provides  for NCT to design,  develop and supply  active  systems for
quieting Electrolux  products.  Electrolux has agreed to purchase the electronic
components for its active noise control products  exclusively from NCT, provided
NCT and its supply joint  ventures are price and quality  competitive.  To date,
NCT  has  completed   development  of  two  household   appliance  products  for
Electrolux. No date has been established for product introduction.

     Ultra Electronics Ltd. (U.K.)

     Since  1991,  NCT and Ultra  (and  Ultra's  predecessor,  part of the Dowty
Group),  have been designing and developing systems to enhance passenger comfort
by  quieting  aircraft  passenger   compartments  in  certain   propeller-driven
aircraft,  which Ultra sells to the worldwide turbo-prop aircraft market. In May
1993,  Ultra and NCT signed a teaming  agreement  to produce and install the NCT
cabin quieting system on the SAAB 340 aircraft.  Deliveries under this agreement
began in 1994. In March 1995,  NCT and Ultra  amended the teaming  agreement and
concluded  a  licensing  and  royalty  agreement  for $2.6  million.  Under this
agreement,  Ultra  will  pay  NCT  a  royalty  of  1.5%  of  sales  of  products
incorporating  NCT  technology  beginning  in 1998  (see  Note 5 - notes  to the
consolidated financial statements for further details).

     The Charles Stark Draper Laboratory, Inc. (U.S.)

     In July 1994,  NCT and Draper of Cambridge,  Massachusetts  entered into an
agreement   whereby  NCT  became  the  exclusive   licensee  to  a  new  silicon
micromachined  microphone  developed by Draper. Under the terms of the agreement
and subsequent  agreements,  Draper will perform engineering services for NCT to
further develop the technology. The SMM technology can be used in a wide variety
of applications within the acoustic and communications fields.

     New Transducers Ltd. (U.K.)

     New   Transducers   Ltd.   (U.K.),   known  as  NXT,  and  NCT  executed  a
cross-licensing  agreement  on March  28,  1997.  Under  the  terms of the Cross
License,  we licensed patents and patents pending which relate to FPT technology
to NXT, and NXT licensed  patents and patents  pending  which relate to parallel
technology  to NCT. In  consideration  of the license,  during the first quarter
1997 NCT  recorded a $3.0  million  license fee from NXT,  and NCT will  receive
royalties on future NXT licensing and product  revenue.  On April 15, 1997,  NXT
plc, a publicly  registered  company in England and Wales,  and its wholly owned
subsidiary,  NXT and NCT executed several agreements and other documents,  which
terminated the Cross License,  and certain related  agreements and replaced them
with a new cross  license,  and new related  agreements.  The  material  changes
effected by the New  Agreements  included  the  inclusion  of NXT plc as a party
along with its  wholly-owned  subsidiary  NXT and provided  that the license fee
payable to NCT could be paid in ordinary  shares of stock.  The subject  license
fee was paid to NCT in ordinary shares of NXT plc stock, which were subsequently
sold by NCT.

     On September  27, 1997,  NXT plc,  NXT, NCT Audio and NCT executed  several
agreements and other documents,  terminating the New Cross License and a related
security  deed and  replacing  them with new  agreements.  The material  changes
effected  by  these  agreements  included  an  expansion  of the  fields  of use
applicable to the exclusive  licenses granted to NXT plc and NXT and an increase
in the royalties payable on future licensing and product  revenues.  On February
9, 1999, NCT Audio and NXT expanded the Cross License  Agreement dated September
27, 1997 to increase  NXT's  fields of use to include  aftermarket  ground-based
vehicles and aircraft sound systems. The amendments also increased the royalties
due NCT Audio from NXT to 10% from 6% and  increased  the royalties due NXT from
NCT Audio to 7% from 6%. In consideration for granting these expanded  licensing
rights,  each party  received a license  fee  (see Note 5 - Joint  Ventures and
Other Strategic Alliances,  and Note 21 - Subsequent Events, in the notes to the
consolidated financial statements for further details).

     On March 30, 2001, we entered into a Framework  Agreement  with NXT plc and
NXT that  provided  for the  termination  of the  various  licenses  and related
agreements  entered  into in 1997 and 1999.  Under the  Framework  Agreement  we
transferred  our  patents  and  related  technology  to NXT that  pertain to FPT
Technology,  and received back a non-exclusive  license to use those patents and
related  technology  and NXT  bought-out  NCT Audio's right to a future  royalty
stream in exchange for  2,000,000  shares of NXT plc. Our rights to sell the NXT
plc shares are limited by a six month  lock-up  agreement.  We also acquired 533
shares of NCT Audio  that were held by NXT plc and  granted  NXT plc a  cashless
exercise of this warrant to purchase  3,850,000  shares of our common stock. NXT
is required to assist DMC in  developing a new flat speaker with video  display,
and we will pay royalties on products developed by NXT.

     Oki Electric Industry Co., Ltd. (Japan)

     In October 1997, NCT and Oki executed a license agreement.  Under the terms
of the  agreement,  which  included an up-front  license fee and future per unit
royalties,  Oki licensed NCT's ClearSpeech(R)  noise cancellation  algorithm for
integration   into   large-scale    integrated   circuits   for   communications
applications.  NCT has  granted  Oki the  right  to  manufacture,  use and  sell
products incorporating the algorithm.  The algorithm is specifically designed to
remove  background  noise from  speech and other  transmitted  signals,  greatly
improving  intelligibility  and  clarity  of  communications.  NCT is  currently
receiving royalties from OKI relating to the license agreement.

     Infineon  Technologies  AG (formerly  Siemens  Semiconductors,  Siemens AG)
     (Germany)

     In December 1997, NCT and Infineon executed a license agreement.  Under the
terms of the agreement,  which  included an up-front  license fee and future per
unit royalties,  Infineon  licensed NCT's SMM and will develop,  manufacture and
market  such  microphones  as  surface  mountable  devices.  The SMM  technology
delivers  microphone  technology  on a  silicon  chip,  a  breakthrough  in  the
microphone  marketplace.   Infineon  and  NCT  have  targeted  the  SMM  to  the
multimedia,  cellular phone, wireless phone, voice recognition and other related
markets.  The  SMM's  small  chip  dimensions  of only 3 mm on each side make it
useful for packaging  into products with tight size  constraints,  such as noise
canceling earplugs and hearing aids.

     VLSI Technology, Inc. (France)

     In February  1998,  NCT and VLSI  executed a license  agreement.  Under the
terms of the agreement,  which included up-front development fees and future per
unit royalties,  VLSI licensed our  ClearSpeech(R)  noise  cancellation and echo
cancellation  algorithms  for use with  VLSI's  current  and  future  integrated
circuits  targeted to the digital cellular and personal  communications  systems
phone  market,  as  well as  emerging  computer  telephony  markets.  The  noise
cancellation  algorithm is specifically designed to remove background noise from
speech and other  transmitted  signals,  greatly improving  intelligibility  and
clarity of  communications.  The echo cancellation  algorithm cancels acoustical
echo for hands-free telephony operations including cellular and speakerphones.

     STMicroelectronics SA & STMicroelectronics S.r.l (France and Italy)

     In November 1998,  Advancel and ST executed a license agreement.  Under the
terms of the agreement,  which included a license fee, a minimum  royalty within
two years and future per unit royalties,  ST licensed Advancel's  tiny2J(TM) for
Java(TM)   ("T2J-processor   core")  to  combine  it  with  its  proven   secure
architecture  and  advanced  nonvolatile  memory  technology,  to  offer  a  new
generation  of  secure   microcontrollers   for  smartcard   applications.   The
T2J-processor  core is the ideal  architecture  to  accelerate  the execution of
Javacard(TM)-based  smartcard applications such as electronic purse credit/debit
card  functions,  ID cards  that  provide  authorized  access  to  networks  and
subscriber  identification  modules  that  secure  certain PCS  cellular  phones
against fraud.

     Lernout & Hauspie Speech Products N.V. (Belgium)

     On March 31, 1999,  NCT signed a license  agreement with L&H. The agreement
provides  NCT  with a  worldwide,  non-exclusive,  non-transferable  license  to
selected L&H technology for use in the company's  ClearSpeech(R)  products.  NCT
recorded a prepaid  royalty of $0.9  million.  On April 12, 1999,  NCT granted a
worldwide non-exclusive, non-transferable license to L&H. The agreement provides
L&H access to NCT's  present and future noise and echo  cancellation  algorithms
for use in L&H's technology.  In consideration of the grant of a license to L&H,
NCT recognized a  non-refundable  royalty fee of $0.8 million.  During the third
quarter of 1999,  NCT and L&H agreed to offset the balances owed each other.  On
November 29, 2000, L&H filed a Chapter 11 petition for reorganization  under the
U.S.  bankruptcy  laws.  It is unclear at this time what effect,  if any,  L&H's
petition will have on our relationship.

     Delphi Automotive Systems (United States)

     On May 3, 2000,  Delphi  Automotive  Systems licensed NCT's  ClearSpeech(R)
noise,  acoustic  echo and live echo  cancellation  algorithms  for use in their
Mobile   Multi  Media  (MMM)   Computing   Platform  for   hands-free   cellular
communications.  NCT's patented ClearSpeech  algorithm cancels 95% of background
road,  tire,  wind,  engine and traffic  noise from  hands-free  communications,
allowing the party receiving the communication to hear voice more clearly.

H.    Marketing and Sales

     In addition to marketing its technology through its strategic  alliances as
described  above,  as of  December  31,  2000,  NCT had an  internal  sales  and
marketing force of 18 employees,  5 independent  sales  representatives  and its
executive officers and directors. The independent sales representatives may earn
commissions  of  generally  up to 6% of  revenues  generated  from  sales of NCT
products to customers the sales  representatives  introduced to NCT and up to 5%
of research and development funding revenues provided by such customers.

     Note  20 -  notes  to the  consolidated  financial  statements  sets  forth
financial  information relating to foreign and domestic operations and sales for
the years ended December 31, 1998, 1999 and 2000.

     NCT does not have a significant  foreign exchange  transaction risk because
the majority of its non-U.S. revenue is denominated and settled in U.S. dollars.
The remaining inter-company revenue, eliminated in consolidation,  is in British
pounds sterling and our underlying cost is also in pounds  sterling,  creating a
natural foreign exchange protection.

I.    Concentrations of Credit Risk

     NCT sells its products and services to OEMs,  distributors and end users in
various  industries  worldwide.  As outlined  below,  the  company's two largest
product customers  accounted for approximately  16.8% of product revenues during
2000 and 1.3% of gross accounts receivable at December 31, 2000.

(in thousands)                         As of December 31, 2000,
                                      And for the year then ended
                                      ----------------------------
                                        Accounts
             Customer                  Receivable       Revenue
-----------------------------------   ------------   -------------
AM.com                                  $    32        $    191
Sharper Image                                41             145
All Others                                5,480           1,665
                                      ------------   -------------
   Total                                $ 5,553        $  2,001
                                      ============   =============

     As outlined  below,  the company's three largest  technology  licensing and
royalty customers accounted for approximately 80.4% of technology  licensing and
royalty  revenues  during  2000.  The  transactions  with  Infinite   Technology
Corporation  and Pro Tech have been  accounted for as  nonmonetary  transactions
with  consideration  being  received by NCT in common  stock of the entity.  The
amount outstanding from Vidikron at December 31, 2000 represented  approximately
36.0% of gross accounts receivable.

(in thousands)                         As of December 31, 2000,
                                      And for the year then ended
                                      ----------------------------
                                      Accounts
             Customer                 Receivable       Revenue
-----------------------------------   ------------   -------------
Infinite Technology Corporation        $     0          $   3,550
Pro Tech                                     0              2,433
Vidikron                                 2,000              2,000
All Others                               3,553              1,945
                                      ------------   -------------
   Total                               $ 5,553          $   9,928
                                      ============   =============

     The  company  does not  require  collateral  or other  security  to support
customer receivables.

     NCT regularly  assesses the  realizability  of its accounts  receivable and
performs a detailed analysis of its aged accounts  receivable.  When quantifying
the realizability of accounts receivable, NCT takes into consideration the value
of past due receivables and the  collectibility  of such  receivables,  based on
credit worthiness.

     Financial  instruments,  which potentially  subject NCT to concentration of
credit  risk,  consist  principally  of cash  and  cash  equivalents  and  trade
receivables.  NCT's  cash  equivalents  consist  of  commercial  paper and other
investments that are readily  convertible into cash and have original maturities
of three months or less. NCT primarily  maintains its cash and cash  equivalents
in two banks.

J.    Competition

     We have a number of direct competitors. The company's principal competitors
in active control systems include Bose Corporation, Lord Corporation, Matsushita
Electric Industrial Co., Ltd., Sennheiser Electronic Corp. and Sony Corporation,
among others. The company's principal competitors in speech applications include
IBM Corporation, Lucent Technologies, Inc. and Texas Instruments,  Incorporated.
To the  company's  knowledge,  each  of  these  entities  is  pursuing  its  own
technology, either on its own or in collaboration with others, and has commenced
attempts to  commercially  exploit such  technology.  NCT also  believes  that a
number  of  other  large  companies,  such as the  major  domestic  and  foreign
communications,  computer,  automobile and appliance  manufacturers,  as well as
aircraft  parts  suppliers  and  manufacturers,  have  research and  development
efforts  underway that could be potentially  competitive to NCT. These companies
are well  established  and have  substantially  greater  management,  technical,
financial, marketing and product development resources than NCT.
<PAGE>
K.    Government Contracts

     The company has acted as a government  subcontractor in connection with its
performance  of  certain  engineering  and  development   services.   Government
contracts provide for cancellation at the government's sole discretion, in which
event the  contractor  or  subcontractor  may recover its actual costs up to the
date  of  cancellation,   plus  a  specified  profit  percentage.   Governmental
expenditures  for defense are  subject to the  political  process and to rapidly
changing  world  events,  either  or both of which  may  result  in  significant
reductions in such  expenditures in the proximate future.  Government  contracts
are  not  viewed  as a  significant  part  of the  company's  business.  No such
contracts were in effect during 2000.

L.    Research and Development

     Company-sponsored   research  and  development   expenses  aggregated  $7.2
million,  $6.2 million and $4.4 million for the fiscal years ended  December 31,
1998, 1999 and 2000, respectively.

M. Environmental Regulation Compliance

     Compliance  with  Federal,   state  and  local  provisions  regulating  the
discharge  of  materials  into the  environment,  or  otherwise  relating to the
protection  of the  environment,  does  not have any  material  effect  upon the
capital expenditures, earnings or competitive position of the company.

     Compliance by existing and potential customers of the company with Federal,
state and local laws and  regulations  pertaining to maximum  permissible  noise
levels  occurring from the operation of machinery or equipment or the conduct of
other activities could be beneficial to sellers of noise reduction  products and
enhance demand for certain applications of the company's technology,  as well as
products developed or to be developed by the company. At the present time, it is
premature to determine what quantitative  effect such laws and regulations could
have on the sale of the company's products and technology.

N.    Employees

     The company had 138 employees as of March 31, 2001.  None of such employees
is represented by a labor union. The company  considers its  relationships  with
employees to be satisfactory.

O.    Acquisitions

     On August 18, 2000, the company  acquired 100% of the  outstanding  capital
stock of Theater Radio Network,  Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas  nationwide,  through a merger with DMC Cinema,
Inc.  ("Cinema"),  a  newly  formed  subsidiary  of the  company's  wholly-owned
subsidiary,  DMC. The  acquisition  included the company's  initial  issuance of
7,405,214  restricted  shares of its common  stock based upon a trailing  market
price (as defined in the stock purchase  agreement) of $0.3376 per share,  for a
total value of $2.5  million and a 7.5% equity  interest in Cinema.  In February
2001,  due to a decline in the  trailing  market  price  prior to the  effective
registration  of shares of common  stock,  an additional  2,455,248  shares were
issued for the acquisition pursuant to a fill-up provision.

     On August 29, 2000, the company  acquired 100% of the  outstanding  capital
stock of Midcore  Software,  Inc. ("MSI"),  provider of Internet  infrastructure
software for business  networks,  through a merger with Midcore  Software,  Inc.
("Midcore") (f/k/a NCT Midcore,  Inc.), a newly formed,  wholly-owned subsidiary
of the company. In connection therewith, the company initially issued 13,913,355
restricted  shares of its  common  stock  based upon a 10-day  weighted  average
closing bid price of $0.34626 per share, for an aggregate value of $4.8 million.
In addition,  the purchase consideration includes $1.7 million to be paid by the
company in cash based upon earned royalties, as defined in the merger agreement,
over 36 months.  If after 36 months,  the total royalty has not been earned then
the parties have the right to collect the remaining  unpaid balance  through the
issuance of the company's common stock. In February 2001 due to a decline in the
closing  bid  price  of the  company's  common  stock  prior  to  the  effective
registration of the stock, an additional  2,863,891  shares were issued pursuant
to a fill-up provision.

     On September 12, 2000, NCT Hearing granted an exclusive license to Pro Tech
Communications, Inc. ("Pro Tech") for rights to certain NCT technologies for use
in light weight cellular,  multimedia and telephony  headsets.  In consideration
for this license,  NCT Hearing received 23.7 million shares of Pro Tech's common
stock   representing   approximately   84%  of  the  common  shares  issued  and
outstanding.  Pro Tech sells high quality,  lightweight headsets to high-profile
users, including the NASA space program and McDonald's.  Pro Tech's common stock
currently  trades under the symbol "PCTU" on the NASD's OTC Bulletin Board. As a
condition precedent to the transaction, NCT Hearing had arranged $1.5 million in
equity financing for Pro Tech in the form of convertible  preferred stock of Pro
Tech. Such convertible  preferred stock is convertible into shares of Pro Tech's
common stock or exchangeable for shares of NCT's common stock, at the investors'
election.

P.    Business Segments

     For a full discussion of business  segments and geographic  areas, see Note
19  -notes  to  the  consolidated   financial  statements  -  "Business  Segment
Information"  and Note 20 - notes to the  consolidated  financial  statements  -
"Geographical Information."

Q.    Available Information

     We file annual,  quarterly and special reports,  proxy statements and other
information with the Securities Exchange  Commission.  You may read and copy any
document we file at the SEC's public  reference  rooms in Washington,  D.C. Call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC  filings  are also  available  to the public  from the SEC's  Website at
"http://www.sec.gov."


ITEM 2.     PROPERTIES

     Our principal  executive  office and corporate  headquarters are located in
Westport,  Connecticut where we lease approximately 18,700 square feet of space.
The lease expires in March 2010 and provides for monthly rental of approximately
$28,000  for the first five years and $31,000 per month for the next five years.
This facility  also houses our  subsidiaries,  DMC and  Advancel,  and sales and
marketing offices, which were previously located in Stamford, Connecticut.

     The  company's  research and  technical  support  laboratory  is located in
Linthicum,  Maryland,  where we lease approximately  40,000 square feet of space
under leases which expire in July 2003. The leases  provide for current  monthly
rentals of approximately  $36,000,  subject to annual inflationary  adjustments.
Utilizing early partial  termination  features of the leases,  the company is in
the process of downsizing  its space in the Maryland  facility to  approximately
14,000 square feet.

     Our majority owned  subsidiary,  Advancel,  had maintained its research and
engineering  facility  in San Jose,  California,  where it leased  approximately
6,000 square feet of space under a lease which expired in August 2000. The lease
provided  for  monthly  rentals  of  approximately  $13,000,  subject  to annual
inflationary  adjustments.  Effective  August 31, 2000,  Advancel closed the San
Jose,  California  facility and relocated its operations to our  headquarters in
Westport, Connecticut.

     Our European operations are conducted in Cambridge,  England where we lease
4,000  square feet of space  under a lease,  which  expires in April  2007,  and
provides for a current monthly rental of approximately $4,000, subject to annual
inflationary adjustments.

     Until July  2000,  we  maintained  a sales and  marketing  office in Tokyo,
Japan,  where we leased  approximately  800 square  feet of space  under a lease
which expired in May 2000,  and provided for a monthly  rental of  approximately
$3,000.  Although we do not lease office  space in Asia,  we continue to operate
and maintain a presence in the Pacific Rim.

     Pro Tech's  executive,  sales and  manufacturing  offices  presently occupy
approximately  5,000  square feet of space  located at 3309 and 3311  Industrial
25th Street, Fort Pierce, Florida, pursuant to three leases expiring on November
30, 2000. Pro Tech continues to lease its current facilities on a month to month
basis. Pro Tech has entered into a new five-year lease agreement effective April
1, 2001 for  approximately  13,000  square  feet at an  average  annual  cost of
approximately $109,000.

     Midcore's  sales  and  product   development   offices   presently   occupy
approximately  1,600 square feet of space located at 900 Straits  Turnpike,  2nd
Floor,  Middlebury,  Connecticut pursuant to a lease expiring on March 31, 2001.
Midcore has entered into a new 5-year lease  agreement  effective  April 1, 2001
for  approximately  6,100 square feet at an average annual cost of approximately
$93,000.

     Effective March 31, 2001,  Cinema closed its Clearwater,  Florida  facility
and relocated its operations to Westport, Connecticut.  Previous to this, Cinema
occupied approximately 1,400 square feet of space located at 4900 Creekside Dr.,
Suite  E,  Clearwater,  Florida  33760  pursuant  to a month  to  month  leasing
arrangement.  In 2000, Cinema incurred lease costs of approximately  $17,000. We
believe  our  facilities  provide  us with  adequate  space  for the  near  term
consistent  with our  current  business  plans.  We are not  intending  to lease
additional space during 2001.
<PAGE>

ITEM 3.     LEGAL PROCEEDINGS

AE Corp. Patent Litigation

     By  a  letter  dated  September  9,  1997,  counsel  to  competitor  Andrea
Electronics  Corporation  ("AECorp.") informed the company that AECorp. believed
NCT was improperly  using the term "ANR Ready" and  infringing  upon a trademark
owned by AECorp.  Representatives  of existing and/or  potential  customers also
have informed the company that AECorp.  has made  statements'  claiming that the
company's  manufacture  and/or sale of certain  in-flight  entertainment  system
products  infringe a patent  owned by the  competitor.  The  company  received a
notice  dated  March  24,  1998 from  AECorp.'s  intellectual  property  counsel
notifying  the company of its concerns but did not confirm any intention to file
suit against  NCT.  The company,  through  special  outside  counsel,  exchanged
correspondence  with AECorp.  but the parties could not come to any  resolution.
The  company was  informed  by  representatives  of  existing  and/or  potential
customers that AECorp. was continuing to infer that the company was infringing.

     On November 17, 1998, the company and NCT Hearing filed a complaint against
AECorp. in the U.S. District Court,  Eastern District of New York. The complaint
requested  that the court enter  judgment  in our favor as follows:  (1) declare
that the two AECorp. patents at issue are invalid and unenforceable and that the
company's  products do not infringe upon them;  (2) declare that the two AECorp.
patents  at issue are  unenforceable  due to misuse  by  AECorp.;  (3) award the
company  compensatory damages of no less than $5 million and punitive damages of
$50 million for AECorp.'s tortious  interference with the company's  prospective
contractual  advantages;  (4) enjoin AECorp.  from stating or inferring that the
company's  products or their use are infringing any AECorp.-owned  patents;  and
(5) award any other relief the court deems appropriate.

     On or about  December 30, 1998,  AECorp.  filed its answer to the company's
complaint.   AECorp.   generally  denied  the  above   allegations  and  brought
counterclaims  against the company.  These include  claims that the company has:
infringed  the two  AECorp.  patents  at issue  and the "ANR  Ready"  trademark;
violated  the  Lanham  Act  through  NCT's use of the  trademark;  and  unfairly
competed with AECorp. by using the trademark.

     The company and NCT Hearing have since filed a Reply and requested that the
court dismiss the  counterclaims  and enter judgment in favor of the company and
NCT Hearing.  The company also argued that AECorp.  is prevented from recovering
under certain equitable theories and defenses.  Discovery in this suit commenced
in mid-1999  and is  continuing,  although a trial date has not yet been set. In
the opinion of management,  after consultation with outside counsel,  resolution
of this  suit  should  not  have a  material  adverse  effect  on the  company's
financial  position or operations.  However,  in the event that the lawsuit does
result in a substantial final judgment against the company,  said judgment could
have a material effect on quarterly or annual operating results.

Schwebel Capital Investments Litigation

     On June 10, 1998, Schwebel Capital Investments,  Inc. ("SCI") filed suit in
a Maryland  state court against the company and Michael J.  Parrella,  its Chief
Executive Officer and Director. The complaint alleges that the company breached,
and Mr. Parrella  interfered  with, a purported  contract entered into "in 1996"
between  the company and SCI.  SCI claims that under the  contract,  the company
agreed to pay SCI commissions when NCT received capital from its investors.  The
complaint  further  alleged that SCI is due  commissions  totaling  $1.5 million
because the company  refused to honor  SCI's right of first  refusal.  SCI seeks
$1,673,000 in compensatory  damages,  $50,000 in punitive damages and $50,000 in
attorneys  fees  from the  company.  SCI also  seeks  $150,000  in  compensatory
damages,  $500,000 in punitive  damages and $50,000 in attorneys'  fees from Mr.
Parrella.  The company has filed and the Court has granted two motions to strike
or  dismiss  some of the  plaintiff's  claims.  The Court held a hearing in this
matter on April 9, 2001,  and a pre-trial  conference  is scheduled for June 20,
2001.  Management  believes  it has many  meritorious  defenses  and  intends to
conduct a  vigorous  defense.  In the event the case  results  in a  substantial
judgment against the company, however, the judgment could have a severe material
effect on quarterly or annual operating results.

Settlement of Mellon Litigation

     On June 25, 1998,  Mellon Bank FSB ("Mellon") filed suit against  Alexander
Wescott & Co., Inc.  ("AWC") and the company in a district court in the Southern
District  of New York.  Mellon  alleged  that  either the  company or AWC owe it
$326,000, a sum Mellon purportedly paid to both entities when it acted as escrow
agent  for the  company  in a  private  placement  of  securities  with  certain
institutional  investors.  On or about  July 27,  1998,  AWC filed  its  answer,
counterclaim and cross-claim against Mellon and NCT. AWC specifically  requested
that the court: (1) dismiss Mellon's  amended  complaint  against AWC; (2) grant
AWC  commissions  totaling  $688,000  owed to AWC by the company;  (3) order the
company to issue  784,905  shares of its common  stock;  (4) declare that AWC is
entitled to keep the $326,000 sought by Mellon;  and (5) order the delivery of a
warrant to purchase  461.13  shares of the common  stock of NCT Audio.  In March
2000,  all  parties  reached a  resolution  of no  material  financial  or other
consequence to the company,  which has been subsequently  approved by the court,
in which all matters have been resolved.

<PAGE>

Settlement of Advancel Litigation

     On September 16, 1999,  certain  former  shareholders  and  optionees  (the
"Claimants") of Advancel,  a majority owned  subsidiary of the company,  filed a
Demand  for  Arbitration  against  the  company  with the  American  Arbitration
Association  in San  Francisco,  CA. On April 25, 2000,  both parties  reached a
resolution  of the  matter.  All  parties  withdrew  all charges and claims with
exception to the  following.  Regarding the Stock  Purchase  Agreement,  NCT and
Advancel  did not  release  the  Claimants  from any  claims  arising  out of or
relating  to  Claimants'  use,  misuse,  destruction  or  theft  of  NCT  and/or
Advancel's  property,  confidential  information,  trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements.  Also, NCT and Advancel did not release Claimants from
any of their  obligations  under the Non-compete  Covenants.  NCT has no further
obligations to the Claimants  under the Stock Purchase  Agreement as a result of
the resolution of this matter, which was of no financial or other consequence to
the company.

NCT Audio Arbitration

     On September 16, 1999, NCT Audio filed a Demand for Arbitration  before the
American Arbitration  Association in Wilmington,  Delaware,  against TST and TSA
(the "Respondents")  alleging,  among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio,  breach of fiduciary
duty  as a  majority  shareholder  owed  to NCT  Audio  which  holds  15% of the
outstanding  stock of TSA,  and  breach  of  obligation  of good  faith and fair
dealing.  NCT Audio seeks  recision of the  purchase  agreement  and recovery of
monies  paid to TST for  TSA's  assets.  Concurrently,  NCT  Audio  commenced  a
preliminary injunction proceeding in the Delaware Court of Chancery,  seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration  proceeding.  NCT Audio subsequently  withdrew such court action. On
December 8, 1999,  Respondents  filed an answer and  counterclaim  in connection
with the  arbitration  proceeding.  Respondents  asserted their  counterclaim to
recover (1) the monies and stock owned under the extension  agreements;  (2) the
$1 million  differential  between  the $9 million  purchase  price paid by Onkyo
America for TSA's assets and the $10 million  purchase  price that NCT Audio had
been obligated to pay; (3) expenses  associated  with extending NCT Audio's time
to  close  the  transaction;   and  (4)  certain  legal  expenses   incurred  by
Respondents.  There were no  material  developments  in this  matter  during the
period covered by this report.

     The  company  believes  there  are no  other  patent  infringement  claims,
litigation,  matters or unasserted claims other than the matters discussed above
that could have a material  adverse effect on financial  position and results of
operations of the company.

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

   None.

<PAGE>

                                     PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
           RELATED STOCKHOLDER MATTERS.

     Prior to the January 6, 1999  delisting of NCT's common stock from NASDAQ's
National Market System,  the company's common stock was listed on the NASDAQ/NMS
under the symbol "NCTI".  NCT's common stock currently  trades on the NASDAQ OTC
Bulletin Board under the symbol "NCTI".  High and low last sale  information for
NCT's common stock for specified quarterly periods is set forth below:

                       1999                    2000
               ----------------------------------------------
                 HIGH         LOW        HIGH         LOW
               ----------  ----------  ----------  ----------
 1st Quarter    $0.440      $0.190      $1.700      $0.160
 2nd Quarter    $0.480      $0.230      $1.220      $0.360
 3rd Quarter    $0.285      $0.172      $0.515      $0.295
 4th Quarter    $0.225      $0.115      $0.405      $0.172


     On April 9, 2001,  the last reported sale of NCT's common stock as reported
by the NASDAQ OTC  Bulletin  Board was $0.138.  As of April 9, 2001,  there were
approximately 55,000 beneficial holders of record of NCT's common stock.

     The company has neither  declared  nor paid any  dividends on its shares of
common  stock  since  inception.  Any  decisions  as to the  future  payment  of
dividends will depend on the earnings and financial  position of the company and
such  other  factors  as the Board of  Directors  deems  relevant.  The  company
anticipates that it will retain earnings,  if any, in order to finance expansion
of  its  operations,  and  has no  intention  of  declaring  dividends  for  the
foreseeable future.

     See Item 7 - "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations - Overview" for a description  of the company's  sales
of unregistered securities during the year ended December 31, 2000.

<PAGE>

ITEM 6.     SELECTED FINANCIAL DATA.

     The selected  consolidated  financial  data set forth below is derived from
the historical  financial statements of the company. The data set forth below is
qualified  in its  entirety by and should be read in  conjunction  with Item 8 -
"Financial  Statements  and  Supplementary  Data"  and  Item  7 -  "Management's
Discussion and Analysis of Financial  Condition and Results of Operations"  that
are included elsewhere in this document.
<TABLE>
<CAPTION>
                                                (In thousands of dollars and shares, except per share amount)
                                                                 Years Ended December 31,
                                                ------------------------------------------------------------
                                                     1996        1997        1998        1999        2000
                             -                  ------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S>                                              <C>          <C>         <C>         <C>         <C>
Product sales, net                               $   1,379    $  1,720    $  2,097    $  2,208    $   2,001
Advertising/media revenue                                -           -           -           -          828
Engineering and development services                   547         368         425       1,303           83
Technology licensing fees and royalties              1,238       3,630         802       3,552        9,928
                                                ------------  ---------   ---------   ---------   ----------
      Total revenues                             $   3,164    $  5,718    $  3,324    $  7,063    $  12,840
                                                ------------  ---------   ---------   ---------   ----------
COSTS AND EXPENSES:
Cost of product sales                            $   1,586    $  2,271    $  2,235    $  2,767    $   1,839
Royalty expense                                          -           -           -           -          288
Cost of advertising/media                                -           -           -           -          814
Cost of engineering and development services           250         316         275       2,216           55
Selling, general and administrative                  4,890       5,217      11,238      11,878       11,408
Research and development                             6,974       6,235       7,220       6,223        4,412
Interest (income) expense, net                          17       1,397(3)     (429)        552       1,849
Equity in net (income) loss of unconsoldiated
  Unconsolidated Affiliates                             80           -           -           -            -
Other (income) expense, net                            192         130      (3,032)(4)   7,198(5)     2,499 (6)
                                                ------------  ---------   ---------   ---------   ----------
      Total costs and expenses                   $  13,989    $ 15,566    $ 17,507    $ 30,834    $  23,164
                                                ------------  ---------   ---------   ---------   ----------
 NET (LOSS)                                      $ (10,825)   $ (9,848)   $(14,183)   $(23,771)   $ (10,324)

Less:
Preferred stock beneficial feature and
  dividend requirement                                   -       1,623       3,200      10,567        4,673
Accretion of difference betwen carrying
  Amount and redemption amount of
  Redeemable preferred stock                             -         285         485         494          113
                                                ------------  ---------   ---------   ---------   ----------
Net (loss) attributable to
  common stockholders                            $ (10,825)   $(11,756)   $(17,868)   $(34,832)   $ (15,110)
                                                ============  =========   =========   =========   ==========
Weighted average number of common
   Shares outstanding(1) - basic and diluted       101,191     124,101     143,855     190,384      292,758
                                                ============  =========   =========   =========   ==========
NET (LOSS)                                       $   (0.11)   $  (0.09)   $  (0.12)   $  (0.18)   $   (0.05)
                                                ============  =========   =========   =========   ==========

                                                                 Years Ended December 31,
                                                ------------------------------------------------------------
                                                     1996        1997        1998        1999        2000
                                                ------------------------------------------------------------
BALANCE SHEET DATA:
 Total assets                                    $   5,881    $ 17,361    $ 15,465    $ 13,377    $  39,382

 Total current liabilities                           3,271       2,984       5,937       7,728       23,386
 Long-term debt                                          -           -           -       4,107        3,761
 Accumulated deficit                               (83,673)    (93,521)   (107,704)   (131,475)    (141,799)
 Stockholders' equity (deficit)(2)                   2,610      14,377       3,426        (367)       9,858
 Working capital (deficiency)                       (1,312)     11,696      (1,187)     (3,281)      (9,727)
</TABLE>

(1)  Excludes  shares  issuable upon the exercise of outstanding  stock options,
     warrants  and  convertible  preferred  stock,  since their  effect would be
     antidilutive.

(2)  The company has never declared nor paid cash dividends on its common stock.

(3)  Includes  interest  expense of  approximately  $1.4 million relating to the
     beneficial conversion feature on convertible debt issued in 1997.

(4)  Includes a $3.2 million gain from the exercise of an option  received  from
     NXT in  connection  with the cross  license  agreement  entered into by the
     Company.

(5)  Includes a $2.4 million charge in connection  with the company's write down
     of its  investment  in TSA to its estimated net  realizable  value;  a $1.8
     million  reserve for promissory note and  pre-acquisition  costs related to
     PPI; and a $3.1 million charge for the impairment of goodwill.

(6)  Includes $3.1 million charge for the impairment of goodwill

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS.

     The  following   discussion   should  be  read  in  conjunction   with  the
consolidated financial statements and the notes thereto included herein.

A.    Forward-Looking Statements

     Statements  in this Annual  Report on Form 10-K,  which are not  historical
facts, are forward-looking statements, which involve risks and uncertainties. We
generally   use   the   words   "believes,"   "expects,"   "intends,"   "plans,"
"anticipates,"  "likely,"  "will" and similar  expressions to identify forward -
looking  statements.  The company's actual results in fiscal 2001 and beyond may
differ  materially from those expressed in any  forward-looking  statements made
by, or on behalf of, the  company.  Important  factors  that could cause  actual
results  to differ  materially  include  but are not  limited  to the  company's
ability to:  achieve  profitability;  achieve a competitive  position in design,
development,   licensing,   production  and  distribution  of  technologies  and
electronic  systems;  produce a cost effective product that will gain acceptance
in relevant consumer and other product markets; increase revenues from products;
realize funding from technology  licensing fees,  royalties,  product sales, and
engineering and development  services to sustain the company's  current level of
operation;  timely  introduce  new  products;  continue  its  current  level  of
operations to support the fees associated with the company's  patent  portfolio;
maintain  satisfactory  relations  with its  customers;  attract  and retain key
personnel;  prevent invalidation,  abandonment or expiration of patents owned or
licensed by the company and expand its patent  holdings to diminish  reliance on
core patents;  have its products  utilized beyond noise attenuation and control;
maintain  and expand its  strategic  alliances;  and protect  company  know-how,
inventions and other secret or unprotected intellectual property.

B.    Overview

     NCT Group,  Inc., which we refer to as NCT or the company,  is a technology
developer with an extensive portfolio of proprietary algorithms and a variety of
product  offerings for consumer,  commercial  and industrial  applications.  The
company  specializes  in the  utilization  of sound and  signal  waves to reduce
noise,  improve  signal-to-noise  ratio and enhance  sound  quality.  Commercial
application  of the company's  technologies  is comprised of a number of product
offerings,  including  NoiseBuster(R)  consumer and communications  active noise
reduction,  or ANR headsets;  ProActive(R) ANR industrial earmuffs and headsets;
Gekko(TM)  flat speakers;  and  ClearSpeech(R)  microphones,  speakers and other
products. In addition to products,  NCT's algorithms are available for licensing
to manufacturers for use in commercial and consumer products.

     During  2000,  NCT focused its efforts on the  development  of  Distributed
Media Corporation, or DMC, a wholly owned subsidiary of NCT, which was formed in
November 1998. DMC is a  microbroadcasting  media company that delivers licensed
CD-quality  music as well as on-air and  billboard  advertising  to  out-of-home
commercial  and  professional  venues  via  a  digital  network  of  place-based
micrbroadcasting  stations,  called  Sight &  Sound(TM).  The Sight & Sound (TM)
system  consists of a central  control  network that  communicates  to a digital
broadcast station,  which plays music selections and advertisements through flat
panel  speakers.  The speaker  grilles  double as visual  billboards.  NCT Audio
Products, Inc will provide the speakers.

     As of  December  31,  2000,  the company  and its  business  units held 585
patents and related rights  worldwide and an extensive  portfolio of proprietary
algorithms,  library of know-how  and other  unpatented  technology.  Management
believes that its intellectual property portfolio prevents other competitors and
potential  competitors from  participating  in certain  commercial areas without
licenses from the company.  The  company's  intellectual  property  allows it to
develop its major product lines.

     The company has continued to make substantial investments in its technology
and  intellectual  property and has incurred  development  costs for engineering
prototypes,  pre-production  models  and  field  testing  of  several  products.
Management believes that the company's investment in its technology has resulted
in the  expansion  of the  value  of its  intellectual  property  portfolio  and
improvement in the functionality, speed and cost of components and products.

     The company's operating revenues are comprised of technology licensing fees
and  royalties,   product  sales,   engineering  and  development  services  and
advertising media revenue. Operating revenues in 2000 consisted of approximately
15.6% in product sales, 0.6% in engineering and development  services,  77.3% in
technology  licensing fees and royalties and 6.5% in advertising  media revenue.
The company continues its transition from a firm focused principally on research
and development of new technology to a firm focused on the  commercialization of
its technology through technology licensing fees,  royalties,  product sales and
microbroadcasting  media  advertising.  Historically,  the  company  derived the
majority of its revenues from  engineering and development  funding  provided by
established  companies  willing to assist the company in the  development of its
active noise and vibration control technology,  and from technology license fees
paid by such  companies.  Management  expects that  technology  licensing  fees,
royalties,  product sales and  microbroadcasting  media advertising revenue will
become the principal sources of the company's  revenue as the  commercialization
of its technology  proceeds.  As  distribution  channels are  established and as
product sales and market acceptance and awareness of the commercial applications
of the company's technologies build as anticipated by management,  revenues from
technology licensing fees, royalties,  product sales and microbroadcasting media
advertising  revenue are forecasted to fund an increasing share of the company's
requirements.  The generation of cash from these revenue  sources,  if realized,
will reduce the company's dependence on engineering and development funding.

     The company  continued  its practice of marketing  its  technology  through
licensing to third parties for fees,  generally by obtaining  technology license
fees when initiating  joint ventures and alliances with new strategic  partners,
and subsequent royalties. The company has entered into a number of alliances and
strategic  relationships  with  established  firms  for the  integration  of its
technology  into  products.  The speed with which the  company  can  achieve the
commercialization of its technology depends in large part upon the time taken by
these firms and their customers for product testing and their  assessment of how
best to integrate the company's technology into their products and manufacturing
operations.  While the  company  works with these  firms on product  testing and
integration,  it is not always able to influence how quickly this process can be
completed.

     Presently,  the company is selling  products  through six of its alliances:
Walker is manufacturing and selling industrial silencers;  Siemens is buying and
contracting  with the company to install  quieting  headsets  for patient use in
Siemens' magnetic  resonance imaging  machines;  Ultra is installing  production
model aircraft cabin quieting systems in the SAAB 340 turboprop aircraft; OKI is
integrating  ClearSpeech(R)  algorithm into large scale integrated  circuits for
communications  applications;  and BE Aerospace  and Long Prosper are  providing
NoiseBuster(R)  components  for United  Airlines'  and five other  international
carriers'   comprehensive   in-flight  entertainment  and  information  systems.
Management believes these developments,  among others help demonstrate the range
of commercial  potential for the company's technology and will contribute to the
company's  transition from  engineering and development to technology  licensing
fees, royalties and product sales.

     Through  the  September  2000  acquisition  of Pro Tech,  the  company  has
expanded  its presence in the  telecommunications  headset  market.  Pro Tech is
currently  expanding  its  headset  product  line for  telephony,  cellular  and
multimedia  communications and is positioning itself to increase market share in
the lightweight headset market.

     The company is certified  under the  International  Standards  Organization
product  quality  program  known as "ISO 9000",  and  continues to  successfully
maintain  its   certification.   The  availability  of  high-quality,   low-cost
electronic  components  for  integration  into the  company's  products  also is
critical to the  commercialization of the company's  technology.  The company is
working with its strategic  partners and other  suppliers to reduce the size and
cost  of the  company's  systems,  so that  the  company  will be able to  offer
low-cost electronics and other components suitable for high-volume production.

     Since its  inception,  the company  has  incurred  substantial  losses from
operations  which  have been  recurring  and  amounted  to $141.8  million  on a
cumulative  basis through  December 31, 2000.  These  losses,  which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to  purchase  common  stock,  (2)  the  sale of  preferred  stock  and or  notes
convertible into common stock, (3) technology licensing fees, (4) royalties, (5)
product sales,  (6) engineering  and  development  funds received from strategic
partners and customers, and (7) advertising media revenues.

     The company's  internally  generated  funds in 2000 were not  sufficient to
cover the operating  costs of the company.  The company was able to continue its
operations during 2000 by raising  additional capital to fund its operations for
2000 and beyond. Refer to "Liquidity and Capital Resources" below and to Notes 1
and 13 - notes to the consolidated  financial statements.  The company's ability
of its revenue  sources,  especially  its  technology  license fees,  royalties,
product sales and microbroadcasting advertising revenue, to generate significant
cash for the  company's  operations  is  critical  to the  company's  long  term
success.  The company cannot predict  whether it will be successful in obtaining
market acceptance of its new products or in completing its current  negotiations
with respect to licenses and royalty revenues.

     In  2000,   the  company  and  its   subsidiaries   entered   into  certain
transactions, which provided additional funding. These transactions included the
issuance of secured convertible notes; the Series G Convertible  Preferred Stock
private  placement;  the Pro Tech Series A Convertible  Preferred  Stock private
placement;  issuance  of  shares  of  common  stock in lieu of the cash  owed to
suppliers and  consultants  to settle certain  obligations  of the company;  and
private  placements of shares of common  stock.  All of these  transactions  are
described in greater detail below under "Liquidity and Capital Resources" and in
Note 13 - notes to the consolidated financial statements.

     As of December 31, 2000, cash and cash equivalents amounted to $1.2 million
and working  capital  (deficit)  was $(9.7)  million.  Management  believes that
currently  available funds will not be sufficient to sustain the company for the
next 12 months.  Such funds consist of available cash and cash from the exercise
of warrants and options,  the funding derived from technology licensing fees and
royalties  and  product  sales and  engineering  development  revenue.  Reducing
operating  expenses and capital  expenditures  alone may not be sufficient,  and
continuation  as a going concern is dependent  upon the level of  realization of
funding from  technology  licensing  fees and  royalties  and product  sales and
engineering and development revenue,  all of which are presently  uncertain.  In
the  event  that   technology   licensing   fees,   royalties,   product  sales,
microbroadcasting  advertising  revenue and engineering and development  revenue
are not realized as planned, then management believes additional working capital
financing must be obtained through the private placement of additional equity of
the company in the form of common  stock,  convertible  preferred  stock  and/or
convertible  debt.  There is no assurance any such  financing is or would become
available.

     There can be no  assurance  that  sufficient  funding  will be  provided by
technology license fees, royalties, product sales, microbroadcasting advertising
revenue and  engineering  and development  revenue.  In that event,  the company
would have to  substantially  reduce its level of operations.  These  reductions
could have an adverse effect on the company's  relationships  with its strategic
partners  and  customers.  Uncertainty  exists with  respect to the  adequacy of
current funds to support the company's  activities until positive cash flow from
operations can be achieved,  and with respect to the  availability  of financing
from other sources to fund any cash deficiencies.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the company will continue as a going concern,  which  contemplates
continuity of operations,  realization of assets and satisfaction of liabilities
in the ordinary  course of business.  The  propriety of using the going  concern
basis  is  dependent  upon,  among  other  things,  the  achievement  of  future
profitable   operations  and  the  ability  to  generate  sufficient  cash  from
operations,  public and private financings and other funding sources to meet its
obligations.  The  uncertainties  described in the  preceding  paragraphs  raise
substantial  doubt at December 31, 2000 about the company's  ability to continue
as a going concern.  The accompanying  consolidated  financial statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities  that might result from the outcome
of these uncertainties.

C.    Results of Operations

Year ended December 31, 2000 compared with year ended December 31, 1999.

     Total  revenues  in 2000  increased  by 80.3% to $12.8  million  from  $7.1
million in 1999 reflecting  increases in each of the company's  revenue sources.
Total costs and  expenses  during the same period  decreased  by 24.9%,  or $7.7
million,  primarily due to the write down of an investment in an  unconsolidated
affiliate ($2.4 million) and a reserve for promissory notes and  pre-acquisition
costs ($1.8 million) recorded in 1999.

     Technology  licensing fees and royalties  increased by 175% or $6.3 million
to $9.9 million from $3.6 million in 1999.  The  technology  licensing  fees and
royalties for 2000 were primarily due to a $3.6 million  technology  license fee
from ITC, a $2.4  million  technology  license fee from Pro Tech, a $2.0 million
technology license fee from Vidikron of America,  Inc., $1.1 million recognition
of deferred  revenue with respect to two site licenses  entered into in 2000 and
$0.5 million prepaid royalties.

     Product  sales  decreased in 2000 by 9.1% to $2.0 million from $2.2 million
in 1999  reflecting  the decreased  sales of the Gekko(TM)  flat  speakers,  the
NoiseBuster(R) product line and the ClearSpeech(R) product line.

     Revenue from  engineering  and  development  services  decreased in 2000 by
93.6% to $0.1 million from $1.3  million in 1999  primarily  due to research and
development  formerly  conducted at Advancel was outsourced to ITC commencing in
the third quarter of 2000. The company continues to focus on products  utilizing
its hearing, audio,  communications and microphone technologies,  products which
have been  developed  within a short time  period and are  targeted  for rapidly
emerging markets. Cost of engineering and development services decreased in 2000
by 98% to $0.1 million  primarily  due to attrition  of Advancel  employees  and
completion of certain on going contracts.

     Cost of product  sales  decreased  35.7% to $1.8  million in 2000 from $2.8
million in 1999,  the decrease was primarily due to a reduction of product sales
for the year ended  December 31, 2000 as compared to the year ended December 31,
1999.  The product  gross  profit  margin  improved to 8% from (25)% in 1999 due
primarily  to the  sale  of  product  inventory  and  reduction  of new  product
manufacture.

     Selling, general and administrative expenses for the year decreased by 3.3%
or $0.4 million to $11.4  million from $11.8 million in 1999 which was primarily
due to a decrease  in  litigation  and patent  expenses as well as a decrease in
selling and marketing related expenses,  primarily advertising and headcount and
travel  related   expenses.   At  December  31,  2000,   selling,   general  and
administrative  expenses  included an $0.8  million  charge to bad debt  expense
relating to the  reduction in value,  at December 31,  2000,  of the  marketable
securities  included as consideration in the Teltran license  transaction.  Such
marketable securities were issued to the company in January 2001.

     Research and  development  expenditures  in 2000 decreased by 29.1% to $4.4
million  from $6.2  million in 1999,  primarily  through  attrition  of Advancel
employees in 1999 and 2000.  Commencing in the third  quarter of 2000,  research
and development formerly conducted at Advancel has been outsourced to ITC.

     Included in the company's  total  expenses were non-cash  expenditures  for
depreciation and amortization of $2.0 million each for 2000 and 1999.

     In each of 1999 and 2000, the company recorded a $3.1 million writedown for
the impairment of goodwill, related to the company's ownership of NCT Audio, and
results from conversions and exchanges of NCT Audio's common stock and preferred
stock for the company's common stock. Interest expense includes $0.3 million for
a beneficial  conversion  feature and non-cash  interest  charges related to the
convertible notes.

     Interest  expense  increased  to $1.9  million in 2000 from $0.6 million in
1999.  The  2000  interest  expense  was  primarily  due to the  recording  of a
beneficial  conversion  feature of $1.0 million in connection with the March 27,
2000  convertible  note,  classified  as  interest  expense and  original  issue
discount  amounts of $0.1 million in connection  with certain  promissory  notes
entered into in 2000.

     The company has net  operating  loss  carryforwards  of $104.8  million and
research and development credit carryforwards of $2.0 million for federal income
tax purposes at December 31, 2000. No tax benefit for these operating losses has
been recorded in the company's  financial  statements.  The company's ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

Year ended December 31, 1999 compared with year ended December 31, 1998.

     Total  revenues in 1999 increased by 112% to $7.1 million from $3.3 million
in 1998 reflecting  increases in each of the company's  revenue  sources.  Total
costs and expenses  during the same period  increased  by 76% or $13.3  million,
primarily due to the write down of an investment in an unconsolidated  affiliate
($2.4  million),  the  impairment of goodwill  ($3.1  million) and a reserve for
promissory notes and pre-acquisition  costs ($1.8 million).  Further, 1998 other
income/expense included a $3.2 million gain from the sale of NXT stock.

     Technology  licensing fees and royalties  increased by 343% or $2.8 million
to $3.6 million from $0.8 million in 1998.  The  technology  licensing  fees and
royalties for 1999 were primarily due to the $0.2 million technology license fee
and $0.9 million prepaid royalty from  STMicroelectronics  S.A. ("ST"),  an $0.8
million license fee from L&H and other  technology  licensing fees and royalties
aggregating  $1.7 million.  (see Note 5 - notes to the financial  statements for
further details).

     Product sales  increased in 1999 by 5% to $2.2 million from $2.1 million in
1998  reflecting  the  increased  sales  of the  Gekko(TM)  flat  speakers,  the
NoiseBuster(R) product line and the ClearSpeech(R) product line.

     Revenue from engineering and development services increased in 1999 by 207%
to $1.3 million from $0.4 million in 1998 primarily due to the contract  between
Advancel  Logic  Corporation  ("Advancel")  and ST.  (see  Note 5 - notes to the
financial statements for further details).

     Cost of  product  sales  increased  24% to $2.8  million  in 1999 from $2.2
million in 1998 and the product margin  deteriorated to (25)% from (7)% in 1998.
The negative margin of $0.6 million in 1999 was primarily due to charges of $0.4
million for slow movement of inventory and tooling  obsolescence  related to the
NoiseBuster(R)  product  lines and NCT  Audio's  subwoofers,  $0.4  million  for
royalty  expense  and  $0.2  million  for  the  write  down of NCT  Audio's  raw
materials.  The  negative  margin of $0.1 million in 1998 was  primarily  due to
reserves for slow moving  inventory and charges for tooling  obsolescence in the
amount of $0.5 million related to the NoiseBuster(R) product lines.

     Cost of engineering and development  services  increased in 1999 by 706% to
$2.2 million  primarily due to the contract  between  Advancel and ST. The gross
margin on engineering and  development  service was a loss of (70%) for 1999 due
to the recording of a reserve for estimated expenses to complete the ST project.

     Selling,  general and administrative  expenses for the year increased by 5%
or $0.6 million to $11.8  million from $11.2 million in 1998 which was primarily
due to amortization of goodwill and increased legal expenses.

     Research  and  development  expenditures  in 1999  decreased by 14% to $6.2
million  from $7.2  million in 1998,  primarily  due to  decreased  spending  on
research and development and the reduction in force in August 1999.

     Included in the company's  total  expenses were non-cash  expenditures  for
depreciation and amortization of $2.0 million for 1999 and $1.0 million in 1998.

     The company reduced its investment in an unconsolidated affiliate to 15% of
equity and recorded a $2.4 million  charge for the  write-down of its investment
to its estimated net realizable value.

     In 1999, the company  recorded $3.1 million for the impairment of goodwill.
The company also recorded a reserve of $1.8 million for the PPI promissory notes
including interest expense and pre-acquisition  costs. Interest expense includes
$0.3 million for a beneficial  conversion  feature and non-cash interest charges
related to the convertible notes. The 1998 other income consists of the gain the
company  realized upon the exercise of a stock option and the subsequent sale of
NXT plc  ordinary  shares.  The  option  had been  acquired  by the  company  in
connection with a cross license agreement among the company, NXT plc and NXT.

     In 1999,  interest  income  decreased  to less than $0.1  million from $0.4
million  in 1998  principally  due to lower  cash  resources.  Interest  expense
increased to $0.4 million in 1999 from less than $0.1 million in 1998, primarily
due to the issuance of convertible notes during 1999.

     The company has net  operating  loss  carryforwards  of $101.2  million and
research and development credit carryforwards of $1.7 million for federal income
tax purposes at December 31, 1999. No tax benefit for these operating losses has
been recorded in the company's  financial  statements.  The company's ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

D.    Liquidity and Capital Resources

     The company has  incurred  substantial  losses  from  operations  since its
inception,  which  have been  recurring  and  amounted  to $141.8  million  on a
cumulative  basis through  December 31, 2000.  These  losses,  which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase  common  stock,  (2) the sale of preferred  stock  convertible  into
common  stock,  (3)  convertible  debt,  (4)  technology   licensing  fees,  (5)
royalties,  (6) product sales,  (7) engineering  and development  funds received
from strategic partners and customers, and (8) advertising media revenues.

     Management  believes that currently  available funds will not be sufficient
to sustain the company for the next 12 months.  Such funds  consist of available
cash and cash from the  exercise of warrants and  options,  the funding  derived
from  technology  licensing fees and royalties and product sales and engineering
development revenue.  Reducing operating expenses and capital expenditures alone
may not be sufficient, and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product  sales  and  engineering  and  development  revenue,  all of  which  are
presently  uncertain.  In the event that technology  licensing fees,  royalties,
product  sales,   microbroadcasting  advertising  revenue  and  engineering  and
development  revenue  are not  realized  as planned,  then  management  believes
additional  working  capital  financing  must be  obtained  through  the private
placement  of  additional  equity of the  company  in the form of common  stock,
convertible  preferred stock and/or  convertible debt. There is no assurance any
such financing is or would become available.

     As previously  noted, on January 6, 1999,  NASDAQ notified the company that
the company's securities were delisted from the NASDAQ National Market effective
with the close of business on January 6, 1999.  The  company's  common  stock is
reported on the OTC Bulletin  Board.  While  delisting of the  company's  common
stock has not had an adverse effect on the company's operations,  it may make it
more  difficult  for the  company to raise  additional  capital  to fund  future
operations.

     There can be no  assurance  that  sufficient  funding  will be  provided by
technology  license  fees,  royalties,   product  sales,  and  microbroadcasting
advertising revenue and engineering and development  revenue. In that event, the
company  would  have to  substantially  reduce  its level of  operations.  These
reductions could have an adverse effect on the company's  relationships with its
strategic  partners  and  customers.  Uncertainty  exists  with  respect  to the
adequacy of current funds to support the  company's  activities  until  positive
cash flow from operations can be achieved,  and with respect to the availability
of financing from other sources to fund any cash deficiencies.

     At December 31, 2000,  cash and cash  equivalents  were $1.2 million.  Such
balance was invested in interest bearing money market accounts.

     The company's  working capital  decreased to a deficit of $(9.7) million at
December 31, 2000,  from a deficit of $(3.3) million at December 31, 1999.  This
$6.4 million decrease was primarily due to additional DBSS installation  related
expenses,  which utilized the remainder of the  restricted  cash at December 31,
2000 and additional  operating  expenses incurred due to the three  acquisitions
completed during 2000.

     During 2000,  the net cash used in operating  activities was $10.5 million,
compared to $10.6 million used in operating  activities during 1999, an decrease
of $0.1 million.  The decrease in net cash used in operating  activities for the
year ended December 31, 2000 is primarily due to the reduction of the net loss.

     The net cash provided by financing  activities  amounted to $10.1  million,
primarily due to the additional $1.0 million secured  convertible note (see Note
10 - "Notes to the Consolidated  Financial Statements" for further details), net
proceeds of $2.0 million from the Series G Preferred  Stock  financing (see Note
13 - "Notes to the Consolidated  Financial Statements" for further details), net
proceeds  of $2.3  million  from the sale of  returnable  shares  (see Note 13 -
"Notes to the  Consolidated  Financial  Statements"  for further  details),  net
proceeds of $1.5 million from the sale of  subsidiary  Series A Preferred  Stock
(see Note 13 - "Notes to the  Consolidated  Financial  Statements"  for  further
details), collection of subscription receivable of $1.0 million and $1.0 million
proceeds  from the sale  subsidiary  common  stock  (see Note 13 - "Notes to the
Consolidated Financial Statemnts" for further details).

     The company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.

     Because  the  company  did not meet its  revenue  targets in either 1999 or
2000, it was necessary for the company to enter into certain transactions, which
provided additional funding as follows:


     The Series F Convertible Preferred Stock

     On  January  27,  2000,  the  Series  F  Preferred  Stock   Certificate  of
Designations  was amended to obligate  the company to issue up to  seventy-seven
million shares of its common stock upon the conversion of the 12,500  designated
shares of Series F Preferred Stock, as noted above.  Such increase in the number
of shares of common stock was made in the interest of investor  relations of the
company.

     Under the terms of the Series F Subscription  Agreement entered into August
10, 1999 that the company  would be  required  to make  certain  payments in the
event of its failure to effect conversion in a timely manner. In connection with
the Series F Preferred  Stock,  the  company  would be  obligated  to redeem the
excess of the stated value over the amount permitted to be converted into common
stock.  Such additional  amounts would be treated as obligations of the company.
At various  dates  through  December 31, 2000 the other 7,526 shares of Series F
Preferred  Stock have been  converted  into  48,776,638  shares of the company's
common  stock.  Presently,  there  are no shares  of  Series F  Preferred  Stock
outstanding.

     Series G Convertible Preferred Stock

     On January 25,  2000,  the Board of  Directors  designated  a new series of
preferred  stock based upon a negotiated  term sheet,  the Series G  Convertible
Preferred  Stock  ("Series G Preferred  Stock").  The Series G  Preferred  Stock
consists of 5,000 designated  shares,  par value of $0.10 per share and a stated
value of one thousand dollars  ($1,000) per share with a cumulative  dividend of
four  percent  (4%) per annum on the stated value  payable  upon  conversion  in
either cash or common stock.  On March 6, 2000,  as amended March 10, 2000,  the
company and an  accredited  investor  entered into an agreement  under which the
company sold an aggregate  stated value of $2.0 million (2,004 shares) of Series
G  Preferred  Stock,  in a private  placement  pursuant to  Regulation  D of the
Securities  Act of 1933  (the  "Securities  Act")  for an  aggregate  of  $1.750
million. The company received proceeds,  net of expenses,  of $1.7 million. Each
share  of  Series  G  Preferred  Stock  is  convertible   into  fully  paid  and
nonassessable  shares of the company's  common stock pursuant to a predetermined
conversion  formula which provides that the conversion  price will be the lesser
of (i) the  average  of the  closing  bid  price  for the  common  stock  on the
securities  market  on which  the  common  stock is  being  traded  for five (5)
consecutive  trading  days  prior to the date of  conversion;  or (ii) the fixed
conversion  price of $0.71925.  The company  filed a  registration  statement on
April 20, 2000,  (amended on June 13,  2000),  to register such shares of common
stock  for the  conversion  of the  Series G  Preferred  Stock  and the  related
warrant.  In connection with the Series G Preferred Stock transaction,  on March
6, 2000,  the  company  granted a warrant for  150,000  shares of the  company's
common stock with an expiration  date of March 31, 2005 and an exercise price of
$0.71925. In accordance with SFAS No. 123, the company estimated the fair market
value of this warrant to be $0.1  million,  using the following  assumptions  in
applying the Black-Scholes valuation method:  risk-free interest rates of 6.14%,
volatility  of 1, and a term of three  years.  Such  amount is  included  in the
preferred stock dividend requirement for the year ended December 31, 2000.

     Secured Convertible Notes

     In 1999 and 2000, the company  received  proceeds  aggregating $4.0 million
from the  issuance of secured  convertible  notes as  described  herein.  Carole
Salkind, spouse of a former director and an accredited investor,  subscribed and
agreed to purchase  secured  convertible  notes of the  company in an  aggregate
principal  amount of $4.0 million.  A secured  convertible note for $1.0 million
was signed on January 26, 1999,  and proceeds were received on January 28, 1999.
The note  matured on January  25,  2001 and earns  interest at the prime rate as
published from time to time in The Wall Street Journal from the issue date until
the note becomes due and payable.  NCT defaulted on that  repayment.  The Holder
has the  right at any  time on or prior to the day the note is paid in full,  to
convert at any time, all or from time to time, any part of the  outstanding  and
unpaid  amount of the note into fully paid and  non-assessable  shares of common
stock of the company at the conversion  price. The conversion  price, as amended
by the parties on September 19, 1999,  of the notes and any future notes,  shall
be the lesser of (1) the lowest closing  transaction  price for the common stock
on the securities  market on which the common stock is being traded, at any time
during  September  1999; (2) the average of the closing bid price for the common
stock on the  securities  market on which the common stock is being traded,  for
five consecutive trading days prior to the date of conversion;  or (3) the fixed
conversion  price of $0.17.  In no event will the conversion  price be less than
$0.12 per share.  The Holder was obligated  purchase the remaining  $3.0 million
principal  amount of the secured  convertible  notes on or before June 30, 1999.
The  company   agreed  to  extend  such  date  for  the  purchase  of  remaining
installments of secured  convertible  notes to April 15, 2000. On various dates,
the Holder has purchased  additional  installments of the remaining $3.0 million
principal  amount of the secured  convertible  notes.  As of March 27, 2000, the
company had received  proceeds  aggregating $4.0 million from the Holder and had
issued secured  convertible notes with the same terms and conditions of the note
described above.

     On January 25,  2001,  NCT  defaulted  on the  repayment of $1.0 million of
secured  convertible  notes.  Under the terms of the default  provisions  in the
note, the company may be obligated to issue 1,034,972 shares of common stock.


     Supplier and Consultant Shares

     During 2000 and 2001,  the company  issued  4,171,098  shares of its common
stock to pay current amounts due (approximately  $0.7 million as of December 31,
2000) and future  amounts due  (approximately  $0.8  million as of December  31,
2000) to  certain  consultants  and  suppliers.  Such  4,171,098  shares  of the
company's common stock were registered under Registration No. 333-47084.

     In 1999, the company issued 13,154,820 shares of its common stock to settle
certain  of its  obligations  to certain  suppliers  and  consultants,  of which
12,759,778  shares were registered under  Registration  Statement No. 333-87757.
The  issuance of these shares of common  stock of the company  represented  $2.5
million  of  obligations  for  which  the  company  did not need to use its cash
resources.  In June 2000, a consultant surrendered 776,316 of such NCT shares of
common stock to the company for failure to fulfill its performance obligations.

     Private Placement of Common Stock

     There can be no  assurance  that  additional  funding  will be  provided by
technology licensing fees, royalties, product sales, engineering and development
revenue and advertising media revenues or additional capital. In that event, the
company would have to cut back its level of operations substantially in order to
conserve cash.  These  reductions  could have an adverse effect on the company's
relations with its strategic partners and customers. (see Note 1 - "Notes to the
Consolidated Financial Statements" for further details).

     The company believes that the level of financial  resources available to it
may be a critical  component  in the  company's  ability to  continue as a going
concern.  The company may elect to raise additional capital,  from time to time,
through   equity  or  debt   financing  in  order  to   capitalize  on  business
opportunities and market conditions.

     The accompanying  financial statements have been prepared assuming that the
company will  continue as a going  concern,  which  contemplates  continuity  of
operations,  realization  of  assets  and  satisfaction  of  liabilities  in the
ordinary  course of business.  The propriety of using the going concern basis is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  public
and private  financings and other funding sources to meet its  obligations.  The
uncertainties  described in the preceding  paragraphs raise substantial doubt at
December 31, 2000 about the  company's  ability to continue as a going  concern.
The accompanying financial statements do not include any adjustments relating to
the  recoverability  of the carrying  amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.

E.    Capital Expenditures

     The  company  intends to continue  its  business  strategy of working  with
supply, manufacturing,  and distribution and marketing partners to commercialize
its technology. The benefits of this strategy include: (1) dependable sources of
electronic and other  components,  which  leverages on their  purchasing  power,
provides important cost savings and accesses the most advanced technologies; (2)
utilization of the manufacturing capacity of the company's allies,  enabling the
company to integrate its active  technology  into products with limited  capital
investment;  and (3) access to  well-established  channels of  distribution  and
marketing capability of leaders in several market segments.

     There were no material  commitments for capital expenditures as of December
31, 2000, and other than the matter discussed above, no material commitments are
anticipated in the near future.

ITEM 7A.    QUANTITATIVE OR QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The company's  primary market risk exposures are  fluctuations  in interest
rates and foreign exchange rates. The company is exposed to short-term  interest
rate risk on  certain  of its debts and trade  accounts  receivable  sales.  The
company does not use  derivative  financial  instruments to hedge cash flows for
such  obligations.  In the  normal  course  of  business,  the  company  employs
established policies and procedures to manage these risks.

     Based upon a  hypothetical  10 percent  proportionate  increase in interest
rates from the average  level of interest  rates during the last twelve  months,
and taking into consideration expected investment positions, commissions paid to
selling  agents,  growth of new  business and the  expected  borrowing  level of
variable-rate  debt the expected  effect on net income  related to our financial
instruments would be immaterial.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The  Reports of the  Independent  Auditors  Goldstein  Golub  Kessler  LLP,
Richard A. Eisner & Company,  LLP and the financial  statements and accompanying
notes are filed as part of this Annual Report on Form 10-K.

                                                                        Page
                                                                       -----
Independent Auditors' Report                                            F-1

Independent Auditors' Report                                            F-2

Consolidated Balance Sheets as of December 31, 1999 and 2000            F-3

Consolidated  Statements  of  Operations  and  Consolidated
  Statements  of Comprehensive Loss for the years ended
  December 31, 1998, 1999 and 2000                                      F-4

Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1998, 1999 and 2000                          F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1999 and 2000                                      F-8

Notes to Consolidated Financial Statements                              F-9

Schedule 11 - Valuation and Qualifying Accounts For the years
  ended December 31, 1998, 1999 and 2000                                F-58

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE.

     On July 17, 2000, the Company notified its independent accountants, Richard
A. Eisner & Co., LLP ("RAE")  that the auditing  services of RAE would no longer
be  required.  RAE's  dismissal  was  approved  by  the  registrant's  Board  of
Directors.  RAE originally was selected as the company's independent accountants
in January, 1995 to audit the company's  consolidated financial statements as of
and for the year ended December 31, 1994.

     During  the two  fiscal  years  ended  December  31,  1999,  and during the
subsequent interim period preceding their dismissal as the company's independent
accountants,  there were no disagreements  with RAE on any matters of accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure,  which  disagreement(s),  if not resolved to the satisfaction of RAE,
would  have  caused  it  to  make   reference  to  the  subject  matter  of  the
disagreement(s)  in connection  with its report.  RAE's reports on the company's
consolidated  financial  statements  as of and for the years ended  December 31,
1999 and  December 31,  1998,  did not contain any adverse  opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.

     On July 17,  2000,  the company  engaged the  accounting  firm of Goldstein
Golub Kessler LLP ("GGK") as independent  accountants to audit the  consolidated
financial  statements  of the company for the fiscal  year ending  December  31,
2000.  The engagement  was  authorized by the  registrant's  Board of Directors.
During the fiscal year ended  December  31,  1999,  and the  subsequent  period,
neither  the  company  nor any  person on the  company's  behalf  consulted  GGK
regarding  either  the  application  of  accounting  principles  to a  specified
transaction,  either  completed or proposed,  or the type of audit  opinion that
might be rendered on the company's consolidated financial statements.
<PAGE>
                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth the names,  ages,  positions and the offices
held by each of the  executive  officers  and  directors  of NCT as of March 31,
2001.

 Name                        Age             Positions and Offices
------                      ----             ---------------------
 Michael J. Parrella         53   Chairman of the Board of Directors and
                                  Chief Executive Officer
 Jay M. Haft                 64   Director
 John J. McCloy II           63   Director
 Samuel A. Oolie             64   Director
 Cy E. Hammond               46   Senior Vice President, Chief Financial
                                  Officer, Treasurer and Assistant Secretary

 Irving M. Lebovics          50   Senior Vice President, Global Sales
 James A. McManus            61   President and Chief Executive Officer of
                                  Distributed Media Corporation
 Irene Lebovics              48   President and Secretary
 Michael A. Hayes, Ph.D.     48   Senior Vice President, Chief Technical
                                  Officer
 Jonathan M. Charry, Ph.D.   53   Senior Vice President, Corporate Development

     Michael J. Parrella  currently serves as Chairman of the Board of Directors
and Chief Executive  Officer.  Mr. Parrella was elected Chairman of the Board of
Directors  on April 21,  2000,  on which date he  relinquished  the  position of
President.  From November 1994 to July 1995,  Mr.  Parrella  served as Executive
Vice President. Prior to that, from February 1988 until November 1994, he served
as President and Chief Operating Officer. He initially became a director in 1986
after  evaluating  the  application   potential  of  NCT's  noise   cancellation
technology.  At that time, he formed an investment  group to acquire  control of
the Board of  Directors  and to raise new  capital  to  restructure  NCT and its
research and  development  efforts.  Mr. Parrella also serves as Chief Executive
Officer and Acting  President of NCT Audio a position to which he was elected on
September  4, 1997.  He became a director  of NCT Audio on August 25,  1998.  On
January 5, 2000,  Mr.  Parrella was elected  Acting Chief  Executive  Officer of
Advancel.  Mr.  Parrella  is a director of  Advancel,  serves as Chairman of the
Board of DMC, and serves as Chairman of the Board of NCT Hearing.

     Jay M.  Haft  currently  serves  as a  director  of NCT and had  served  as
Chairman of the Board of Directors  until April 21, 2000.  From November 1994 to
July  1995,  he served as  President.  He also  serves  as a  director  of NCT's
subsidiaries,  NCT Audio, DMC, Advancel and NCT Hearing. Mr. Haft is a strategic
and financial consultant for growth stage companies.  He is currently of counsel
to  Parker  Duryee  Rosoff  & Haft,  in New  York.  He was  previously  a senior
corporate partner of such firm (1989-1994) and prior to that, a founding partner
of  Wofsey,  Certilman,   Haft  et  al  (1966-1988).   Mr.  Haft  is  active  in
international  corporate  finance,  mergers and acquisitions,  as well as in the
representation  of emerging growth  companies.  He has actively  participated in
strategic planning and fund raising for many high-tech  companies,  leading edge
medical  technology  companies  and  technical  product,  service and  marketing
companies.  He is a Managing  General  Partner of Gen Am "1"  Venture  Fund,  an
international  venture  capital fund. Mr. Haft is a director of numerous  public
and private  corporations,  including RVSI, Inc. (OTC),  DCAP Group, Inc. (OTC),
Encore Medical Corporation (OTC),  Viragen,  Inc. (OTC), PC Service Source, Inc.
(OTC), DUSA Pharmaceuticals, Inc. (OTC), Oryx Technology Corp. (OTC), and Thrift
Management,  Inc. (OTC).  He served as a Commissioner on the Florida  Commission
for Government Accountability to the People. Mr. Haft serves as Treasurer of the
Miami City Ballet and is a Trustee of Florida International University.

     John J. McCloy II currently serves as a director of NCT. He served as Chief
Executive  Officer from  September  1987 to November 1994 and as Chairman of the
Board of Directors from September 1986 to November 1994. In addition,  he served
as Chief  Financial  Officer  from  November  1990 to  February  1993 and as its
Secretary-Treasurer  from  October  1986  to  September  1987.  Mr.  McCloy  was
appointed a director of NCT Audio on November 14, 1997.  Since 1981, he has been
a private  investor  concentrating on venture capital and early stage investment
projects in a variety of industries.  Mr. McCloy is the Chairman of Mondial Ltd.
and Unified Waste Services. He is a director of American University in Cairo and
the Sound Shore Fund, Inc.

     Sam Oolie  currently  serves as a director of NCT. Since his appointment on
September 4, 1997,  Mr. Oolie has also served as a director of NCT Audio.  He is
Chairman of NoFire  Technologies,  Inc.,  a  manufacturer  of  high-performance,
fire-retardant  products,  and has held that position  since August 1995.  Since
July 1985,  he has also served as Chairman of Oolie  Enterprises,  an investment
company.  Mr. Oolie currently serves as a director of Avesis,  Inc. and Comverse
Technology,  Inc. He served as a director of CFC  Associates,  a venture capital
partnership, from January 1984 to December 1999.

     Cy E. Hammond  currently  serves as Senior Vice President,  Chief Financial
Officer,  Treasurer and Assistant  Secretary of NCT. He joined NCT as Controller
in January 1990 and was appointed a Vice President in February 1994. Mr. Hammond
also serves as Acting Chief  Financial  Officer and  Treasurer  of NCT Audio,  a
position  to which he was  elected  on  September  4,  1997,  and  Acting  Chief
Financial Officer, Treasurer and Assistant Secretary for Advancel, a position to
which he was  elected on January 5, 2000.  During  1989,  he was  Treasurer  and
Director  of Finance for  Alcolac,  Inc.,  a  multinational  specialty  chemical
producer.  Prior to 1989 and from 1973,  Mr.  Hammond  served in several  senior
finance  positions  at the  Research  Division of W.R.  Grace & Co., the last of
which included management of the division's worldwide financial operations.

     Irving M. Lebovics currently serves as Senior Vice President, Global Sales.
He joined NCT in February 1998 as Vice President,  Worldwide Sales. From January
1996  to  February  1998  Mr.  Lebovics  was  a  principal  of  Enhanced  Signal
Processing,   which  exclusively  sold  NCT's  technologies  to  large  original
equipment  manufacturers.  From  1993  to  1996,  Mr.  Lebovics  served  as Vice
President  of Sales for  Kasten  Chase  Applied  Research,  a wide area  network
hardware and software  provider to companies such as Dow Jones and the Paris and
Madrid stock exchanges. From 1985 to 1993, Mr. Lebovics served as Vice President
of Sales for Relay Communications,  a provider of PC-to-mainframe communications
software and Microcom,  Inc.  (which acquired Relay  Communications),  a leading
provider  of modems and local  area  network  equipment  including  bridges  and
routers. Irving M. Lebovics is the spouse of Irene Lebovics, President of NCT.

     James McManus  currently serves as President and Chief Executive Officer of
DMC, a position he has held since March 1999. Prior to that and from April 1998,
he served as a  consultant  to DMC. He started his career as a Certified  Public
Accountant in  California.  During the 10 years he spent with the Disney Company
in  the  financial  area,   Disney's  activities  included  the  development  of
Audio-Animatronics,  Walt Disney World,  Disney Theme Hotels,  the City Planning
Board for Lake Buena Vista,  Florida,  and Disney's  joint  venture with Florida
Telephone. Subsequent to Disney, he designed and executed a financial turnaround
plan for Great  Adventure  Park in New Jersey.  Later,  Mr.  McManus ran his own
computer consulting firm for several years providing customized computer systems
for small and medium  size  businesses.  He was a member of the Radio City Music
Hall management team that revitalized New York's famous landmark, first as Chief
Financial  Officer and then for 10 years as President  and CEO. Mr.  McManus has
been active in the business  community with  involvement  as Director,  New York
Council of the Boy Scouts of America; Director, Hugh O'Brian Youth Organization;
Director,  Association to Help Retarded Children;  The Mayor's Summer Youth Jobs
Program and others.

     Irene  Lebovics  currently  serves as  President  and  Secretary of NCT and
President of NCT Hearing.  On January 5, 2000,  Ms.  Lebovics was elected Acting
Chief  Marketing  Officer  and  Secretary  of  Advancel.  She joined NCT as Vice
President of NCT and  President of NCT Medical  Systems in July 1989. In January
1993, she was appointed Senior Vice President of the company.  In November 1994,
Ms.  Lebovics  became  President of NCT Hearing.  From August 1, 1995, to May 1,
1996, she also served as Secretary of NCT. In 1999,  Ms.  Lebovics was appointed
as Executive Vice  President.  In April 2000,  she became  President of NCT. Ms.
Lebovics has held various positions in product marketing with  Bristol-Myers,  a
consumer  products  company,  and in advertising with McCaffrey and McCall.  Ms.
Lebovics is the spouse of Irving  Lebovics NCT's Senior Vice President of Global
Sales.

     Michael A. Hayes,  Ph.D.  currently serves as Senior Vice President,  Chief
Technical  Officer  after  joining  NCT in 1996.  On  January  5,  2000,  he was
appointed Acting Chief Technical Officer of Advancel.  During 1995 and 1994, Dr.
Hayes served as Deputy Project Director,  Research Support for Antarctic Support
Associates,  with operations in Chile, New Zealand,  Australia,  and Antarctica.
From 1991 to 1994, he served as Deputy Program Manager,  Special  Payloads,  for
Martin  Marietta  Government  Services  (formerly  General  Electric  Government
Services) while directly managing critical spacecraft  sub-system and instrument
development for Goddard Space Flight Center.  Prior to 1991, Dr. Hayes served as
a research  faculty member at Georgia  Institute of Technology,  and as a Senior
Process Engineer at Texas Instruments.

     Jonathan M.  Charry,  Ph.D.  currently  serves as Senior Vice  President of
Corporate Development. Dr. Charry was formerly Chairman and CEO of Digital Power
Networks,  Inc.  and  Environmental  Research  Information,  Inc.  He  has  held
appointments as a Rockefeller  Foundation Fellow and Assistant  Professor at the
Rockefeller  University,  Adjunct  Professor in Applied Social Psychology at New
York  University,  and Senior  Research  Scientist at the New York  Institute of
Basic Research. He is a member of the American  Psychological  Association,  The
Rockefeller  University  Chapter of Sigma Xi, the American  Association  for the
Advancement of Science, and the New York Academy of Sciences.

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
the  company's  officers and  directors,  and persons who own more than 10% of a
registered  class  of the  company's  equity  securities,  to  file  reports  of
ownership and changes in ownership with the Securities and Exchange  Commission.
Officers,   directors  and  greater  than  10%   stockholders  are  required  by
regulations  of the  Securities  and Exchange  Commission to furnish the company
with  copies of all such  reports.  Based  solely on its review of the copies of
such reports received by it, or written  representations  from certain reporting
persons that no reports were required for those  persons,  the company  believes
that,  during the period from January 1, 2000 to December  31, 2000,  all filing
requirements  applicable  to its  officers,  directors,  and  greater  than  10%
stockholders  were complied with except that Jonathan Charry did not timely file
a Form 3 when he became Senior Vice  President,  Corporate  Development  but Mr.
Charry  has  subsequently  filed  a  report  on  Form 5 to  report  his  initial
beneficial ownership.

<PAGE>
ITEM 11.    EXECUTIVE COMPENSATION.

     Information required under this item is contained in a proxy statement that
the Registrant will file on or before April 30, 2001, and is incorporated herein
by reference.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information required under this item is contained in a proxy statement that
the Registrant will file on or before April 30, 2001, and is incorporated herein
by reference.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     On January 26, 1999, Carole Salkind, an accredited investor and spouse of a
former director,  subscribed and agreed to purchase secured convertible notes of
the  company  in an  aggregate  principal  amount  of $4.0  million.  A  secured
convertible  note for $1.0  million  was signed on  January  26,  1999,  and the
company  received the proceeds on January 28, 1999.  The note matured on January
25, 2001 and earns  interest at the prime rate as published from time to time in
The Wall  Street  Journal  from the issue  date until the note  becomes  due and
payable. The Holder has the right at any time on or prior to the day the note is
paid in full, to convert at any time,  all or from time to time, any part of the
outstanding  and unpaid  amount of the note into  fully paid and  non-assessable
shares of common stock of the company at the  conversion  price.  The conversion
price,  as amended by the parties on  September  19,  1999,  of the note and any
future notes, is the lesser of (i) the lowest closing  transaction price for the
common stock on the securities market on which the common stock is being traded,
at any time during September 1999; (ii) the average of the closing bid price for
the common  stock on the  securities  market on which the common  stock is being
traded for five (5) consecutive trading days prior to the date of conversion; or
(iii) the fixed conversion price of $0.17. In no event will the conversion price
be less than $0.12 per share.  The Holder agreed to purchase the remaining  $3.0
million principal amount of the secured  convertible notes on or before June 30,
1999.  The  company  agreed to extend such date for the  purchase  of  remaining
installments  of secured  convertible  notes to April 15, 2000. On various dates
through March 22, 2000,  the Holder  purchased  additional  installments  of the
remaining $3.0 million principal amount of the secured convertible notes and NCT
issued secured  convertible notes with the same terms and conditions of the note
described above.

     On January 25,  2001,  NCT  defaulted  on the  repayment of $1.0 million of
secured convertible notes. The default provisions in the note imposed a penalty,
the default  amount,  of $100,000  (10% of the  principal  payment in  default).
Default interest from the date of default is due on the principal in default and
the default amount at the rate of 5% plus prime. We registered  1,034,972 shares
of common  stock  that we may be  obligated  to issue  pursuant  to the  default
provisions in the note.

     On February 13, 2001, the Holder and the company  entered into an unsecured
promissory note in the amount of $0.5 million. Such principal amount and accrued
interest  was due and  payable  on April 14,  2001.  The  promissory  note bears
interest at the rate of 7% per annum and  includes  the  issuance of warrants to
purchase  $0.5 million  worth of either NCT's common stock at $0.21 per share or
Pro Tech's common stock at $0.44 per share. In addition, the Holder can elect to
convert the  principal and interest into either NCT's or Pro Tech's common stock
at the share  price of the  warrants.  As of March 30,  2001,  the  company  had
received  proceeds  aggregating  $4.5  million  from the  Holder  and had issued
secured and unsecured convertible notes as described above.

     On various dates in 2000, the company's  Senior Vice  President,  Corporate
Development,  entered into several  short-term  promissory notes to borrow funds
from the  company in  anticipation  of cash  overrides  due under the  incentive
compensation  arrangement  described  above.  As of  December  31,  2000,  three
promissory notes were outstanding for an aggregate  principal amount owed to the
company  of  $69,379.  The notes  bear  interest  at the prime  lending  rate as
published  in The Wall Street  Journal on the date of issuance of the notes plus
one percent,  or an annual rate of 10.5% for the notes  outstanding  at December
31, 2000.
<PAGE>

                                     PART IV


ITEM 14.    Exhibits, Financial Statements Schedules and
            Reports on Form 8-K.

(a)    (1)  Financial  Statements.  The following financial statements are filed
as part of this Form 10-K.

Independent Auditors' Reports

Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000.

Consolidated   Statements  of   Operations   and   Consolidated   Statements  of
Comprehensive Loss for the years ended December 31, 1998, 1999 and 2000.

Consolidated Statements of Stockholders' Equity for the years ended December 31,
1998, 1999 and 2000.

Consolidated  Statements  of Cash Flows for the years ended  December  31, 1998,
1999 and 2000.

Notes to Consolidated Financial Statements.

(a)    (2)  Financial Statement Schedules.

Report of Independent Auditors with Respect to Schedule.

Schedule II.  Valuation and Qualifying Accounts.

Other  schedules  have been omitted as they are not  applicable  or the required
information  is  included  in the  consolidated  financial  statements  or notes
thereto.

(a)     (3)  Exhibits. The exhibits listed on the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.

(b) No report on Form 8-K was filed  during the last quarter of the year covered
by this Annual Report on Form 10-K.



<PAGE>

                                 NCT Group, Inc.
                                Index to Exhibits
                                  Item 14(a)(3)


Exhibit
Number      Description of Exhibit

     2(a)   Stock Purchase  Agreement dated August 21, 1998,  among the Company,
            Advancel  Logic  Corporation  and  the  Holders  of the  Outstanding
            Capital  Stock  of  Advancel  Logic  Corporation,   incorporated  by
            reference to Exhibit 2 of the  Company's  Registration  Statement on
            Form S-3  (Registration  No. 333-64967) filed on September 30, 1998,
            as amended by Amendment No. 1 thereto filed on October 30, 1998.

     3(a)   Restated  Certificate of  Incorporation  of the Company filed in the
            Office  of the  Secretary  of State  of the  State  of  Delaware  on
            September 23, 1996, incorporated herein by reference to Exhibit 3(a)
            to the Company's Quarterly Report on Form 10-Q for the quarter ended
            September 30, 1996.

     3(b)   Certificate   of   Amendment   of  the   Restated   Certificate   of
            Incorporation of the Company filed in the Office of the Secretary of
            State of the State of Delaware  on June 20,  1997,  incorporated  by
            reference to Exhibit 3(a) to the Company's  Quarterly Report on Form
            10-Q for the quarter ended June 30, 1997.

*           3(c)  Certificate  of  Amendment  of  the  Restated  Certificate  of
            Incorporation of the Company filed in the Office of the Secretary of
            State of the State of Delaware on October 21, 1998.

     3(d)   Certificate  of  Designations,  Preferences  and  Rights of Series C
            Convertible  Preferred  Stock of the Company  filed in the Office of
            the Secretary of State of the State of Delaware on October 29, 1997,
            incorporated  by reference to Exhibit 3(c) to the  Company's  Annual
            Report on Form 10-K for the fiscal year ended December 31, 1997.

     3(e)   Certificate  of  Increase  in the  Number of Shares in the  Series C
            Convertible  Preferred  Stock of the Company  filed in the Office of
            the  Secretary  of State of the State of Delaware  on  November  14,
            1997,  incorporated  by reference  to Exhibit 3(d) to the  Company's
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            1997.

     3(f)   Certificate  of  Designations,  Preferences  and  Rights of Series D
            Convertible  Preferred  Stock of the Company  filed in the Office of
            the  Secretary  of State of the State of Delaware on July 24,  1998,
            incorporated by reference to Exhibit 4 of the Company's Registration
            Statement  on  Form  S-3   (Registration  No.  333-64967)  filed  on
            September  30, 1998,  as amended by Amendment No. 1 thereto filed on
            October 20, 1998.

     3(g)   By-laws of the Company,  incorporated herein by reference to Exhibit
            3(b) to Amendment No. 1 to the Company's  Annual Report on Form 10-K
            for the fiscal year ended December 31, 1991.

     3(h)   Certificate   of   Amendment   of  the   Restated   Certificate   of
            Incorporation of the Company filed in the Office of the Secretary of
            the  State of  Delaware  on July 29,  1999,  incorporated  herein by
            reference to Exhibit 3(h) to the Company's  Quarterly Report on Form
            10-Q for the period ended June 30, 1999.

     3(i)   Certificate   of   Amendment   of  the   Restated   Certificate   of
            Incorporation of the Company filed in the Office of the Secretary of
            the State of Delaware on July 18, 2000, incorporated by reference to
            the  Company's  Registration  Statement on Form S-8 filed on October
            13, 2000.

     4(a)   Warrant to purchase 125,000 shares of common stock of the Company at
            a  purchase  price of $.20 per share  issued to John J.  McCloy  II,
            incorporated  herein by reference to Exhibit 4(a) to Amendment No. 1
            to the  Company's  Annual  Report on Form 10-K for the  fiscal  year
            ended December 31, 1991.

     4(b)   Warrant  #BW-1-R to purchase  862,500  shares of common stock of the
            Company  at a  purchase  price of $.75 per  share  issued to John J.
            McCloy II,  incorporated  herein by reference to Exhibit 4(b) to the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1996.

     4(c)   Warrant  #BW-2-R to purchase  862,500  shares of common stock of the
            Company at a purchase  price of $.75 per share  issued to Michael J.
            Parrella,  incorporated  herein by  reference to Exhibit 4(c) to the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1996.

     4(d)   Warrant  #BW-4-R to purchase  201,250  shares of common stock of the
            Company  at a  purchase  price of $.75  per  share  issued  to Irene
            Lebovics,  incorporated  herein by  reference to Exhibit 4(d) to the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1996.

     4(e)   Warrant  #BW-9-R and #BW-46-R to purchase  218,500  shares of common
            stock of the Company at a purchase price of $.75 per share issued to
            Jay M. Haft, incorporated herein by reference to Exhibit 4(e) to the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1996.

     4(f)   Secretary's  Certificate  dated March 20, 1998, as to a two (2) year
            extension of the expiration dates of the Warrants described in 4(b),
            (c), (d) and (e) above,  incorporated herein by reference to Exhibit
            4(f) to the Company's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1997.

     4(g)   Warrant Agreement, dated as of January 20, 1988, between the Company
            and American Stock Transfer Company,  as Warrant Agent,  relating to
            certain  warrants to purchase common stock of the Company at a price
            of $.40 per share issued to Sam Oolie,  Oolie  Enterprises,  John J.
            McCloy II, and Michael J. Parrella, incorporated herein by reference
            to Exhibit 4(g) to Amendment No. 1 to the Company's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1991.

*    4(h)   Certificate of Designations, Preferences and Rights of Series E
            Convertible  Preferred  Stock of the Company  filed in the Office of
            the  Secretary  of State of the State of Delaware  on  December  24,
            1998.

     4(i)   Certificate  of  Designations,  Preferences  and  Rights of Series F
            Convertible  Preferred  Stock of the Company  filed in the Office of
            the  Secretary  of the  State of  Delaware  on  September  8,  1999,
            incorporated  herein by reference  to Exhibit 4(i) to  Pre-effective
            Amendment No. 1 to the Company's  Registration Statement on Form S-1
            (Registration No. 333-35210) filed on June 13, 2000.

     4(j)   Certificate of Amendment of Certificate of Designations, Preferences
            and Rights of Series F  Convertible  Preferred  Stock of the Company
            filed in the Office of the  Secretary  of the State of  Delaware  on
            January 27, 2000,  incorporated  herein by reference to Exhibit 4(j)
            to  Pre-effective  Amendment  No.  1 to the  Company's  Registration
            Statement on Form S-1 (Registration No. 333-35210) filed on June 13,
            2000.

     4(k)   Certificate  of  Designations,  Preferences  and  Rights of Series G
            Convertible  Preferred  Stock of the Company  filed in the Office of
            the   Secretary   of  the  State  of  Delaware  on  March  6,  2000,
            incorporated  herein by reference  to Exhibit 4(k) to  Pre-effective
            Amendment No. 1 to the Company's  Registration Statement on Form S-1
            (Registration No. 333-35210) filed on June 13, 2000.

     4(l)   Corrected  Certificate of  Designations,  Preferences  and Rights of
            Series G  Convertible  Preferred  Stock of the Company  filed in the
            Office of the  Secretary of the State of Delaware on March 10, 2000,
            incorporated  herein by reference  to Exhibit 4(l) to  Pre-effective
            Amendment No. 1 to the Company's  Registration Statement on Form S-1
            (Registration No. 333-35210) filed on June 13, 2000.

     4(m)   Certificate  of  Amendment  of  the  Certificate  of   Designations,
            Preferences  and Rights of Series G Convertible  Preferred  Stock of
            the  Company  filed in the  Office of the  Secretary  of the Sate of
            Delaware on September 27, 2000,  incorporated herein by reference to
            Exhibit  4(m) of the  Company's  Pre-effective  Amendment  No.  1 to
            Registration  Statement  on Form S-1  (Registration  No.  333-47084)
            filed on October 25, 2000.

**  10(a)   1987 Incentive  Stock Option Plan,  incorporated herein by reference
            to Exhibit 10(b) to Amendment No. 1 on Form S-1  to  the  Company's
            Registration Statement on Form S-8 (Registration No. 33-19926).

**  10(b)   Stock Option Agreement, dated as of February 26, 1987, between
            the Company and John J. McCloy II,  incorporated herein by reference
            to Exhibit 10(b) to Amendment  No. 1 to the Company's  Annual Report
            on Form 10-K for the fiscal year ended December 31, 1991.

**  10(c)   Stock Option Agreement, dated as of February 26, 1987, between
            the  Company  and  Michael  J.  Parrella,   incorporated  herein  by
            reference  to  Exhibit  10(c) to  Amendment  No. 1 to the  Company's
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            1991.

**  10(d)   Stock Option Agreement, dated as of February 26, 1987, between
            the  Company  and Sam Oolie,  incorporated  herein by  reference  to
            Exhibit 10(d) to Amendment  No. 1 to the Company's  Annual Report on
            Form 10-K for the fiscal year ended December 31, 1991.


**  10(e)   Stock Option Agreement, dated as of June 17, 1987, between the
            Company and John J. McCloy II,  incorporated  herein by reference to
            Exhibit 10(f) to Amendment  No. 1 to the Company's  Annual Report on
            Form 10-K for the fiscal year ended December 31, 1991.

**  10(f)   Stock Option  Agreement,  dated as of March 29, 1990,  between
            the Company and Jay M. Haft,  incorporated  herein by  reference  to
            Exhibit 10(m) to Amendment  No. 1 to the Company's  Annual Report on
            Form 10-K for the fiscal year ended December 31, 1991.


   10(k)    Patent  Assignment  Agreement,  dated as of June 21,  1989,  among
            George  B.B. Chaplin,  Sound  Alternators  Limited,  the Company,
            Active Noise and Vibration  Technologies,  Inc. and Chaplin Patents
            Holding Co., Inc.,  incorporated  herein  by reference to Exhibit
            10(aa) to Amendment  No. 2 on Form S-1 to the Company's Registration
            Statement (Registration No. 33-19926).

   10(l)    Joint  Venture and  Partnership  Agreement,  dated as of November 8,
            1989, among the Company, Walker Manufacturing Company, a division of
            Tenneco,  Walker Electronic  Mufflers,  Inc. and NCT Muffler,  Inc.,
            incorporated  herein by reference to Exhibit (c)(1) to the Company's
            Current  Report on Form 8-K,  dated  November 8, 1989, as amended on
            Form 8, dated January 24, 1990.

   10(l)(1) Letter Agreement between Tenneco Automotive, a division of Tennessee
            Gas  Pipeline  Company,  and the Company  dated  November  22, 1993,
            incorporated  herein by reference to Exhibit  10(a) to the Company's
            Current Report on Form 8-K dated November 22, 1993.

   10(l)(2) Stock Purchase Agreement between Tenneco  Automotive,  a division of
            Tennessee Gas Pipeline  Company,  and the Company dated December 14,
            1993,  incorporated  herein by  reference  to  Exhibit  10(b) to the
            Company's Current Report on Form 8-K dated November 24, 1993.

   10(l)(3) Transfer  Agreement among Walker  Manufacturing  Company a division
            of Tennessee Gas Pipeline  Company,  Walker  Electronic  Mufflers,
            Inc.,  the  Company,  NCT Muffler,  Inc.,  Chaplin Patents Holding
            Co., Inc. and Walker Noise Cancellation Technologies  dated November
            15,  1995,  incorporated  herein by  reference to  Exhibit  10(l)(3)
            to the  Company's  Annual  Report on Form 10-K for the fiscal
            year ended December 31, 1995. ***

   10(l)(4) License   Agreement  between  Chaplin  Patents  Holding  Co.,  Inc.
            and  Walker Electronic  Mufflers,  Inc.  dated  November  15, 1995,
            incorporated  herein by reference to  Exhibit  10(l)(4) to  the
            Company's  Annual Report on Form 10-K for the fiscal year ended
            December 31, 1995. ***

   10(l)(5) License   Agreement   between  the  Company  and  Walker  Electronic
            Mufflers,  Inc.  dated  November  15, 1995,  incorporated  herein by
            reference to Exhibit 10(l)(5) to the Company's Annual Report on Form
            10-K for the fiscal year ended December 31, 1995. ***

   10(l)(6) Support,  Research and Development Agreement among Walker Electronic
            Mufflers, Inc.,  the Company,  NCT Muffler, Inc. and Chaplin Patents
            Holding Co.,  Inc. dated November 15, 1995,  incorporated  herein by
            reference to Exhibit  10(l)(6) to the Company's  Annual Report on
            Form 10-K for the fiscal year ended  December  31, 1995. ***

   10(l)(7) Mutual Limited Release by (i) the Company, NCT Muffler,  Inc. and
            Chaplin Patent Holding Co., Inc. and (ii) Tennessee Gas Pipeline
            Company and Walker  Electronic  Mufflers,  Inc.  dated  November 15,
            1995,  incorporated  herein by reference to Exhibit  10(l)(7) to the
            Company's  Annual  Report on Form 10-K for the fiscal year ended
            December 31, 1995. ***

   10(m)    Technical Assistance  and License  Agreement,  dated March 25, 1991,
            among the Company, Foster Electric Co., Ltd. and Foster/NCT Headsets
            International Ltd., incorporated  herein by  reference to Exhibit
            10(nn) to Amendment  No. 1 to the  Company's   Annual   Report   on
            Form   10-K   for  the   fiscal  year  ended December 31, 1991.***

   10(m)(1) Amendment, dated April 16, 1991, to Technical Assistance and License
            Agreement, dated  March  25,  1991,  among the  Company,  Foster
            Electric  Co.,  Ltd.  and Foster/NCT  Headsets  International  Ltd.,
            incorporated  herein by reference to Exhibit  10(nn)(1) to Amendment
            No. 5 to the  Company's  Annual  Report on Form 10-K for the fiscal
            year ended December 31, 1991.

   10(m)(2) Letter  Agreement  between  Foster  Electric  Co.,  Ltd.  and the
            Company  dated November 22,  1993, incorporated  herein by reference
            to Exhibit  10(b) to the Company's Current Report on Form 8-K dated
            November 22, 1993.

   10(m)(3) Letter   agreement  among  Foster  Electric  Co.,  Ltd., Foster  NCT
            Headsets International,  Ltd. and the Company dated July 28, 1995,
            incorporated herein by reference to Exhibit  10(a) of the Company's
            Quarterly  Report on Form 10-Q for the quarter ended June 30, 1995.

   10(n)    Joint  Development  Cooperation  Agreement,  dated  June  28,  1991,
            between  AB  Electrolux  and the  Company,  incorporated  herein  by
            reference  to Exhibit  10(oo) to  Amendment  No. 3 to the  Company's
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            1991.***

   10(n)(1) Amendments to the Joint  Development  Cooperation  Agreement,  dated
            June 28, 1991, between AB Electrolux and the Company as set forth in
            the First  Amendment  to Joint  Development  Cooperation  Agreement,
            dated  September  1, 1993,  between AB  Electrolux  and the Company,
            incorporated   herein  by  reference  to  Exhibit  10(z)(1)  to  the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1994.***

   10(n)(2) Second Amendment to Joint Development  Cooperation Agreement,  dated
            January,  1994 between AB Electrolux  and the Company,  incorporated
            herein by reference to the Exhibit  10(z)(2) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1994.

   10(o)    Letter Agreement,  dated March 19, 1992,  between Siemens Medical
            Systems,  Inc. and NCT Medical  Systems,  Inc., incorporated  herein
            by  reference  to Exhibit 10(pp) to Amendment No. 1 to the Company's
            Annual Report on Form 10-K for the fiscal year ended
            December 31, 1991.

   10(o)(1) OEM Agreement  between the Company and Siemens AG dated November 24,
            1993,  incorporated  herein by  reference  to  Exhibit  10(a) to the
            Company's Current Report on Form 8-K dated November 24, 1993.

** 10(p)    Noise Cancellation Technologies, Inc. Stock Incentive Plan (as
            adopted  April 14,  1993,  and  amended  through  August 16,  1996),
            incorporated  herein by  reference  to  Exhibit  4 to the  Company's
            Registration  Statement  on Form S-8  filed  with the  Securities  &
            Exchange Commission on August 30, 1996 (Reg. No. 333-11213).


   10(r)    Asset Purchase  Agreement,  dated September 16, 1994, between Active
            Noise and Vibration Technologies, Inc. and the Company, incorporated
            herein by reference to Exhibit 2 to the Company's  Current Report on
            Form 8-K filed September 19, 1994.

** 10(s)    Noise  Cancellation  Technologies,  Inc.  Option Plan for Certain
            Directors (as adopted  November 15, 1994 and amended  through August
            16, 1996),  incorporated herein by  reference  to Exhibit 4 to the
            Company's  Registration  Statement on Form S-8 filed with the
            Securities  and Exchange  Commission on August 30, 1996
            (Reg. No. 333-11209).

   10(t)    Variation   of  Teaming   Agreement   between   Noise   Cancellation
            Technologies,  Inc.  and Ultra  Electronics  Limited  dated April 6,
            1995,  incorporated  herein by  reference  to  Exhibit  10(c) of the
            Company's Current Report on Form 8-K filed August 4, 1995.

   10(t)(1) Agreement  for Sale and Purchase of Part of the Business and Certain
            Assets   among  Noise   Cancellation   Technologies,   Inc.,   Noise
            Cancellation Technologies (UK) Limited and Ultra Electronics Limited
            dated April 6, 1995,  incorporated  herein by  reference  to Exhibit
            10(d) of the  Company's  Current  Report on Form 8-K filed August 4,
            1995.

   10(t)(2) Patent  License  Agreement  among Noise  Cancellation  Technologies,
            Inc.,  Noise  Cancellation   Technologies  (UK)  Limited  and  Ultra
            Electronics  Limited  dated  April 6, 1995,  incorporated  herein by
            reference to Exhibit 10(e) of the Company's  Current  Report on Form
            8-K filed August 4, 1995.

   10(t)(3) License   Agreement   between  Chaplin  Patents  Holding  Co.,  Inc.
            and  Ultra Electronics  Limited  dated April 6, 1995,  incorporated
            herein by reference to Exhibit 10(f) of the Company's Current Report
            on Form 8-K filed August 4, 1995.

   10(t)(4) Patent Sub-License Agreement among Noise Cancellation  Technologies,
            Inc.,  Noise  Cancellation   Technologies  (UK)  Limited  and  Ultra
            Electronics  Limited  dated  May 15,  1995,  incorporated  herein by
            reference to Exhibit 10(g) of the Company's  Current  Report on Form
            8-K filed August 4, 1995.

** 10(u)    Agreement  among  Noise  Cancellation  Technologies,  Inc.,  Noise
            Cancellation  Technologies (UK) Limited, Dr. Andrew John Langley,
            Dr.  Graham Paul Eatwell and Dr. Colin Fraser Ross dated April 6,
            1995,  incorporated  herein by reference to Exhibit  10(h) of the
            Company's Current Report on Form 8-K filed August 4, 1995.

   10(w)(1) Cross  License  Agreement  dated April 15, 1997,  among Verity Group
            plc, New Transducers  Limited and Noise  Cancellation  Technologies,
            Inc.,  incorporated  by reference to Exhibit  10(a) to the Company's
            Quarterly  Report  on Form  10-Q  for the  quarter  ended  June  30,
            1997.***

   10(w)(2) Security  Deed  dated  April  14,  1997,  from  Noise   Cancellation
            Technologies, Inc. to Verity Group plc, incorporated by reference to
            Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997.

   10(w)(3) Common  Stock  Purchase  Option  dated  April 15,  1997,  from Noise
            Cancellation Technologies, Inc. to Verity Group plc, incorporated by
            reference to Exhibit 10(c) to the Company's Quarterly Report on Form
            10-Q for the quarter ended June 30, 1997.

   10(w)(4) Letter  Agreement  dated  April 17,  1997,  from Noise  Cancellation
            Technologies, Inc. to Verity Group plc, incorporated by reference to
            Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997.

   10(x)(1) New Cross License  Agreement dated  September 27, 1997, among Verity
            Group  plc,   New   Transducers   Limited,   Noise   Cancellation
            Technologies,  Inc. and NCT Audio Products, Inc., incorporated by
            reference to Exhibit 10(a) to the Company's  Quarterly  Report on
            Form 10-Q for the quarter ended September 30, 1997.

   10(x)(2) Master  License  Agreement  dated  September  27, 1997,  between New
            Transducers  Limited and NCT Audio Products,  Inc.,  incorporated by
            reference to Exhibit 10(b) to the Company's Quarterly Report on Form
            10-Q for the quarter ended September 30, 1997.

   10(x)(3) Letter  Agreement dated September 27, 1997, from Noise  Cancellation
            Technologies, Inc. to Verity Group plc, incorporated by reference to
            Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 1997.

   10(x)(4) License   Agreement  dated  September  4,  1997,   between  Noise
            Cancellation  Technologies,  Inc. and NCT Audio  Products,  Inc.,
            incorporated  by  reference  to  Exhibit  10(d) to the  Company's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            1997.

   10(y)    License  Agreement dated July 15, 1998,  between the Company and NCT
            Hearing Products,  Inc.,  incorporated by reference to Exhibit 10 of
            the  Company's  Quarterly  Report on Form 10-Q for the period  ended
            September 30, 1998.

   10(z)    License Agreement dated January 25, 1999, between NCT Group, Inc.
            and  DistributedMedia.com,  Inc.,  incorporated  by  reference to
            Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
            quarter ended September 30, 1999.

   10(aa)   Securities  Exchange  Agreement,  dated as of October 9, 1999, among
            the  Company,   Austost  Anstalt  Schaan  and  Balmore  Funds,  S.A.
            incorporated by reference to Exhibit 10(a) of the Company's  Current
            Report on Form 8-K filed on January 12, 2000.

   10(ab)   Registration  Rights  Agreement,  dated as of October 9, 1999, among
            the  Company,   Austost  Anstalt  Schaan  and  Balmore  Funds,  S.A.
            incorporated by reference to Exhibit 10(b) of the Company's  Current
            Report on Form 8-K filed on January 12, 2000.

   10(ac)   Securities  Purchase  Agreement,  dated  as of  December  27,  1999,
            among the Company,  Austost Anstalt Schaan,  Balmore Funds,  S.A.
            and Nesher,  Inc.  incorporated  by reference to Exhibit 10(c) of
            the  Company's  Current  Report on Form 8-K filed on January  12,
             2000.

   10(ad)   Registration  Rights  Agreement,  dated  as of  December  27,  1999,
            among the Company,  Austost Anstalt Schaan,  Balmore Funds, S.A..
            Nesher, Inc. and Libra Finance S.A.  incorporated by reference to
            Exhibit 10(d) of the Company's  Current  Report on Form 8-K filed
            on January 12, 2000.

   10(ae)   Amendment No. 1 to the Securities Exchange Agreement, dated  as  of
            March 7, 2000,  among the  Company,  Austost  Anstalt  Schaan and
            Balmore Funds, S.A.,  incorporated by reference to Exhibit 10(ae)
            of the  Company's  Annual  Report on Form 10-K filed on April 14,
            2000.

   10(af)   Letter  Agreements  dated  December 1, 1999, between the Company and
            holders  of Series F  Preferred  Stock:  Atlantis  Capital  Fund;
            Canadian Advantage Limited Partners; Dominion Capital Fund, Ltd.;
            The Endeavour  Capital Fund,  S.A.; and Sovereign  Partners,  LP.
            incorporated  by  reference  to Exhibit  10(af) of the  Company's
            Registration  Statement on Form S-1  (Registration No. 333-35210)
            filed on April 20, 2000.

   10(ag)   Strategic   Alliance  and  Technology  License  Agreement  entered
            into as of May 8, 2000  among NCT  Group,  Inc.,  Advancel  Logic
            Corporation and Infinite Technology Corporation,  incorporated by
            reference  to  Exhibit  10(ag)  of  the  Company's  Pre-effective
            Amendment  No.  1 to  the  Registration  Statement  on  Form  S-1
            (Registration No. 333-35210) filed on June 13, 2000.

   10(ah)   License Agreement  Amendment dated effective June 30, 2000,  between
            NCT Group, Inc.,  Advancel Logic Corporation and Infinite Technology
            Corporation,  incorporated  herein by reference to Exhibit 10 of the
            Company's  Quarterly  Report on Form 10-Q for the quarter ended June
            30, 2000.

   10(ai)   Agreement and Plan of Merger dated August 29, 2000, among NCT Group,
            Inc, NCT Midcore, Inc. and Midcore Software,  Inc.,  incorporated
            herein by reference to Exhibit 2 of the Company's  Current Report
            on Form 8-K filed on September 13, 2000.

   10(aj)   Stock Purchase  Agreement dated August 18, 2000 by and between NCT
            Group,  Inc.,  DistributedMedia.com,  Inc., DMC Cinema,  Inc. and
            Jeff Arthur,  LaJuanda Barrera,  Robert Crisp,  Steven Esrick and
            Alan Martin,  incorporated  herein by reference to Exhibit 10(aj)
            of the Company's  Pre-effective  Amendment No. 1 to  Registration
            Statement  on Form  S-1  (Registration  No.  333-47084)  filed on
            October 25, 2000.

   10(ak)   Securities Purchase and Supplemental Exchange Rights Agreement dated
            August 10, 2000 by and among ConnectClearly.com,  Inc. NCT Group,
            Inc. and Austost Anstalt Schaan, Balmore S.A. and Zakeni Limited,
            incorporated  herein  by  reference  to  Exhibit  10(ak)  of  the
            Company's Pre-effective Amendment No. 1 to Registration Statement
            on Form S-1  (Registration  No.  333-47084)  filed on October 25,
            2000.

   10(al)   Strategic  Alliance and Technology  Development  Amendment  dated
            effective June 20, 2000, between NCT Group, Inc.,  Advancel Logic
            Corporation  and Infinite  Technology  Corporation,  incorporated
            herein  by   reference  to  Exhibit   10(al)  of  the   Company's
            Pre-effective  Amendment No. 1 to Registration  Statement on Form
            S-1 (Registration No. 333-47084) filed on October 25, 2000.

   10(am)   Securities Purchase and Supplemental Exchange Rights Agreement dated
            September  29, 2000 by and among Pro Tech  Communications,  Inc.,
            NCT Group, Inc., Austost Anstalt Schaan,  Balmore S.A. and Zakeni
            Limited,  incorporated  herein by reference to Exhibit  10(am) of
            the  Company's  Pre-effective  Amendment  No.  1 to  Registration
            Statement  on Form  S-1  (Registration  No.  333-47084)  filed on
            October 25, 2000.

   10(an)   Stock  Purchase  Agreement  between  NCT  Hearing  Products,  Inc.
            and Pro Tech Communications, Inc. dated as of September 13, 2000,
            incorporated  by  reference  to Exhibit  10(an) of the  Company's
            Pre-effective  Amendment No. 2 to Registration  Statement on Form
            S-1 (Registration No. 333-47084) filed on December 12, 2000.

   10(ao)   License   Agreement   between  NCT   Hearing   Products,   Inc.  and
            Pro  Tech   Communications,   Inc.  dated   September  12,  2000,
            incorporated  by  reference  to Exhibit  10(ao) of the  Company's
            Pre-effective  Amendment No. 2 to Registration  Statement on Form
            S-1 (Registration No. 333-47084) filed on December 12, 2000.

   10(ap)   Subscription  Agreement  between NCT Networks, Inc. and Subscribers:
            Austost Anstalt Schaan; Balmore, S.A.; Amro International,  S.A.;
            Nesher  Ltd.;   Talbiya  B.  Investments   Ltd.;  and  The  Gross
            Foundation,  Inc. (collectively,  Holders of Convertible Notes of
            NCT Networks, Inc.) dated January 9, 2001, incorporated herein by
            reference  to  Exhibit  10(ap)  of  the  Company's  Pre-effective
            Amendment   No.  3  to   Registration   Statement   on  Form  S-1
            (Registration No. 333-47084) filed on January 26, 2001.

   10(aq)   Form  of  Convertible  Note  of  NCT Networks,  Inc.  dated  January
            9, 2001,  incorporated  herein by reference to Exhibit  10(aq) of
            the  Company's  Pre-effective  Amendment  No.  3 to  Registration
            Statement  on Form  S-1  (Registration  No.  333-47084)  filed on
            January 26, 2001.

   10(ar)   Exchange Right Agreement among NCT Group,  Inc. and Holders of
            Convertible  Notes of NCT Networks,  Inc.  dated January 9, 2001,
            incorporated  herein  by  reference  to  Exhibit  10(ar)  of  the
            Company's Pre-effective Amendment No. 3 to Registration Statement
            on Form S-1  (Registration  No.  333-47084)  filed on January 26,
            2001.

   10(as)   Registration  Rights Agreement among NCT Group,  Inc. and Holders of
            Convertible  Notes of NCT Networks,  Inc.  dated January 9, 2001,
            incorporated  herein  by  reference  to  Exhibit  10(as)  of  the
            Company's Pre-effective Amendment No. 3 to Registration Statement
            on Form S-1  (Registration  No.  333-47084)  filed on January 26,
            2001.

   21       Subsidiaries

   23(a)    Consent of Goldstin Golub Kessler LLP

   23(b)    Consent of Richard A. Eisner & Company, LLP

   23(b)    Consent of Peters Elworthy & Moore, Chartered Accountants.

*  99(a)    Letter from Peters Elworthy & Moore, Chartered Accountants, to
            Noise  Cancellation  Technologies,  Inc. regarding audited financial
            statements of the Company's U.K.  subsidiaries and reports of Peters
            Elworthy & Moore,  Chartered  Accountants,  on their  audits of such
            financial  statements as at December 31, 1999 and for the year ended
            December 31, 1999.

   99(b)    Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
            Cancellation   Technologies,   Inc.   regarding   audited  financial
            statements of the Company's U.K.  subsidiaries and reports of Peters
            Elworthy & Moore,  Chartered  Accountants,  on their  audits of such
            financial  statements as at December 31, 1998 and for the year ended
            December 31, 1998, incorporated by reference to Exhibit 99(a) to the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1998.

   99(c)    Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
            Cancellation   Technologies,   Inc.   regarding   audited  financial
            statements of the Company's U.K.  subsidiaries and reports of Peters
            Elworthy & Moore,  Chartered  Accountants,  on their  audits of such
            financial  statements as at December 31, 1997 and for the year ended
            December 31, 1997, incorporated by reference to Exhibit 99(b) to the
            Company's  Annual  Report on Form  10-K for the  fiscal  year  ended
            December 31, 1997.

*  99(d)    Letter  from  Peters  Elworthy  &  Moore,   Chartered   Accountants,
            to Noise Cancellation  Technologies,  Inc. regarding confirmation
            that the accounts of the Company's U.K. subsidiaries for the year
            ended  December 31, 1999 were audited  under  auditing  standards
            substantially similar to US General Accepted Auditing Standards.

   99(e)    Letter from Peters Elworthy & Moore, Chartered Accountants, to Noise
            Cancellation  Technologies,  Inc.  regarding  confirmation  that the
            accounts  of the  Company's  U.K.  subsidiaries  for the year  ended
            December   31,   1998  were   audited   under   auditing   standards
            substantially  similar to US General  Accepted  Auditing  Standards,
            incorporated  by reference to Exhibit 99(d) to the Company's  Annual
            Report on Form 10-K for the fiscal year ended December 31, 1998.

** 99(f)    Employment  Agreement  by and between the Company and Paul D.
            Siomkos,  dated  February  26,  1998,  incorporated  by reference to
            Exhibit 99 to the  Company's  Quarterly  Report on Form 10-Q for the
            period ended June 30, 1998.

*           Filed with the  Company's  Annual Report on Form 10-K for its fiscal
            year ended December 31, 1999.

**          Pertains to a management contract or compensation plan or
            arrangement.

***         Confidential treatment requested for portions of this document. Such
            portions  have been  omitted from the  document  and  identified  by
            asterisks.  Such portions also have been filed  separately  with the
            Commission  pursuant to the Company's  application for  confidential
            treatment.
<PAGE>

INDEPENDENT AUDITORS' REPORT


To the Board of Directors
NCT Group, Inc. and Subsidiaries


We have audited the accompanying  consolidated  balance sheet of NCT Group, Inc.
and  Subsidiaries  (the  "Company")  as of December  31,  2000,  and the related
consolidated statements of operations,  comprehensive loss, stockholders' equity
and cash  flows for the year then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  Unites  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of NCT Group, Inc. and
Subsidiaries  as of December  31, 2000 and the results of their  operations  and
their  cash  flows  for the  year  then  ended  in  conformity  with  accounting
principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working  capital  deficiency,  and continues to be dependent on public and
private  financing  to  support  its  business  efforts.   These  factors  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plan in regard to these  matters is also  described in Note 1. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.


/s/ GOLDSTEIN GOLUB KESSLER LLP
    GOLDSTEIN GOLUB KESSLER LLP

New York, New York
April 9, 2001



<PAGE>


                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
NCT Group, Inc.

     We have audited the accompanying  consolidated  balance sheet of NCT Group,
Inc. and  subsidiaries  (the "Company") as of December 31, 1999, and the related
consolidated statements of operations,  comprehensive loss, stockholders' equity
and cash flows for each of the years in the two-year  period ended  December 31,
1999.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion of these  financial
statements  based on our  audits.  We did not audit the 1998 and 1999  financial
statements  of  the  Company's  two  foreign  subsidiaries.  These  subsidiaries
accounted for revenues of  approximately  $28,000 and $4,000 for the years ended
December 31, 1998 and 1999,  respectively,  and assets of approximately $218,000
and $164,000 as of December 31, 1998 and 1999,  respectively.  These  statements
were audited by other  auditors  whose reports have been furnished to us, one of
which contained a paragraph on the  subsidiary's  dependence on NCT Group,  Inc.
for  continued  financial  support.  Our  opinion,  insofar as it relates to the
amounts included for these entities, is based solely on the reports of the other
auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our  audits  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

In our opinion,  based on our audits and the reports of the other auditors,  the
financial statements enumerated above present fairly, in all materials respects,
the consolidated  financial  position of NCT Group,  Inc. and subsidiaries as of
December 31, 1999 and the  consolidated  results of their  operations  and their
consolidated  cash  flows for each of the  years in the  two-year  period  ended
December 31, 1999 in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements,  the Company has not been able to generate sufficient cash
flow from  operating  activities  to  sustain  its  operations  and since it has
incurred net losses since inception and has a working capital deficiency, it has
been and  continues  to be  dependent  on equity  financing  and  joint  venture
arrangements to support its business  efforts.  These factors raise  substantial
doubt about its ability to continue as a going concern.  Management's plans in
regard to these matters are also  described in Note 1. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.


/s/ RICHARD A. EISNER & COMPANY, LLP
    Richard A. Eisner & Company, LLP

New York, New York
February 25, 2000


<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Note 3)
<TABLE>
<CAPTION>
                                                                                                  (in thousands)
                                                                                                    December 31,
                                                                                                1999        2000
                                                                                              -----------   -----------
ASSETS
Current assets:
<S>                                  <C>                                                      <C>           <C>
     Cash and cash equivalents (Note 3)                                                       $    1,126    $    1,167
     Restricted cash                                                                                 667             -
     Accounts receivable, net of reserves (Note 6)                                                   237         5,483
     Inventories, net of reserves (Note 7)                                                         2,265         2,184
     Other current assets(Note 9)                                                                    152         4,825
                                                                                              -----------   -----------
                     Total current assets                                                          4,447        13,659

Property and equipment, net (Note 8)                                                                 449           688
Goodwill, net                                                                                      3,497        11,711
Patent rights and other intangibles, net (Note 3)                                                  2,296         5,330
Other assets (Note 9)                                                                              2,688         7,994
                                                                                              -----------   -----------
                                                                                              $   13,377    $   39,382
                                                                                              ===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                         $    3,647    $    4,144
     Accrued expenses                                                                              3,253         5,689
     Current maturities of convertible notes (Note 10)                                                 -         3,975
     Deferred income                                                                                   -         5,652
     Other liabilities (Note 11)                                                                     828         3,222
     Notes Payable                                                                                     -           704
                                                                                              -----------   -----------
                     Total current liabilities                                                     7,728        23,386
                                                                                              -----------   -----------

Long term liabilities:
     Deferred income                                                                                   -         1,611
     Royalty payable (Note 11 )                                                                        -         1,150
     Convertible notes  (Note 10)                                                                  4,107         1,000
                                                                                              -----------   -----------
                     Total long term liabilities                                                   4,107         3,761
                                                                                              -----------   -----------

Commitments and contingencies

Common stock subject to resale guarantee (Note 12)                                                 1,592           191
                                                                                              -----------   -----------

Minority interest in consolidated subsidiary                                                           -         2,186
                                                                                              -----------   -----------
Preferred stock in subsidiary,  $.10 par value, 1,000 shares authorized;  issued
and outstanding,  60 and 0 shares, respectively  (redemption amount $317,162 and
$0, respectively)                                                                                    317             -
                                                                                              -----------   -----------
Preferred stock in subsidiary,  $.10 par value, 1,500 shares authorized;  issued
 and outstanding,  0 and 1,500  shares,  respectively (redemption  amount $0 and
 $1,515,452, respectively)                                                                             -             -

Stockholders' equity(deficit) (Note 13):

Preferred stock, $.10 par value, 10,000,000 shares authorized:

  Series F  preferred  stock,  issued  and  outstanding,  4,715  and 0 shares,
   respectively  (redemption amount $4,789,407 and $0, respectively)                               2,790             -

  Series G preferred  stock,  issued and  outstanding,  0 and 924 shares, respectively
   (redemption amount $0 and $783,409, respectively)                                                   -           574

Common stock, $.01 par value, authorized 325,000,000 and 450,000,000 shares, respectively;
 issued 268,770,739 and 334,149,669 shares, respectively                                           2,688         3,341

Additional paid-in-capital                                                                       130,865       154,838
Unearned portion of compensatory stock, warrants and options                                         (55)          (37)
Accumulated other comprehensive income/(loss)                                                         65        (3,321)
Expenses to be paid with common stock                                                             (1,282)         (562)
Accumulated deficit                                                                             (131,475)     (141,799)
Stock subscriptions receivable                                                                    (1,000)         (213)
Treasury stock, at cost,  6,078,065 shares of common stock                                        (2,963)       (2,963)
                                                                                              -----------   -----------
                     Total stockholders' equity(deficit)                                            (367)        9,858
                                                                                              -----------   -----------
                                                                                              $   13,377    $   39,382
                                                                                              ===========   ===========
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 3)
<TABLE>
<CAPTION>
                                                                   (In thousands, except per share amounts)
                                                                               For the Years
                                                                             Ended December 31,
                                                                      --------------------------------
REVENUES:                                                                1998       1999       2000
                                                                      ---------  ---------  ----------
<S>                                                                   <C>        <C>        <C>
   Technology licensing fees and royalties                            $    802   $  3,552   $   9,928
   Product sales, net                                                    2,097      2,208       2,001
   Advertising/media revenue                                                 -          -         828
   Engineering and development services                                    425      1,303          83
                                                                      ---------  ---------  ----------
          Total revenues                                                 3,324      7,063      12,840
                                                                      ---------  ---------  ----------

COSTS AND EXPENSES:
   Cost of product sales                                                 2,235      2,767       1,839
   Royalty expense                                                           -          -         288
   Cost of advertising/media revenue                                         -          -         814
   Cost of engineering and development services                            275      2,216          55
   Selling, general and administrative                                  11,238     11,801      11,383
   Research and development                                              7,220      6,223       4,412
   Other (income)/expense, net                                          (3,264)      (100)       (574)
   Provision for doubtful accounts                                         232         77          25
   Reserve for promissory notes and preacquisition costs                     -      1,788           -
   Impairment of goodwill                                                    -      3,125       3,073
   Write down of investment in unconsolidated  affiliate (Note 9)            -      2,385           -
    Interest expense (includes $204 and $1,000 of discounts on
   beneficial conversion feature on convertible debt
   in 1999 and 2000)                                                         9        578       1,880
   Interest income                                                        (438)       (26)        (31)
                                                                      ---------  ---------  ----------
          Total costs and expenses                                      17,507     30,834      23,164
                                                                      ---------  ---------  ----------
NET (LOSS)                                                             (14,183)   (23,771)    (10,324)

   Preferred stock beneficial conversion feature and
     dividend requirement                                                3,200     10,567       4,673
   Accretion of difference between carrying amount
     and redemption amount of redeemable
     preferred stock                                                      485        494         113
                                                                      ---------  ---------  ----------
NET (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS                                                   $(17,868)  $(34,832)  $ (15,110)
                                                                      =========  =========  ==========
Basic and diluted Net (loss) per share                                $  (0.12)  $  (0.18)  $   (0.05)
                                                                      =========  =========  ==========
Weighted average common shares outstanding -
   basic and diluted                                                   143,855    190,384     292,758
                                                                      =========  =========  ==========

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
                                                                               For the Years
                                                                              Ended December 31,
                                                                      --------------------------------
                                                                         1998       1999        2000
                                                                      ---------  ---------  ----------
NET (LOSS)                                                            $(14,183)  $(23,771)  $ (10,324)
Other comprehensive income/(loss):
   Currency translation adjustment                                         (74)        20          (7)
   Unrealized loss on marketable securities                                  -          -      (3,379)
                                                                      ---------  ---------  ----------
COMPREHENSIVE (LOSS)                                                  $(14,257)  $(23,751)  $ (13,710)
                                                                      =========  =========  ==========
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (Note 1)
(in thousands)
<TABLE>
<CAPTION>
                                                                          Series C             Series D             Series E
                                                                         Convertible          Convertible          Convertible
                                                                       Preferred Stock      Preferred Stock      Preferred Stock
                                                                       Shares    Amount     Shares    Amount     Shares   Amount
                                                                      -------- ----------  -------- ----------  -------- ----------
<S>                                                                       <C>  <C>           <C>       <C>       <C>          <C>
Balance at December 31, 1997                                               13   $ 10,458         -   $      -         -  $       -

Shares issued in consideration for patent rights                            -          -         -          -         -          -
Return of shares for subscription receivable                                -          -         -          -         -          -
Conversion of Series C preferred stock, less expenses of $53              (12)   (11,726)        -          -         2      1,577
Sale of preferred stock                                                     -          -         6      5,138         9      4,735
Accretion and amortization of discount on beneficial conversion
  price to preferred shareholders                                           -      1,970         -        775         -        165
Discount on beneficial conversion price to preferred shareholders           -          -         -       (673)        -     (3,179)
Offering of Series A preferred stock in subsidiary                          -          -         -          -         -          -
   Discount on beneficial conversion price to preferred shareholders        -          -         -          -         -          -
   Accretion and amortization of discount on beneficial conversion
    price to preferred shareholders                                         -          -         -          -         -          -
Exchange of subsidiary common stock for parent common stock                 -          -         -          -         -          -
Payment of stock subscription receivable                                    -          -         -          -         -          -
Repurchase of common shares                                                 -          -         -          -         -          -
Acquisition of Advancel, less expenses of $24                               -          -         -          -         -          -
Other                                                                       -          -         -          -         -          -
Net Loss                                                                    -          -         -          -         -          -
Currency translation adjustment                                             -          -         -          -         -          -
Restricted shares issued for compensation                                   -          -         -          -         -          -
Compensatory stock options and warrants                                     -          -         -          -         -          -
                                                                      -------- ----------  -------- ----------  -------- ----------
Balance at December 31, 1998                                                1   $    702         6   $  5,240        11  $   3,298

Sale of common stock, less expenses of $17                                  -          -         -          -         -          -
   Less common stock subject to resale                                      -          -         -          -         -          -
Conversion of preferred stock                                              (1)      (730)       (6)    (5,273)       (4)    (2,443)
Accretion and amortization of discount on beneficial conversion
   price to preferred shareholders                                          -         28         -         33         -      5,929
Discount on beneficial conversion price to preferred shareholders           -          -         -          -         -     (2,666)
Exchange of preferred stock for license fees                                -          -         -          -        (9)    (3,631)
Exchange of Series A preferred stock in subsidiary                          -          -         -          -         -          -
   Accretion and amortization of discount on beneficial conversion
    price to preferred shareholders                                         -          -         -          -         -          -
Sale of preferred stock                                                     -          -         -          -         2       (487)
Exchange of subsidiary common stock for parent common stock                 -          -         -          -         -          -
Shares issued in consideration for patent rights                            -          -         -          -         -          -
Shares issued for settlement obligations/prepayments                        -          -         -          -         -          -
   Less common stock subject to resale                                      -          -         -          -         -          -
Warrant issued in conjunction with convertible debt                         -          -         -          -         -          -
Beneficial conversion feature on convertible note                           -          -         -          -         -          -
Net loss                                                                    -          -         -          -         -          -
Currency translation adjustment                                             -          -         -          -         -          -
Shares issued upon exercise of warrants & options                           -          -         -          -         -          -
Compensatory stock options and warrants                                     -          -         -          -         -          -
                                                                      -------- ----------  -------- ----------  -------- ----------
Balance at December 31, 1999                                                -   $      -         -   $      -         -  $       -

Sale of common stock, less expenses of $49                                  -          -         -          -         -          -
   Less common stock subject to resale                                      -          -         -          -         -          -
Sale of preferred stock
Conversion of preferred stock                                               -          -         -          -         -          -
Accretion and amortization of discount on beneficial conversion
    price to preferred shareholders                                         -          -         -          -         -          -
Discount on beneficial conversion price to preferred shareholders
Exchange of Series A preferred stock in subsidiary                          -          -         -          -         -          -
   Accretion and amortization of discount on beneficial conversion
    price to preferred shareholders                                         -          -         -          -         -          -
Exchange of subsidiary common stock for parent common stock                 -          -         -          -         -          -
Shares issued in consideration for patent rights                            -          -         -          -         -          -
Sale of returnable shares of common stock net of commissions of $156        -          -         -          -         -          -
Shares issued for settlement obligations/prepayments                        -          -         -          -         -          -
   Less common stock subject to resale                                      -          -         -          -         -          -
Shares issued as deposit for acquisition                                    -          -         -          -         -          -
Shares issued for acquisition of subsidiaries                               -          -         -          -         -          -
Sale of subsidiary stock in excess of net book value                        -          -         -          -         -          -
Liability for make up of value on shares issued to ITC                      -          -         -          -         -          -
Warrant issued in conjunction with convertible debt                         -          -         -          -         -          -
Beneficial conversion feature on convertible note                           -          -         -          -         -          -
Net loss                                                                    -          -         -          -         -          -
Currency translation adjustment                                             -          -         -          -         -          -
Shares issued upon exercise of warrants & options                           -          -         -          -         -          -
Valuation of Available for Sale Marketable Securities                       -          -         -          -         -          -
Compensatory stock options and warrants                                     -          -         -          -         -          -
                                                                      -------- ----------  -------- ----------  -------- ----------
Balance at December 31, 2000                                                -   $      -         -   $      -         -  $       -
                                                                      ======== ==========  ======== ==========  ======== ==========
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (Note 1)
(in thousands)
<TABLE>
<CAPTION>


                                                                   Series F      Series G
                                                                 Convertible    Convertible
                                                              Preferred Stock Preferred Stock  Common Stock   Additional   Accumu-
                                                              --------------- --------------- ---------------   Paid-in     lated
                                                              Shares  Amount  Shares  Amount  Shares  Amount    Capital    Deficit
                                                              ------ -------- ------ -------- ------- -------- --------- ---------
<S>                                                            <C>   <C>       <C>      <C>      <C>     <C>      <C>       <C>
Balance at December 31, 1997                                      -  $     -      -  $     -  133,161 $ 1,332  $ 96,379  $  (93,521)

Shares issued in consideration for patent rights                  -        -      -        -    1,250      12       494           -
Return of shares for subscription receivable                      -        -      -        -        -       -         -           -
Conversion of Series C preferred stock, less expenses
  of $53                                                          -        -      -        -   20,665     207     9,889           -
Sale of preferred stock                                           -        -      -        -        -       -         -           -
Accretion and amortization of discount on beneficial
  conversion price to preferred shareholders                      -        -      -        -        -       -    (2,910)          -
Discount on beneficial conversion price to preferred
  shareholders                                                    -        -      -        -        -       -     3,852
Offering of Series A preferred stock in subsidiary                -        -      -        -        -       -      (862)          -
   Discount on beneficial conversion price to preferred
     shareholders                                                 -        -      -        -        -       -       673           -
   Accretion and amortization of discount on beneficial
     conversion price to preferred shareholders                   -        -      -        -        -       -      (775)          -
Exchange of subsidiary common stock for parent common stock       -        -      -        -    1,135      11       545           -
Payment of stock subscription receivable                          -        -      -        -        -       -         -           -
Repurchase of common shares                                       -        -      -        -        -       -         -           -
Acquisition of Advancel, less expenses of $24                     -        -      -        -        -       -      (151)          -
Other                                                             -        -      -        -        1       -       (48)          -
Net Loss                                                          -        -      -        -        -       -         -     (14,183)
Currency translation adjustment                                   -        -      -        -        -       -         -           -
Restricted shares issued for compensation                         -        -      -        -      125       1        96           -
Compensatory stock options and warrants                           -        -      -        -        -       -       301           -
                                                              ------ -------- ------ -------- ------- -------- --------- -----------
Balance at December 31, 1998                                      -  $     -      -  $     -  156,337 $ 1,563   107,483  $ (107,704)

Sale of common stock, less expenses of $17                        -        -      -        -    4,135      41       442           -
   Less common stock subject to resale                            -        -      -        -        -       -      (600)          -
Conversion of preferred stock                                    (3)  (1,652)     -        -   65,701     657     9,441           -
Accretion and amortization of discount on beneficial
    conversion price to preferred shareholders                    -    5,004      -        -        -       -   (10,994)          -
Discount on beneficial conversion price to preferred
  shareholders                                                    -   (4,884)     -        -        -       -     7,550
Exchange of preferred stock for license fees                     (1)    (574)                                     3,355
Exchange of Series A preferred stock in subsidiary                -        -      -        -   11,700     117     9,189           -
   Accretion and amortization of discount on beneficial
     conversion price to preferred shareholders                   -        -      -        -        -       -       (68)          -
Sale of preferred stock                                           9    4,896      -        -        -       -         -           -
Exchange of subsidiary common stock for parent common stock       -        -      -        -   17,738     178     2,454           -
Shares issued in consideration for patent rights                  -        -      -        -        -       -        88           -
Shares issued for settlement obligations/prepayments              -        -      -        -   13,155     132     2,371           -
   Less common stock subject to resale                            -        -      -        -        -       -      (537)          -
Warrant issued in conjunction with convertible debt               -        -      -        -        -       -       446           -
Beneficial conversion feature on convertible note                 -        -      -        -        -       -       204           -
Net loss                                                          -        -      -        -        -       -         -     (23,771)
Currency translation adjustment                                   -        -      -        -        -       -         -           -
Shares issued upon exercise of warrants & options                 -        -      -        -        5       -         -           -
Compensatory stock options and warrants                           -        -      -        -        -       -        41           -
                                                              ------ -------- ------ -------- ------- -------- --------- -----------
Balance at December 31, 1999                                      5  $ 2,790      -  $     -  268,771 $ 2,688   130,865  $ (131,475)

Sale of common stock, less expenses of $49                        -        -      -        -    2,467      25       426           -
   Less common stock subject to resale                            -        -      -        -                        600           -
Sale of preferred stock                                           -       (5)     2    1,698
Conversion of preferred stock                                    (5)  (2,865)    (1)  (1,159)  28,376     284     3,740           -
Accretion and amortization of discount on beneficial
  conversion price to preferred shareholders                      -       80      -      412        -       -      (492)          -
Discount on beneficial conversion price to preferred
  shareholders                                                    -        -      -     (377)       -       -       377           -
Exchange of Series A preferred stock in subsidiary                -        -      -        -      635       6       311           -
   Accretion and amortization of discount on beneficial
     conversion price to preferred shareholders                   -        -      -        -        -       -         -           -
Exchange of subsidiary common stock for parent common stock       -        -      -        -        -       -     3,124           -
Shares issued in consideration for patent rights                  -        -      -        -        -       -         -           -
Sale of returnable shares of common stock net of
  commissions of $156                                             -        -      -        -        -       -     2,275           -
Shares issued for settlement obligations/prepayments              -        -      -        -    1,528      15     2,068           -
   Less common stock subject to resale                            -        -      -        -
Shares issued as deposit for acquisition                          -        -      -        -      245       2       123           -
Shares issued for acquisition of subsidiaries                     -        -      -        -   30,843     308     9,460           -
Sale of subsidiary stock in excess of net book value              -        -      -        -        -       -       950           -
Liability for make up of value on shares issued to ITC            -        -      -        -        -       -      (812)          -
Warrant issued in conjunction with convertible debt               -        -      -        -        -       -         -           -
Beneficial conversion feature on convertible note                 -        -      -        -        -       -     1,000           -
Net loss                                                          -        -      -        -        -       -         -     (10,324)
Currency translation adjustment                                   -        -      -        -        -       -                     -
Shares issued upon exercise of warrants & options                 -        -      -        -    1,285      13       735           -
Valuation of Available for Sale Marketable Securities             -        -      -        -        -       -         -           -
Compensatory stock options and warrants                           -        -      -        -        -       -        88           -
                                                              ------ -------- ------ -------- ------- -------- --------- -----------
Balance at December 31, 2000                                      -  $     -      1  $   574  334,150 $ 3,341  $154,838  $ (141,799)
                                                              ====== ======== ====== ======== ======= ======== ========= ===========
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (Note 1)
(in thousands)
<TABLE>
<CAPTION>
                                                                                    Unearned
                                                                                    Portion of  Expenses
                                                           Accumulated     Stock      Compen-  to be Paid
                                                               Other       Subscrip-   satory     with    Treasury Stock
                                                           Comprehensive    tion      Option/   Common    ----------------
                                                           Income/(Loss)  Receivable  Warrant     Stock    Shares   Amount   Total
                                                          -------------- ----------- ---------- --------- ------- -------- ---------
<S>                                                        <C>           <C>         <C>        <C>        <C>       <C>   <C>
Balance at December 31, 1997                               $    119       $   (390)   $      -  $      -       -  $     -  $ 14,377

Shares issued in consideration for patent rights                  -              -           -         -       -        -       506
Return of shares for subscription receivable                      -             64           -         -     158      (64)        -
Conversion of Series C preferred stock, less
  expenses of $53                                                 -              -           -         -       -        -       (53)
Sale of preferred stock                                           -         (4,000)          -         -   2,100     (735)    5,138
Accretion and amortization of discount on beneficial
  conversion  price to preferred shareholders                     -              -           -         -       -        -         -
Discount on beneficial conversion price to preferred
  shareholders                                                    -              -           -         -       -        -
Offering of Series A preferred stock in subsidiary                -              -           -         -       -        -      (862)
   Discount on beneficial conversion price to preferred
     shareholders                                                 -              -           -         -       -        -       673
   Accretion and amortization of discount on beneficial
    conversion price to preferred shareholders                    -              -           -         -       -               (775)
Exchange of subsidiary common stock for parent
  common stock                                                    -              -           -         -       -        -       556
Payment of stock subscription receivable                          -            326           -         -       -        -       326
Repurchase of common shares                                       -              -           -         -   5,607   (3,292)   (3,292)
Acquisition of Advancel, less expenses of $24                     -              -         (94)        -  (1,787)   1,128       883
Other                                                             -              -           -         -       -        -       (48)
Net Loss                                                          -              -           -         -       -        -   (14,183)
Currency translation adjustment                                 (74)             -           -         -       -        -       (74)
Restricted shares issued for compensation                         -              -           -         -       -        -        97
Compensatory stock options and warrants                           -              -        (144)        -       -        -       157
                                                          -------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 1998                                     45       $ (4,000)   $   (238) $      -   6,078  $(2,963) $  3,426

Sale of common stock, less expenses of $17                        -              -           -         -       -        -       483
   Less common stock subject to resale                            -              -           -         -       -        -      (600)
Conversion of preferred stock                                     -              -           -         -       -        -         -
Accretion and amortization of discount on beneficial
    conversion price to preferred shareholders                    -              -           -         -       -        -         -
Discount on beneficial conversion price to
  preferred shareholders                                          -              -           -         -       -        -         -
Exchange of preferred stock for license fees                      -              -           -         -       -        -      (850)
Exchange of Series A preferred stock in subsidiary                -              -           -         -       -        -     9,306
   Accretion and amortization of discount on beneficial
    conversion  price to preferred shareholders                   -              -           -         -       -        -       (68)
Sale of preferred stock                                           -          3,000           -         -       -        -     7,409
Exchange of subsidiary common stock for parent
  common stock                                                    -              -           -         -       -        -     2,632
Shares issued in consideration for patent rights                  -              -           -         -       -        -        88
Shares issued for settlement obligations/prepayments              -              -           -    (2,503)      -        -         -
   Less common stock subject to resale                            -              -           -     1,221       -        -       684
Warrant issued in conjunction with convertible debt               -              -           -         -       -        -       446
Beneficial conversion feature on convertible note                 -              -           -         -       -        -       204
Net loss                                                          -              -           -         -       -        -   (23,771)
Currency translation adjustment                                  20              -           -         -       -        -        20
Shares issued upon exercise of warrants & options                 -              -           -         -       -        -         -
Compensatory stock options and warrants                           -              -         183         -       -        -       224
                                                          -------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 1999                                     65       $ (1,000)        (55)  $(1,282)  6,078  $(2,963) $   (367)

Sale of common stock, less expenses of $49                        -              -           -         -       -        -       451
   Less common stock subject to resale                            -              -           -         -       -        -       600
Sale of preferred stock                                           -          1,000           -         -       -        -     2,693
Conversion of preferred stock                                     -              -           -         -       -        -         -
Accretion and amortization of discount on beneficial
    conversion price to preferred shareholders                    -              -           -         -       -        -         -
Discount on beneficial conversion price to
  preferred shareholders                                          -              -           -         -       -        -         -
Exchange of Series A preferred stock in subsidiary                -              -           -         -       -        -       317
   Accretion and amortization of discount on beneficial
     conversion  price to preferred shareholders                  -              -           -         -       -        -         -
Exchange of subsidiary common stock for parent
  common stock                                                    -              -           -         -       -        -     3,124
Shares issued in consideration for patent rights                  -              -           -         -       -        -         -
Sale of returnable shares of common stock net of
  commissions of $156                                             -              -           -         -       -        -     2,275
Shares issued for settlement obligations/prepayments              -              -           -      (547)      -        -     1,536
   Less common stock subject to resale                            -              -           -     1,267       -        -     1,267
Shares issued as deposit for acquisition                          -              -           -         -       -        -       125
Shares issued for acquisition of subsidiaries                     -           (213)          -         -       -        -     9,555
Sale of subsidiary stock in excess of net book value              -              -           -         -       -        -       950
Liability for make up of value on shares issued to ITC                                                 -       -        -      (812)
Warrant issued in conjunction with convertible debt               -              -           -         -       -        -         -
Beneficial conversion feature on convertible note                 -              -           -         -       -        -     1,000
Net loss                                                          -              -           -         -       -        -   (10,324)
Currency translation adjustment                                  (7)             -           -         -       -        -        (7)
Shares issued upon exercise of warrants & options                 -              -           -         -       -        -       748
Valuation of Available for Sale Marketable Securities        (3,379)             -           -         -       -        -    (3,379)
Compensatory stock options and warrants                           -              -          18         -       -        -       106
                                                          -------------- ----------- ---------- --------- ------- -------- ---------
Balance at December 31, 2000                               $ (3,321)      $   (213)  $     (37) $   (562) $6,078  $(2,963) $  9,858
                                                          ============== =========== ========== ========= ======= ======== =========
The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>
<PAGE>
NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                (in thousands of dollars)
                                                                                             For the Years Ended December 31,
                                                                                      ---------------------------------------------
                                                                                           1998           1999             2000
                                                                                      -------------  -------------   --------------
Cash flows from operating activities:
<S>                                                                                    <C>            <C>               <C>
Net loss                                                                               $ (14,183)     $  (23,771)       $ (10,324)
Adjustments to reconcile net loss to net cash used in operating activities:
 Depreciation and amortization                                                             1,030           1,970            2,014
 Common stock options and warrants issued as consideration for:
    Compensation                                                                             301             224              106
    Operating expenses                                                                         -             401              497
 Costs incurred related to convertible debt                                                    -             102
 Provision for tooling costs                                                                 151             180                -
 Provision for inventory                                                                       -             199              100
 Provision for doubtful accounts                                                             232              77              803
 (Gain) loss on disposition of fixed assets                                                   34               -              (12)
 Write down of investment in unconsolidated affiliate (Note 7)                                 -           2,385                -
 Preferred stock received for license fees                                                                  (850)               -
  Impairment of goodwill (Note 12)                                                             -           3,125            3,073
 Reserve for promissory note and pre-acquisition costs                                         -           1,788
 Beneficial conversion feature on convertible note (Note 8)                                    -             204            1,000
  Common stock received for license fee                                                        -               -           (6,000)
 Common stock and warrants to be received for license fee                                      -               -             (384)
 Changes in operating assets and liabilities:
              (Increase) decrease in accounts receivable                                    (193)            209           (4,624)
              (Increase) decrease in license fees receivable                                   8             192                -
              (Increase) decrease in inventories, net                                     (1,986)            858              636
              Increase in other assets                                                       (12)         (1,168)          (2,072)
              Increase (decrease) in accounts payable and accrued expenses                 1,816           2,851             (886)
              Increase in other liabilities                                                   48             427            5,562
                                                                                      -------------  -------------   --------------
 Net cash used in operating activities                                                 $ (12,754)     $  (10,597)       $ (10,511)


Cash flows from investing activities:
Capital expenditures                                                                   $    (548)     $      (51)       $    (322)
 Decrease in restricted cash                                                                   -            (667)             667
Acquisition of patent rights                                                                (822)              -                -
Acquisition of Advancel (net of $100 cash acquired)                                           40               -                -
Sale of capital equipment                                                                     46               -               26
Cash and cash equivalents received from acquisitions                                           -               -               88
Acquisition and advances, including $135 of costs                                         (5,134)              -                -
                                                                                      -------------  -------------   --------------
 Net cash provided by (used in) investing activities                                   $  (6,418)     $     (718)       $     459
                                                                                      -------------  -------------   --------------

Cash flows from financing activities:
Proceeds from:
 Convertible notes, net (Note8)                                                        $       -      $    4,000        $     989
 Advances payable                                                                              -               -            1,955
 Sale of preferred stock, net (Note 12)                                                    5,085           7,409            1,963
 Sale of subsidiary Series A preferred stock (net)                                         5,138               -            1,500
  Sale of subsidiary common stock                                                            (21)              -            1,000
 Sale of common stock, net                                                                   (51)            483              500
  Sale of returnable shares, net (Note 11)                                                     -               -            2,275
  Collection of subscription receivable                                                      326               -              995
 Purchase of treasury stock                                                               (3,292)              -                -
 Exercise of stock options, net                                                                -               -              748
Repayment of Promissory notes                                                                  -               -           (1,825)
                                                                                      -------------  -------------   --------------
 Net cash provided by financing activities                                             $   7,185      $   11,892        $  10,100
                                                                                      -------------  -------------   --------------
Effect of exchange rate changes on cash                                                $     (88)     $       20        $      (7)
                                                                                      -------------  -------------   --------------

Net increase (decrease) in cash and cash equivalents                                   $ (12,075)     $      597        $      41
Cash and cash equivalents - beginning of year                                             12,604             529            1,126
                                                                                      -------------  -------------   --------------
Cash and cash equivalents - end of year                                                $     529      $    1,126        $   1,167
                                                                                      =============  =============   ==============

Supplemental disclosures of cash flow information:
Cash paid during the year for:
   Interest                                                                            $       9      $        4        $       3
                                                                                      =============  =============   ==============

Supplemental disclosures of non-cash investing and financing activities:
  Unrealized holding loss on available-for-sale securities                             $       -      $        -        $  (3,379)
                                                                                      =============  =============   ==============
  Issuances of common stock for acquisition of Midcore Software, Inc                   $       -      $        -        $   4,817
                                                                                      =============  =============   ==============
  Issuances of common stock for acquisition of Theater Radio Network                   $       -      $        -        $   2,500
                                                                                      =============  =============   ==============

  Issuance of common stock in exchange for prepaid research and engineering expenses   $       -      $        -        $   3,000
                                                                                      =============  =============   ==============
  Issuance of common stock to suppliers and consultants                                $       -      $    2,000        $     846
                                                                                      =============  =============   ==============
  Receipt of Pro Tech shaers as payment for license                                    $       -      $        -        $   2,430
                                                                                      =============  =============   ==============

The  accompanying  notes  are an  integral  part of the  condensed  consolidated financial statements.
</TABLE>
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.   Background:

     NCT Group, Inc. ("the company") is a technology  developer with a portfolio
of proprietary  algorithms and a wide variety of product offerings for consumer,
commercial  and  industrial   applications.   The  company  specializes  in  the
utilization of sound and signal waves to reduce noise,  improve  signal-to-noise
ratio and enhance  sound  quality.  The company  develops its  technologies  for
integration into a wide range of products for applications serving major markets
in  the  transportation,   manufacturing,   commercial,  consumer  products  and
communications  industries. The company designs some of its applications so that
other firms can integrate  them with their own inventions  and  technologies  to
develop  such  technology  into  commercial   applications,   to  integrate  the
applications  into existing  products and to distribute  such  technologies  and
products into various industrial,  commercial and consumer markets.  The company
also markets its  technologies  through  licensing to third parties for fees and
royalties.  Commercial  application of our technologies is comprised of a number
of product  offerings,  including  NoiseBuster(R)  consumer  and  communications
active noise reduction, also known as ANR headsets;  ProActive(R) ANR industrial
earmuffs and headsets;  Gekko(TM) flat speakers; and ClearSpeech(R) microphones,
speakers and other products. The company,  through it's wholly-owned  subsidiary
DistributedMedia   Corporation  ("DMC"),  a  microbroadcasting   media  company,
delivers licensed  CD-quality music as well as on-air and billboard  advertising
to  out-of-home  commercial  and  professional  venues via a digital  network of
place-based  microbroadcasting  stations,  called Sight & Sound(TM). The Sight &
Sound(TM)  system consists of a central  control network that  communicates to a
digital  broadcast  station,  which plays music  selections  and  advertisements
through flat panel speakers. The speaker grilles double as visual billboards.

     The company has  incurred  substantial  losses  from  operations  since its
inception,  which  have been  recurring  and  amounted  to $141.8  million  on a
cumulative basis through December 31, 2000. These losses, which include the cost
for development of products for commercial use, have been funded  primarily from
(1) the sale of common  stock,  including the exercise of warrants or options to
purchase common stock,  (2) the sale of preferred stock  convertible into common
stock,  (3) technology  licensing  fees, (4) royalties,  (5) product sales,  (6)
engineering and development funds received from strategic partners and customers
and (7) advertising/media revenue.

     Cash and cash equivalents amounted to $1.2 million at December 31, 2000. In
addition,  the company had $9.7 million negative working capital at December 31,
2000.  Management believes that currently available funds will not be sufficient
to sustain the company at present  levels for the next 12 months.  The company's
ability to continue as a going  concern is  dependent  on funding  from  several
sources,  including  available  cash,  cash from the  exercise of  warrants  and
options,  and  cash  inflows  generated  from  the  company's  revenue  sources:
technology  licensing fees and royalties,  product sales,  and  engineering  and
development  services.  The level of  realization  of funding from the company's
revenue sources is presently uncertain. In the event that anticipated technology
licensing fees and royalties,  product sales,  and  engineering  and development
services do not generate sufficient cash, management believes additional working
capital financing must be obtained.  There is no assurance any such financing is
or would become available.

     In the event  that  funding  from  internal  sources is  insufficient,  the
company would have to  substantially  cut back its level of spending which could
substantially curtail the company's  operations.  These reductions could have an
adverse  effect on the  company's  relations  with its  strategic  partners  and
customers. Uncertainty exists about the adequacy of current funds to support the
company's  activities  until positive cash flow from operations can be achieved,
and uncertainty exists about the availability of financing from other sources to
fund any cash deficiencies. (see Note 13).

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the company will continue as a going concern,  which  contemplates
continuity of operations,  realization of assets and satisfaction of liabilities
in the ordinary  course of business.  The  propriety of using the going  concern
basis  is  dependent  upon,  among  other  things,  the  achievement  of  future
profitable   operations  and  the  ability  to  generate  sufficient  cash  from
operations,  public and private financings and other funding sources to meet its
obligations.  The  uncertainties  described in the  preceding  paragraphs  raise
substantial  doubt at December 31, 2000 about the company's  ability to continue
as a going concern.  The accompanying  consolidated  financial statements do not
include any adjustments relating to the recoverability and classification of the
carrying  amount  of  recorded  assets  or  the  amount  and  classification  of
liabilities  that might  result  should the  company be unable to  continue as a
going concern.

2.  Acquisitions:

     On August 18, 2000, the company  acquired 100% of the  outstanding  capital
stock of Theater Radio Network,  Inc. ("TRN"), a provider of entertainment audio
programming in multiplex cinemas  nationwide,  through a merger with DMC Cinema,
Inc.  ("Cinema"),  a newly formed  subsidiary  of the  company's  wholly-  owned
subsidiary,  DMC. The  acquisition  included the company's  initial  issuance of
7,405,214  restricted  shares of its common  stock based upon a trailing  market
price (as defined in the stock purchase  agreement) of $0.3376 per share,  for a
total  value  of  $2.5  million  and a  7.5%  equity  interest  in  Cinema.  The
acquisition was accounted for using the purchase method and resulted in goodwill
of approximately $2.8 million.  Amounts allocated to goodwill are amortized over
20 years on a  straight-line  basis.  In February  2001, due to a decline in the
trailing  market price prior to the effective  registration  of shares of common
stock, an additional  2,455,248 shares were issued for the acquisition  pursuant
to a fill-up  provision.  Additional  NCT shares may be due June 2002 based upon
the trailing market price at that time.

     On August 29, 2000, the company  acquired 100% of the  outstanding  capital
stock of Midcore  Software,  Inc. ("MSI"),  provider of Internet  infrastructure
software for business  networks,  through a merger with Midcore  Software,  Inc.
("Midcore") (formerly known as NCT Midcore, Inc.), a newly formed,  wholly-owned
subsidiary of the company. In connection therewith, the company initially issued
13,913,355  restricted  shares of its common stock based upon a 10-day  weighted
average closing bid price of $0.34626 per share,  for an aggregate value of $4.8
million.  In addition,  the purchase  consideration  includes $1.7 million to be
paid by the  company  in cash  based upon  earned  royalties,  as defined in the
merger agreement,  over 36 months. If after 36 months, the total royalty has not
been earned or if earned, not paid, then the parties shall be entitled to elect,
at the recipients  discretion,  upon written notice to the company either to (i)
continue  to receive  payment of the  royalties  in  accordance  with the merger
agreement,  or (ii)  receive  the unpaid  balance  in the form of the  company's
common stock, calculated as defined in the merger agreement. The acquisition was
accounted  for  using  the  purchase  method,  and  the  resulting  goodwill  of
approximately $6.4 million.  Amounts allocated to goodwill are amortized over 20
years on a straight-line basis. In February 2001 due to a decline in the closing
bid price of the company's  common stock prior to the effective  registration of
the stock,  an  additional  2,863,891  shares were issued  pursuant to a fill-up
provision.

     On September 12, 2000, the company's wholly-owned  subsidiary,  NCT Hearing
Products,  Inc.  ("NCT  Hearing")  granted  an  exclusive  license  to Pro  Tech
Communications, Inc. ("Pro Tech") for rights to certain NCT technologies for use
in light weight cellular,  multimedia and telephony  headsets.  In consideration
for this license,  NCT Hearing received 23.7 million shares of Pro Tech's common
stock   representing   approximately   83%  of  the  common  shares  issued  and
outstanding.  The company  recognized  approximately $2.5 million of license fee
revenue with respect to this transaction. Such amount represents the license fee
revenue  applicable  to  the  minority  interest  shareholders.  As a  condition
precedent to the  transaction,  NCT Hearing had arranged  $1.5 million in equity
financing for Pro Tech in the form of convertible  preferred  stock of Pro Tech.
Such convertible preferred stock is convertible into shares of Pro Tech's common
stock or  exchangeable  for  shares of NCT's  common  stock,  at the  investors'
election. The acquisition was accounted for using the purchase method, resulting
in  negative  goodwill of  approximately  $0.1  million.  Amounts  allocated  to
goodwill are amortized over 20 years on a straight-line basis.

     The results of  operations  of the  acquired  entities  are included in the
company's  consolidated  results  of  operations  from the  respective  dates of
acquisition.  The pro forma  results  listed  below are  unaudited  and  reflect
purchase  accounting  adjustments  assuming  the  acquisitions  occurred  at the
beginning  of each fiscal  year  presented.  For years ended 1999 and 2000,  pro
forma adjustments  include additional  amortization  expense of $1.5 million and
$0.9   million,   respectively.   The  pro  forma   results  are  presented  for
informational  purposes  only and are not  necessarily  indicative of the future
results of operations of the company or the results of operations of the company
had the  acquisitions  occurred  on  January  1,  1999 and  January  1, 2000 (in
thousands, except per share data):

                                               Year Ended     Year Ended
                                               December 31,  December 31,
                                                   1999         2000
                                                     (UNAUDITED)
                                              ------------  ------------
Net revenues                                   $  10,386    $  15,834
Net loss                                       $ (25,776)   $ (11,431)
Net loss attributable to common shareholders   $ (40,841)   $ (16,262)
Net loss per common share--basic               $   (0.19)   $   (0.05)
Net loss per common share--diluted             $   (0.19)   $   (0.05)

     A summary of the assets and liabilities  acquired, at estimated fair market
value was as follows:

     Assets acquired and liabilities assumed:

            Current assets                                  $   1,484
            Property, plant and equipment                         272
            Goodwill                                            9,100
            Other assets                                        2,750
            Current liabilities                                (2,726)
            Long-term liabilities                              (1,350)
                                                            -----------
            Fair market value of acquired entities          $   9,530
                                                            ===========


3.   Summary of Significant Accounting Policies:

Basis of Presentation:

     The consolidated  financial  statements include the accounts of the company
and  its  majority-owned  subsidiaries  after  elimination  of  all  significant
inter-company transactions and accounts. Investments in less than majority-owned
affiliates  are  principally  accounted for under the equity  method.  All other
investments in affiliates are carried at cost.

Estimates:

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect reported  amounts in the financial  statements.  Actual
results could differ from those estimates.

Reclassifications:

     Certain amounts in prior period financial statements have been reclassified
to conform to the current year's presentation.

Income Taxes:

     Deferred  income  taxes  are  provided  for the  tax  effect  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.

Cash and cash equivalents:

     Cash and cash  equivalents  include  all  highly  liquid  investments  with
original  maturities  of three months or less.  Restricted  cash consists of the
balance of an escrow account  established in conjunction  with the issuance of a
convertible promissory note (see Note 10).

Deferred Charges:

     Deferred  charges,  included  on the  consolidated  balance  sheet in other
assets,  represent  expenses  related  to the  installation  of DBSS  systems at
customer   locations.   Such  installation   expenses  consist  of  labor  costs
attributable to contractor installation and outside management fees. The company
amortizes  such deferred  charges over the  five-year  life of the customer site
location  agreement.  In the event a customer site location is de-installed  the
unamortized deferred charges relating to that site are then expensed in full. In
2000, the company amortized  approximately  $0.1 million of deferred charges and
wrote off  unamortized  charges  relating to de-installs of  approximately  $0.2
million.

Revenue Recognition:

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting  Bulletin No. 101, Revenue  Recognition in Financial  Statements (SAB
101), which we adopted effective January 1, 2000. SAB 101 addresses, among other
items,  when revenue relating to certain license fees should be recognized.  The
company  performs a detailed  analysis of its license fee  revenues  and records
deferred revenues and associated  expenses  accordingly.  These deferred amounts
are  recognized  over  the  life  of each  specific  license.

     Revenue,  other than  license fee revenue  accounted  for under SAB 101, is
recognized  when  earned.  Revenue  from product  sales is  recognized  when the
product is  shipped.  Revenue  from  engineering  and  development  services  is
generally  recognized  and billed as the services are  performed.  However,  for
certain engineering and development  services  contracts,  revenue is recognized
using the percentage of completion method after 10% of the total estimated costs
have been  incurred.  Under the  percentage of completion  method,  revenues and
gross profit are recognized as work is performed  based on the  relationship  of
actual costs incurred to total estimated costs at completion.  Estimated  losses
are recorded  when  identified.  Revenues  recognized  under the  percentage  of
completion  method  amounted to $0.1,  $1.3 million and zero for the years ended
December 31, 1998, 1999 and 2000, respectively.

     For  technology  licensing  fees  paid by  joint  venturers,  co-venturers,
strategic  partners  or other  licensees  which are  nonrefundable,  revenue  is
recognized  upon  execution  of the  license  agreement  unless it is subject to
completion of any performance criteria specified within the agreement,  in which
case it is  deferred  until such  performance  criteria  is met.  Royalties  are
frequently  required  pursuant  to license  agreements  or may be the subject of
separately  executed  royalty  agreements.  Revenue from royalties is recognized
ratably over the royalty  period based upon  periodic  reports  submitted by the
royalty obligor or based on minimum royalty requirements.

Inventories:

     Inventories  are stated at the lower of cost or market.  Cost is determined
on an average cost basis. The company assesses the  realizability of inventories
by  periodically  conducting a complete  physical  inventory  and  reviewing the
movement of inventory on an  item-by-item  basis to determine the value of items
which  are slow  moving  and  obsolete.  The  potential  for  near-term  product
engineering changes and/or technological  obsolescence and current realizability
are considered in determining  the adequacy of inventory  reserves.  At December
31, 1999 and 2000, the company's  inventory  reserves were $0.5 million and $0.1
million, respectively.

Property and Equipment:

     Property and  equipment are stated at cost.  Depreciation  is computed over
the estimated  useful lives of the  depreciable  assets using the  straight-line
method.  Leasehold  improvements  are  amortized  over the shorter of the useful
lives or the related lease term.

Software Costs:

     It is our policy to capitalize  certain costs  incurred in connection  with
developing or obtaining  internal use software.  Capitalized  software costs are
included in property and  equipment  and are being  amortized  over three years.
During the year ended December 31, 2000, $0.1 million was capitalized.

Goodwill, Patent Rights and Other Intangible Assets:

     The  excess of the  consideration  paid over the fair  value of net  assets
acquired in business  combinations  is  recorded as  goodwill.  Goodwill is also
recorded by the company on the acquisition of minority interests of a subsidiary
of the company for shares of the company's  common stock.  Goodwill is amortized
using the  straight-line  method,  over periods  generally  ranging from five to
twenty  years.  Goodwill  amortization  expense was $0.1,  $1.0 million and $1.0
million for 1998, 1999 and 2000, respectively. Accumulated goodwill amortization
was $4.2 million and $5.3 million at December 31, 1999 and 2000, respectively.

     Patent  rights  and  other  intangible  assets  are  stated at cost and are
amortized  using the  straight-line  method,  over the  remaining  useful lives,
ranging from one to fifteen years.  Amortization expense was $0.5 million,  $0.6
million and $0.7  million  for 1998,  1999 and 2000,  respectively.  Accumulated
amortization  was $2.9  million and $4.2  million at December 31, 1999 and 2000,
respectively.

     At  each  balance  sheet  date,   the  Company   evaluates  the  period  of
amortization of intangible  assets. The factors used in evaluating the period of
amortization  include:  (i)  current  operating  results,  (ii)  project  future
operating  results,  and  (iii) any  other  material  factors  that  effect  the
continuity of the business.

     The company  recognized an impairment loss from goodwill of $3.1 million in
each of 1999 and 2000. No other events have been  identified that would indicate
an  impairment  of the  value of  material  intangible  assets  recorded  in the
accompanying consolidated financial statements.

Advertising:

     Advertising costs are expensed as incurred.  Advertising  expense for years
ended December 31, 1998,  1999 and 2000 was $1.7 million,  $1.2 million and $0.3
million, respectively.

Foreign currency translation:

     Local currencies are generally  considered the functional  currency for our
share of foreign investments. The company translates share of foreign assets and
liabilities at exchange rates in effect at the balance sheet dates. Revenues and
expenses are translated using average rates for the year. The resulting  foreign
currency translation adjustments are included in other accumulated comprehensive
income/(loss) as a component of stockholders'  equity. The currency  transaction
gains and losses are included in the  consolidated  statements of operations and
were not material for any periods presented.

Loss per common share:

     The company  reports loss per common share in accordance  with Statement of
Financial   Accounting   Standards  ("SFAS")  No.  128,  "Earnings  Per  Share."
Generally,  the per share  effects of potential  common shares such as warrants,
options,  convertible  debt  and  convertible  preferred  stock  have  not  been
included, as the effect would be antidilutive (see Notes 12, 13 and 14).

     However,  when  preferred  stock will be  convertible  to common stock at a
conversion  rate that is at a discount from the common stock market price at the
time of issuance,  the discounted  amount is an assured  incremental  yield, the
"preferred  stock dividend  requirement,"  to the preferred  shareholders and is
accounted for as an embedded  dividend to preferred  shareholders.  In addition,
when warrants are issued,  the fair value of warrants are determined by applying
the  Black-Scholes  valuation model using the factors in accordance with FAS No.
128. In accordance  with EITF 96-13,  as codified in EITF 00-19,  these warrants
are considered  permanent equity  instruments  since they may only be physically
settled with the issuance of the company's stock. The fair value is deemed to be
a "preferred stock beneficial  conversion"  feature and is in essence  accounted
for as a component of additional paid-in capital.

     The company has reflected such beneficial  conversion feature and preferred
stock dividend requirement as a preferred stock dividend and as an adjustment to
the net loss attributable to common stockholders.

Concentrations of Credit Risk:

     Financial   instruments,   which   potentially   subject   the  company  to
concentration  of credit risk,  consist of cash and cash  equivalents  and trade
receivables.  The company  maintains cash and cash  equivalents in accounts with
various financial  institutions in amounts,  which at times, may be in excess of
the FDIC insurance  limit.  The company has not  experienced  any losses on such
accounts and does not believe it is exposed to any significant risk with respect
to cash and cash equivalents.

     The company sells its products and services to  distributors  and end users
in  various   industries   worldwide.   The  company   regularly   assesses  the
realizability of accounts  receivable and takes into  consideration the value of
past due receivables and the collectibility of such receivables, based on credit
worthiness. The company does not require collateral or other security to support
customer receivables.

Major Customers:

     The company  derived a  significant  protion of its revenues from two major
customers during 1999 and three major customers during 2000. For the year ending
1999 and 2000, the company recorded  revenue of  approximately  $3.0 million and
$8.0 million,  respectively  from these  customers.  As of December 31, 1999 and
2000,  the  company  had  approximately  $32,000  and $2.0  million of  accounts
receivable resulting from revenue derived from these customers.

Fair Value of Financial Instruments:

     The company's  financial  instruments consist of cash and cash equivalents,
short-term  investments,   accounts  receivable,  other  receivables,   accounts
payable, accrued expenses, notes payable and other liabilities.  At December 31,
1999 and 2000, the fair value of these instruments  approximated  their carrying
value. With respect to notes payable, because interest rates adjust with changes
in the prime rate,  the fair value of the notes payable is equal to the carrying
amount.

Stock-Based Compensation:

     The company has adopted the  disclosure  only  provisions  of SFAS No. 123,
Accounting  for  Stock-Based  Compensation,  and  continues to apply  Accounting
Principles  Board Opinion No. 25 and related  interpretations  in accounting for
its stock-based compensation plans. (See Note 14).

Comprehensive Loss:

     The company  reports  comprehensive  loss in accordance  with SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"). The provisions for SFAS 130 require
the  company to report the  changes in  stockholders'  equity  from all  sources
during  the  period  other  than  those   resulting  from   investments  by  and
distributions  to  shareholders.  Accordingly,  the  consolidated  statements of
comprehensive loss are presented,  while accumulated other comprehensive loss is
included on the balance  sheet as a component of  stockholders'  equity.  Due to
availability of net operating losses, there is no tax effect associated with any
component of other  comprehensive  loss.  Comprehensive  loss includes gains and
losses on foreign  currency  translation  adjustments  and unrealized  losses on
marketable securities.

4.  Recent Accounting Pronouncements:

     In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138  ("SFAS  138"),  Accounting  for  Certain  Derivative  Instruments  - an
Amendment of FAS 133. SFAS 138  establishes  accounting and reporting  standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives). SFAS 138 is effective
for all fiscal  quarters  of all fiscal  years  beginning  after June 15,  2000.
Management  believes the adoption of SFAS 138 will not have a material impact on
the company's  consolidated  financial  statements as the company currently does
not use derivative instruments.

     In March  2000,  the FASB  issued  Interpretation  No. 44,  Accounting  for
Certain Transactions  Involving Stock Compensation - an Interpretation of APB 25
("FIN 44").  This  interpretation  clarifies  certain  issues  relating to stock
compensation.  FIN 44 is effective July 1, 2000; however, certain conclusions in
this  interpretation  cover specific events that occurred prior to July 1, 2000.
FIN  44  did  not  have  an  impact  on  the  company's  consolidated  financial
statements.

     In September  2000, the FASB issued SFAS 140,  Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of SFAS 125. This statement replaced SFAS 125 and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. SFAS 140 is effective for recognition and disclosures of certain
securitization  transactions for fiscal years ending after December 15, 2000. As
of December 31, 2000, the company had no such transactions. The company does not
expect  FAS 140 will have a  significant  impact on the  company's  consolidated
financial statements.


5.   Joint Ventures and Other Strategic Alliances:

     The company and certain of its  majority-owned  subsidiaries  have  entered
into  agreements  to  establish  joint  ventures and other  strategic  alliances
related to the design, development,  manufacture,  marketing and distribution of
its technologies  and products  containing such  technologies.  These agreements
generally  provide that the company license  technology and contribute a nominal
amount of initial capital and that the other parties provide  substantially  all
of the funding to support the venture or alliance.  This support  funding  often
includes amounts paid or services  rendered for engineering and development.  In
exchange for this funding,  the other parties  generally receive a preference in
the  distribution  of cash and/or  profits from the joint  ventures or royalties
from these  alliances until such time that the support funding (plus an interest
factor in some  instances)  is  recovered.  At December 31, 2000,  there were no
preferred distributions due to joint venture partners from future profits of the
joint ventures.

     Certain of the joint ventures become  suppliers to the company and to other
of the joint ventures and transfer  products to the related  entities based upon
pricing  formulas  established  in the  agreements.  Such formulas are generally
based upon fully burdened cost, as defined in the agreements.

     Technology  licensing fees and engineering and development services paid by
joint  ventures  to the  company are  recorded  as revenue  consistent  with the
company's  revenue  recognition  policy.  Total revenues recorded by the company
relating  to  the  joint  ventures  and  alliances,  or  their  principals,  for
technology  licensing fees and royalties,  engineering and development  services
and product sales were as follows (in thousands):


                                                Years ended December 31,
                                          --------------------------------------
        Joint Venture/Alliance               1998         1999         2000
----------------------------------------  ----------   ----------  -------------
Walker Noise Cancellation Technologies     $     -      $     -     $       -
Ultra Electronics, Ltd.                         68           40            49
Siemens Medical Systems, Inc.                  102           14             -
AB Electrolux                                    -            -             -
Oki Electric Industry Co., Ltd.                  8           80           269
VLSI Technology, Inc.                          285            -
                                                                            -
STMicroelectronics S.A. &
  STMicroelectronics S.r.l                     246        2,156             -
Lernout & Hauspie Speech Products N.V.           -          800             -
Infinite Technology Corporation                  -            -         3,550
New Transducers Ltd.                             -          500             -
                                         ----------   ----------  ------=-------
                 Total                    $    709     $  3,590    $    3,868
                                         ==========   ==========  ==============


     Outlined  below is a summary  of the  nature  and terms of  selected  joint
ventures and other strategic alliances:

     Ultra Electronics Ltd. ("Ultra")  (formerly Dowty Maritime Limited) and the
company entered into a teaming  agreement in May 1993 and  subsequently  amended
such agreement and entered into a licensing and royalty agreement  commencing in
1998.  Such  teaming  agreement  calls  for  the  collaboration  on the  design,
manufacture  and  installation  of  products  to reduce  noise in the  cabins of
various  types of  aircraft.  In  accordance  with the  agreement,  the  company
provided  informational  and  technical  assistance  relating  to  the  aircraft
quieting  system and Ultra  reimbursed  the  company  for  expenses  incurred in
connection  with such  assistance.  Ultra was  responsible for the marketing and
sales  of  the  products.  The  company  was to  supply  Ultra  with  electronic
components  required for the aircraft  quieting system, at a defined cost, to be
paid by Ultra.  Such  licensing  and  royalty  agreement,  among  other  things,
included  a future  royalty  of 1.5% of sales  commencing  in  1998.  Under  the
agreement,  Ultra also acquired the company's active aircraft  quieting business
based in  Cambridge,  England,  leased a portion of the  Cambridge  facility and
employed certain of the company's  employees.  The company  recognized  $68,000,
$40,000 and $49,000 in royalty revenue in 1998, 1999 and 2000, respectively.

     New  Transducers  Ltd.  ("NXT"),  a  wholly-owned  subsidiary  of  NXT  plc
(formerly,  Verity  Group  plc)  and the  company  executed  a  cross  licensing
agreement (the "Cross  License") on March 28, 1997. Under the terms of the Cross
License,  the company licensed patents and patents pending which relate to FPTTM
technology to NXT, and NXT licensed  patents and patents pending which relate to
parallel  technology  to the company.  The company also executed a security deed
(the "Security  Deed") in favor of NXT granting NXT a conditional  assignment in
the patents and patents  pending  licensed to NXT under the Cross License in the
event a default in a certain  payment to be made by the company  under the Cross
License continued beyond fifteen days.  Concurrently with the Cross License, the
company and NXT plc executed  agreements granting each an option for a four year
period  commencing on March 28, 1998, to acquire a specified number of shares of
common stock of the other, subject to certain conditions and restrictions.  With
respect to the company's  option to NXT plc (the "NXT plc Option"),  3.8 million
shares of common stock  (approximately  3.4% of the then issued and  outstanding
common  stock) of the  company  were  covered  by such  option  and the  company
executed a registration  rights agreement (the "Registration  Rights Agreement")
covering such shares.  Five million ordinary shares  (approximately  2.0% of the
then  issued and  outstanding  ordinary  shares) of NXT plc were  covered by the
option  granted by NXT plc to the company.  The exercise price under each option
was the fair value of a share of the  applicable  stock on March 28,  1997,  the
date of grant. On April 15, 1997, NXT plc, NXT and the company  executed several
agreements and other  documents  (the "New  Agreements")  terminating  the Cross
License,  the  Security  Deed,  the NXT plc Option and the  Registration  Rights
Agreement and replacing them with new agreements  (respectively,  the "New Cross
License,"  the  "New  Security  Deed,"  the "New  NXT plc  Option"  and the "New
Registration  Rights  Agreement").  The  material  changes  effected  by the New
Agreements were the inclusion of NXT plc as a party along with its  wholly-owned
subsidiary  NXT;  providing that the license fee payable to NCT could be paid in
ordinary  shares of NXT plc stock;  and reducing  the  exercise  price under the
option  granted to NXT plc to purchase  shares of the company's  common stock to
$0.30 per share.  The  subject  license  fee was paid to the company in ordinary
shares  of NXT  plc  stock  which  were  subsequently  sold by the  company.  On
September  27, 1997,  NXT plc, NXT, NCT Audio and the company  executed  several
agreements and other  documents,  terminating  the New Cross License and the New
Security Deed and replacing them with other agreements (respectively, the "Cross
License Agreement dated September 27, 1997" and the "Master License Agreement").
The material changes effected by these replacement  agreements were an expansion
of the fields of use applicable to the exclusive licenses granted to NXT plc and
NXT,  an  increase  in the  royalties  payable on future  licensing  and product
revenues, cancellation of the New Security Deed covering the patents licensed by
the  company,  and the  acceleration  of the date on  which  the  parties  could
exercise their respective stock purchase option to September 27, 1997.

     On April 30, 1998, the company  completed the sale of five million ordinary
shares of NXT plc acquired upon the  company's  exercise on April 7, 1998 of the
option  (described above) it held to purchase such shares at a price of 50 pence
per share.  The company  realized a $3.2 million gain from the exercise and sale
of the shares under such option, which is included in other income in 1998.

     On February 9, 1999, NCT Audio and NXT expanded the Cross License Agreement
dated September 27, 1997 to increase NXT's fields of use to include  aftermarket
ground-based vehicles and aircraft sound systems and increased the royalties due
NCT Audio from NXT to 10% from 6% and  increased  the royalties due NXT from NCT
Audio to 7% from 6%. In consideration for granting NXT these expanded  licensing
rights, NCT Audio received a $0.5 million license fee. Also on February 9, 1999,
NCT Audio and NXT amended  the Master  License  Agreement  to include a one time
minimum  royalty  payment of $160,000.  NCT Audio  recorded  royalty  expense of
$160,000 in 1999,  and a liability  of $64,000  ($160,000  royalty  expense less
patent  expense  reimbursement  of $96,000) at December 31, 1999.  The liability
balance outstanding as of December 31, 2000 was $64,000 (see Note 21).

     VLSI Technology,  Inc.  ("VLSI").  On February 5, 1998, the company entered
into a license,  engineering and royalty agreement with VLSI. Under the terms of
the  agreement,  the  company has  granted a  non-exclusive  license to VLSI for
certain patents and patents pending which relate to the company's ClearSpeech(R)
technologies.  In 1998, the company recorded $0.3 million in related engineering
services.  The company will recognize  royalties on future products sold by VLSI
incorporating the ClearSpeech(R)  technology.  The company recognized no royalty
revenue in 1999 and 2000.

     STMicroelectronics  SA &  STMicroelectronics  S.r.l ("ST"). On November 16,
1998,  Advancel Logic  Corporation  ("Advancel"),  a  majority-owned  subsidiary
acquired by the company in September 1998, and ST executed a license  agreement.
Under the terms of the  agreement,  which  included  a  license  fee,  a minimum
royalty within two years and future per unit royalties,  ST licensed  Advancel's
tiny2J(TM)  for  Java(TM)  ("t2J-Processor  Core") to combine it with its proven
secure  architecture  and  advanced  nonvolatile  memory  technology.   Advancel
recorded a $0.2  million  license  fee in 1998.  In 1999,  Advancel  recorded an
additional  $0.2 million  license fee, $0.9 million  non-refundable  royalty and
$1.1 million engineering and development  services funding. The company recorded
no license, royalty or engineering revenue for 2000.

     Lernout & Hauspie  Speech  Products N.V.  ("L&H").  On March 31, 1999,  the
company signed a license agreement with L&H. The agreement  provides the company
with a  worldwide,  non-exclusive,  non-transferable  license  to  selected  L&H
technology  for use in NCT's  ClearSpeech(R)  products.  The company  recorded a
prepaid  royalty of $0.9  million.  On April 12,  1999,  the  company  granted a
worldwide non-exclusive, non-transferable license to L&H. The agreement provides
L&H access to NCT's  present and future noise and echo  cancellation  algorithms
for use in  L&H's  technology.  In  consideration  of the  company's  grant of a
license to L&H,  the company  recognized  a  non-refundable  royalty fee of $0.8
million.  During 1999,  the company and L&H agreed to offset the  balances  owed
each other. Consequently, the company's balance due L&H at December 31, 1999 and
2000 is $0.1 million.

     Oki Electric Industry Co., Ltd.  ("Oki").  In October 1997, the company and
Oki  executed  a license  agreement.  Under the  terms of the  agreement,  which
included an up-front license fee and future per unit royalties, Oki licensed the
company's  ClearSpeech(R)  noise  cancellation  algorithm for  integration  into
large-scale integrated circuits for communications applications. The company has
granted Oki the right to manufacture,  use and sell products  incorporating  the
algorithm.  The algorithm is specifically  designed to remove  background  noise
from speech and other transmitted signals, greatly improving intelligibility and
clarity of communications.  The company recognized $0.1 million and $0.3 million
in royalty revenue in 1999 and 2000, respectively.

     Infinite  Technology  Corporation  ("ITC").  In 2000, Advancel entered into
license  agreement  with ITC. Under the  agreement,  Advancel,  a majority owned
subsidiary of the company, granted ITC exclusive rights to create, make, market,
sell and license products and  intellectual  property based upon Advancel's Java
Turbo-J(TM)  technology.  Advancel  also  granted  ITC  non-exclusive  rights to
Advancel's Java smartcard core. In consideration  for this license,  the company
received  1.2 million  shares of ITC's  common  stock valued at $6.0 million and
on-going  unit  royalties.  With the exception of certain  rights  granted to ST
Microelectronics  in 1998,  the  license  granted ITC an  exclusive  irrevocable
worldwide license to design,  make, use, transfer,  market and sell products and
intellectual  property  incorporating  or  based  upon  Advancel's  TJ  and  T2J
technology.

     In conjunction  with this license  agreement the company,  Advancel and ITC
entered into a Strategic Alliance and Technology  Development Amendment pursuant
to which the  company  will  fund  specific  product  application  research  and
engineering  development  related to microprocessor and semiconductor  chips for
which the company will pay ITC $2.5 million. The company issued 9,523,810 shares
of its  common  stock  having a market  value of $3.0  million to ITC as prepaid
research and  engineering  costs. In the event ITC does not receive $2.5 million
in proceeds from the sale of the company shares, the company is required to make
up any  shortfall in cash or return to ITC a sufficient  number of ITC shares of
common  stock  received  by the company as outlined  above.  Conversely,  if ITC
receives $2.5 million in proceeds from the sale of the company  shares and there
are company  shares  remaining,  ITC must return the unsold  share excess to the
company.  Though the aforementioned license agreement and the Strategic Alliance
and Technology Development Amendment,  both with ITC, are separate and unrelated
it  has  been  determined  that  they  should  be  accounted  for  as  a  single
transaction,  thereby,  both  agreements  are combined for  financial  reporting
purposes.  At December 31, 2000 the company  recognized  $3.6 million of license
fee revenue which represents the net of the two transactions.

6.   Accounts Receivable:

   Accounts receivable comprise the following (in thousands):
                                                      December 31,
                                               ----------------------------
                                                   1999            2000
                                               --------------   -----------
  Technology license fees and royalties        $         -      $    4,597
  Joint ventures and affiliates                         33              76
  Other trade receivables                              287             880
                                               --------------   -----------
                                               $       320      $    5,553
  Allowance for doubtful accounts                      (83)            (70)
                                               --------------   -----------
  Accounts receivable, net                     $       237      $    5,483
                                               ==============   ===========

     On March 7, 2000,  DMC entered into a license  agreement  with Eagle Assets
Limited to develop a portion of the DMC  affiliate  network in the New York City
region.  Eagle licensed the use of Digital Broadcasting Station Software systems
and  related  technology  in two  station  areas  in  the  New  York  geographic
territory.  At December 31, 2000,  the amount  remaining in accounts  receivable
totaled $1.5 million.

     On March 30,  2000,  the company and DMC signed an agreement to license the
use of DBSS systems and related technology in Israel to Brookepark Limited.  The
amount of the license fee was $2.0 million of which  approximately  $1.5 million
has been  deferred at  December  31,  2000.  At December  31,  2000,  the amount
remaining in accounts receivable totaled $1.0 million.

     On September 29, 2000,  the company and DMC signed  separate  agreements to
license the use of certain  technology  for $1.0 million  each with  Vidikron of
America, Inc., known as Vidikron. The total amount of the license fees were $2.0
million and is included in accounts receivable at December 31, 2000.

7.   Inventories:

   Inventories comprise the following (in thousands):
                                                        December 31,
                                                 ----------------------------
                                                     1999            2000
                                                 --------------   -----------
  Components                                     $       360      $     603
  Finished goods                                       2,434          1,681
                                                 --------------   -----------
                                                 $     2,794      $   2,284
  Reserve for obsolete & slow moving inventory          (529)          (100)
                                                 --------------   -----------
  Inventories, net of reserves                   $     2,265      $   2,184
                                                 ==============   ===========


8.   Property and Equipment:

   Property and equipment comprise the following (in thousands):

                                   Estimate           December 31,
                                  Useful Life    ----------------------
                                    (Years)        1999        2000
                                  -------------  ---------   ----------

   Machinery and equipment            3-5        $  1,965    $  2,018
   Furniture and fixtures             3-5           1,070       1,257
   Leasehold improvements             7-10          1,038       1,139
   Tooling                            1-3               -         462
   Other                              5-10             60         164
                                                 ---------   ----------
                                                 $  4,133    $  5,040
   Accumulated depreciation                        (3,684)     (4,352)
                                                 ---------   ----------
   Property and equipment, net                   $    449    $    688
                                                 =========   ==========

     Depreciation  expense for the years ended December 31, 1998,  1999 and 2000
was $ 0.5 million, $0.4 million and $0.3 million, respectively.

9.    Other Assets - current and long-term:

     Other assets primarily comprise the company's  investment in affiliates and
notes receivable and interest thereon, as described herein.

     On August 14, 1998,  NCT Audio agreed to acquire  substantially  all of the
assets of Top Source Automotive,  Inc., known as TSA, an automotive audio system
supplier.  The total  purchase  price was $10.0  million and up to an additional
$6.0 million in possible  future cash  contingent  payments.  NCT Audio paid Top
Source  Technologies,  Inc.,  known  as TST,  $3.5  million.  NCT  Audio  had an
exclusive  right,  as  extended,  to purchase the assets of TSA through July 15,
1999. Under the terms of the original  agreement,  NCT Audio was required to pay
TST $6.5  million on or before  March 31, 1999 to complete  the  acquisition  of
TSA's assets.  As  consideration  for an extension of such exclusive  right from
March  31,  1999 to May 28,  1999,  NCT  Audio  agreed  to pay TST a fee of $0.4
million,  consisting  of $20,685 in cash,  $0.1 million of NCT Audio's  minority
interest in TSA  earnings,  and a $0.2  million note payable due April 16, 1999.
Due to the  non-payment  of the note by April 30,  1999,  (a) the note  began to
accrue  interest  on April 17,  1999 at the lower of the rate of two times prime
rate or the highest  rate  allowable  by law;  (b) the $20,685 and $0.1  million
portion of the extension fee would no longer be credited toward the $6.5 million
purchase price due at closing; and (c) the $0.2 million portion of the extension
fee would no longer be credited  toward the $6.5 million  closing amount due. To
date, NCT Audio has not paid the note. In addition,  due to NCT Audio's  failure
to close the  transaction  by March 31,  1999,  NCT Audio was  required to pay a
penalty premium of $0.1 million of NCT Audio's preferred stock.  Since NCT Audio
failed to close the  contemplated  transaction  by May 28,  1999,  NCT Audio has
forfeited  its minority  earnings in TSA for the period June 1, 1999 through May
30, 2000. In exchange for an extension  from May 28, 1999 to July 15, 1999,  NCT
Audio relinquished 25% of its minority equity ownership in TSA. As a result, NCT
Audio now has a 15%  minority  interest in TSA. On or about July 15,  1999,  NCT
Audio determined it would not proceed with the purchase of the assets of TSA, as
structured,  due  primarily  to its  difficulty  in raising the  requisite  cash
consideration. Consequently, NCT Audio reduced its net investment in TSA to $1.2
million,   representing   its  15%   minority   interest,   net  of  the   above
noted penalties,  and recorded a $2.4 million  charge in the quarter  ended June
30, 1999 for the  write-down of its  investment to its estimated net  realizable
value. On September 30, 1999, Onkyo America  purchased  substantially all of the
assets of TSA and certain assets of TST used in TSA's  operations.  NCT Audio is
claiming  and  seeks  its pro  rata  share  of the  consideration  paid by Onkyo
America, less the penalties described above. The amount which TST owes NCT Audio
is in dispute;  consequently,  receipt of the funds is contingent on the outcome
of the arbitration between the company, TST and TSA (see Note 17).

     On August  17,  1998,  NCT  Audio  agreed to  acquire  all of the  members'
interest in Phase Audio LLC, known as Precision  Power,  Inc. or PPI, a supplier
of  custom-made  automotive  audio  systems.  NCT Audio intended to acquire such
interest in exchange for shares of its common stock having an aggregate value of
$2.0 million.  NCT Audio also agreed to retire $8.5 million of PPI debt, but NCT
Audio  needed to obtain  adequate  financing  before  the  transaction  could be
completed. NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $0.5  million,  evidenced by a demand  promissory  note. On August 18,
1998,  NCT Audio  provided  PPI a second  working  capital loan in the amount of
$1,000,000,  also evidenced by a demand  promissory  note. The unpaid  principal
balance of these notes bears  interest at a rate equal to the prime lending rate
plus one percent (1.0%).  As noted,  the transaction was contingent on NCT Audio
obtaining  outside financing to retire the PPI debt. On January 6, 1999, the PPI
members  notified  NCT  Audio  that,  while  they  remained  willing  to do  the
transaction,  they may choose at some point to abandon the  transaction  because
NCT Audio had not obtained the financing in a timely manner. The company was not
able to obtain the financing to consummate this transaction, and PPI experienced
significant  organizational  changes  which has resulted in  abandonment  of the
proposed  acquisition.  During the third  quarter  of 1999,  the  company  fully
reserved the $1.5 million due from PPI plus interest and  pre-acquisition  costs
thereon  amounting to $0.3 million.  The company  continues to seek repayment of
the  notes.  During  the  fourth  quarter  of  1999,  NCT  Audio  suspended  its
acquisition strategy.

     On May 10, 2000,  the company  announced a license  agreement with Infinite
Technology  Corporation  know as ITC. Under the agreement,  Advancel granted ITC
exclusive  rights  to  create,  make,  market,  sell and  license  products  and
intellectual  property  based  upon  Advancel's  Java  Turbo-J(TM)   technology.
Advancel also granted ITC nonexclusive rights to Advancel's Java smartcard core.
In  consideration  for this license,  the company received 1.2 million shares of
ITC's common stock valued at $6.0 million and on-going unit royalties.  With the
exception of certain rights granted to ST  Microelectronics in 1998, the license
granted ITC an exclusive  irrevocable  worldwide  license to design,  make, use,
transfer,  market and sell products and intellectual  property  incorporating or
based upon Advancel's TJ and T2J  technology.  The company is accounting for its
investment in ITC's common stock as  available-for  -sale  securities  valued at
fair value, with unrealized gains and losses excluded from earnings but reported
in a separate component of stockholders' equity until they are sold. At the time
of sale, any gains or losses  calculated by the specific  identification  method
will be recognized as a component of operating  results.  The  securities  had a
fair value of $5.1  million.  At  December  31,  2000 the  company  recorded  an
unrealized loss of $0.9 million  included on the  consolidated  balance sheet as
part of accumulated other comprehensive income/(loss).

     On  May  5,  2000  TRN  entered   into  an   advertising   agreement   with
Insiderstreet.com,  Inc.,  known as the advertiser.  The  advertising  agreement
calls for, among other things, for TRN to play the advertiser's commercials in a
minimum of 8,500  theater  screens at a cost of $20.58  per  theater  screen per
month, as further  described in the agreement.  The term of the agreement is for
two years  commencing on June 19, 2000. At date of acquisition of TRN by Cinema,
TRN had remaining  475,595 shares of the originally issued 575,595 shares of the
advertiser  which  were  valued at $2.5  million.  If the value of the  original
shares issued is less than $2.0 million on May 10, 2001, the  advertiser  agrees
to deliver additional  compensating shares of the advertiser to TRN on or before
May 31, 2001 to increase the total value of the  transaction  to $2.0 million at
that time. It was  determined by both parties that the airtime  purchased by the
advertiser had an actual value of $4.2 million. The agreement also calls for the
advertiser  shares  issued to TRN to be  registered on or before April 30, 2001.
The company  recorded a deferred  liability  of $2.9  million at the time of the
transaction  and is  recognizing  revenue over a two year  period.  For the year
ended December 31, 2000 the company recognized $0.5 million in advertising/media
revenue with respect to this  transaction.  The company has been  accounting for
its  investment  in  the  advertiser's   common  stock  as  available-for  -sale
securities  valued at fair value, with unrealized gains and losses excluded from
earnings but reported in a separate component of stockholders' equity until they
are sold. At December 31, 2000 the company  recorded an unrealized  loss of $2.5
million included on the consolidated  balance sheet as part of accumulated other
comprehensive income/(loss).

     On September 29, 2000,  NCT Video  Displays,  Inc.,  known as NCT Video,  a
newly formed,  wholly-owned  subsidiary  of the company,  entered into a product
development and license agreement with Advanced Display Technologies, LLP, known
as ADT.  Under the  agreement,  NCT Video is granted by ADT exclusive  right and
license to make, have made, use, sell, lease, license, or otherwise commercially
dispose of all Licensed  Products and  Components,  as defined in the agreement.
Such Licensed Products are defined as ViewBeam(TM) Display(s),  which employ the
Licensed Technology, as defined in the agreement. Such license is valued at $0.9
million  and is  being  amortized  over 9 years,  the  earliest  date of  patent
expiration.  At December 31, 2000 the company recorded  amortization  expense of
approximately $35,000. In addition, as part of this agreement, NCT Video and ADT
have  entered  into a  product  development  arrangement  whereby  work is to be
performed by ADT in  developing  the  Prototype  and  production  design for the
Licensed  Products.  In return,  NCT Video agreed to pay a "development  fee" of
$0.9 million for performing  such  development  work. At December 31, 2000, such
$0.8 million was included in other current liabilities (see Note 11).

     As  described  in Note 5, on October  23, 2000  Midcore  executed a license
agreement with Teltran.  As  consideration  for such license,  Teltran agreed to
issue  Midcore  2.8  million  shares of  Teltran  common  stock and a warrant to
purchase  6.0 million  shares of Teltran  common stock for $0.125 per share as a
non-refundable  up-front  license fee.  Teltran  agreed to register  such issued
common stock and the common stock  underlying the warrant within eight months of
the  execution  of the  license  agreement.  Teltran is also  required to pay an
ongoing, per unit royalty, as defined in the license agreement.  At December 31,
2000 the  company  recognized  $0.4  million of license  fee  revenue,  deferred
revenue of $4.2 million and recorded,  in other current assets, the value of the
2.8  million  common  shares to be  received  and the fair value of the  warrant
aggregating  $3.8 million.  At December 31, 2000 the company recorded a bad debt
expense of $0.8 million with respect to the reduction in market value of the 2.8
million  shares on that  date.  Effective  January  10,  2001,  the date the 2.8
million  common shares were issued,  the company will account for its investment
in Teltran's  common stock, in accordance  with FAS 115,  Accounting for Certain
Investments in Debt and Equity  Securities,  as  available-for  -sale securities
valued at fair value,  with  unrealized  gains and losses excluded from earnings
but  reported in a separate  component  of  stockholders'  equity until they are
sold.  At the time of sale,  any  gains or  losses  calculated  by the  specific
identification method, will be recognized as a component of operating results.

10.   Convertible Notes:

     On January 26, 1999,  Carole  Salkind,  spouse of a former  director and an
accredited investor (the "Holder"), subscribed to and agreed to purchase secured
convertible  notes of the  company  in an  aggregate  principal  amount  of $4.0
million.  The company entered into secured  convertible  notes (the "Notes") for
$4.0 million  between  January 26, 1999 and March 27, 2000. The Notes mature two
years from their respective  inception dates and earn interest at the prime rate
as published from day to day in The Wall Street Journal. The secured convertible
notes are  collateralized  by substantially all of the company's assets owned or
hereafter  acquired.  The Holder shall have the right at any time on or prior to
the day the Notes are paid in full, to convert at any time,  all or from time to
time, any part of the  outstanding and unpaid amount of the Note into fully paid
and non-assessable shares of common stock of the company at the conversion price
as defined in the notes.  At December  31,  2000,  $3.0  million was included in
current maturities of convertible notes with the balance of $1.0 million, due in
2002,  included  as part of the  long-term  portion of  convertible  notes.  The
company recorded a beneficial  conversion  feature of $1.0 million in connection
with the March 27, 2000  convertible  note recorded  during the first quarter of
2000,  classified as interest  expense.  On each of June 4, 1999, June 11, 1999,
July 2, 1999, July 23, 1999, August 25, 1999 and September 19, 1999, the Company
received  proceeds of  $250,000,  $250,000,  $500,000,  $250,000,  $500,000  and
$250,000, respectively, from the Holder for other secured convertible notes with
the same terms and conditions of the Note described  above. The company recorded
a  beneficial  conversion  feature  of  $0.2  million  in  connection  with  the
convertible notes in 1999.

     On January 25, 2001,  NCT defaulted on the repayment of $1.0 million of the
Notes. The default provisions in the note imposed a penalty, the default amount,
of $100,000 (10% of the principal payment in default). Default interest from the
date of default is due on the principal in default and the default amount at the
rate of prime plus 5%. We  registered  1,034,972  shares of common stock that we
may be obligated to issue pursuant to the default provisions in the note.

     On February 13, 2001, the company issued a 60-day,  $0.5 million promissory
note bearing  interest at 7% per annum, to the holder of the Notes together with
a warrant to purchase either $500,000 of our common stock at $0.21 or Pro Tech's
common stock at $0.44.  On April 14, 2001, NCT defaulted on the repayment of the
promissory note.

     On July 19, 1999, DMC entered into a convertible guaranteed term promissory
note ("PRG Note") with  Production  Resource Group ("PRG") in the amount of $1.0
million.  Of the $1.0 million note,  $0.8 million was  deposited  into an escrow
account  restricted  in its use to pay  rental  and  installation  costs of DBSS
systems.  Further, DMC had the right to draw an additional $0.1 million provided
that PRG continued to have a good faith belief that the Systems were functioning
properly and that DMC had obtained at least one network-wide  advertising client
providing annual advertising  revenues of at least $0.3 million.  The balance in
the escrow account,  classified as restricted cash, was $0.7 million and zero at
December 31, 1999 and 2000, respectively.  The PRG Note matures on July 19, 2001
and earns interest at ten percent (10%) per annum.  PRG may convert the PRG Note
in whole or in part at its election into shares of DMC's common  stock,  without
par value, at any time during the period  commencing on the date of issuance and
ending on the maturity date. In connection  with the PRG Note, PRG was granted a
common stock warrant.  In accordance with SFAS 123,  "Accounting for Stock-Based
Compensation",  the company  estimated the fair value of this warrant to be $0.8
million using the following assumptions in applying the Black-Scholes  valuation
method: risk-free interest rates of 5.61%, volatility of 1%, and a term of three
years.  Such amount is being  amortized  to interest  expense  over the two-year
period of the related promissory note. Amortization amounted to $0.1 million and
$0.2  million for the years  ended  December  31,  1999 and 2000,  respectively.
Unamortized  discount of $0.3 million and $0.1  million has been  reflected as a
reduction of the notes payable amount in the accompanying  December 31, 1999 and
2000 financial  statements.  Such note payable  balance  included as part of the
current  portion  of  convertible  notes was $0.8  million  and $0.9  million at
December 31, 1999 and 2000, respectively (see Note 21).

11.  Other Liabilities:

     On June  5,  1998,  Interactive  Products,  Inc.  ("IPI")  entered  into an
agreement  with the company  granting the company a license to, and an option to
purchase a joint ownership interest in, patents and patents pending which relate
to IPI's speech recognition  technologies,  speech compression  technologies and
speech  identification and verification  technology.  The aggregate value of the
patented  technology  is $1.3  million,  which was paid by a $0.2  million  cash
payment and delivery of 1.3 million shares of the company's  common stock valued
at  $0.65625  per share on June 5,  1998.  At such time as IPI sells any of such
shares,  the proceeds thereof will be allocated  towards a fully paid-up license
fee for the technology  rights noted above.  In the event that the proceeds from
the sale of shares are less than the $1.1  million,  the  company  will record a
liability  representing  the cash payment due. On July 5, 1998, the company paid
IPI  $50,000,  which was held in escrow as security for the  fulfillment  of the
company's obligations,  toward the liability.  The company recorded a liability
representing the difference  between the company's  payment  obligations and the
IPI net proceeds  from its sale of shares of the company's  common  stock.  Such
liability was $0.5 million at December 31, 1999 and 2000.

     On  September  4, 1998,  the company  acquired  the issued and  outstanding
common stock of Advancel,  a Silicon  Valley-based  developer of  microprocessor
cores that execute Sun Microsystems' Java(TM) code. The acquisition was pursuant
to a stock purchase  agreement  dated as of August 21, 1998 (the "Stock Purchase
Agreement")  among the company,  Advancel and certain  shareholders  of Advancel
(the "Advancel  Shareholders").  The  consideration  for the  acquisition of the
Advancel common stock consisted of an initial payment of $1.0 million payable by
the delivery of 1.8 million shares of the company's treasury stock (see Note 10)
together with future payments, payable in cash or in common stock of the company
at the election of the Advancel Shareholders (individually, an "earnout payment"
and collectively,  the "earnout  payments") based on Advancel's  earnings before
interest, taxes, depreciation and amortization, as defined in the Stock Purchase
Agreement,   for  each  of  the  calendar  years  1999,   2000,  2001  and  2002
(individually,  an "earnout year" and collectively,  the "earnout years"). While
each  earnout  payment may not be less than $0.3  million in any  earnout  year,
there is no maximum  earnout  payment  for any  earnout  year or for all earnout
years in the  aggregate.  In connection  therewith,  the  company's  liabilities
include an earnout  obligation  of $0.1 million and $0.2 million at December 31,
1998  and  1999,   respectively  (see  Note  17).  In  addition,  the  company's
liabilities include a $0.1 million note payable to a former employee of Advancel
at  December  31,  1999 and 2000.  The note bears  interest  at a rate of 8.25%,
compounded  annually and was due in two equal  installments  on December 1, 1998
and March 1, 1999. The note has not been paid.

     In connection  with the company's  acquisition  of 100% of the  outstanding
capital stock of MSI, the company initially issued 13,913,355  restricted shares
of its common stock based upon a 10-day  weighted  average  closing bid price of
$0.34626 per share,  for an aggregate  value of $4.8 million.  In addition,  the
purchase  consideration  includes $1.7 million to be paid by the company in cash
based upon earned royalties, as defined in the merger agreement, over 36 months.
If after 36 months, the total royalty has not been earned, then the parties have
the right to collect the remaining  unpaid  balance  through the issuance of the
company's common stock. At December 31, 2000 other current liabilities  includes
$0.6 million and other long-term  liabilities includes $1.2 million with respect
to this contingent liability.

12.  Common Stock Subject to Resale Guarantee:

     On September 24, 1999, the company issued 12,005,847 shares of common stock
to suppliers and  consultants to settle current  obligations of $1.8 million and
future or  anticipated  obligations  of $0.5 million.  On October 27, 1999,  the
company issued an additional  1,148,973  shares of common stock to suppliers and
consultants to settle obligations of $0.2 million.  During the fourth quarter of
1999, suppliers and vendors sold $1.5 million of such shares and as a result the
company recorded $1.0 million common stock subject to resale  guarantee.  During
the year ended  December 31, 2000,  suppliers  and vendors sold $0.9 million and
surrendered 776,316 previously issued shares.

     During 2000, the company issued 2,304,571 shares of common stock to certain
consultants  and  suppliers to settle  current  obligations  of $0.4 million and
future or anticipated obligations of $0.5 million due to them by the company.

     Common stock  subject to resale  guarantee was $0.2 million at December 31,
2000,  which  represented the  outstanding  shares of common stock valued at the
date of  issuance to  suppliers  and  vendors.  Common  stock  subject to resale
guarantee  was  $1.6  million  at  December  31,  1999,  which  represented  the
outstanding  shares of common  stock valued at the date of issuance to suppliers
and consultants  ($1.0 million) and the purchase price plus guaranteed return on
investment related to the Purchase Agreement ($0.6 million).

     The company had certain contingent  obligations under a securities purchase
agreement,  dated as of December 27, 1999 (the "Purchase Agreement"),  among the
company,  Austost  Anstalt  Schaan  ("Austost"),  Balmore S.A.  ("Balmore")  and
Nesher, Inc. ("Nesher").  Based on an offer as of November 9, 1999, the company,
Austost,  Balmore and Nesher  entered  into the Purchase  Agreement  whereby the
company,  on December  28, 1999,  issued a total of  3,846,155  shares (the "SPA
Shares") to Austost,  Balmore and Nesher for a total purchase price of $500,000.
In  addition,  the  company  issued  288,461  shares of its common  stock to the
placement agent for the  transaction.  The price of the SPA Shares was $0.13 per
share, which was $0.03, or 19%, less than the closing bid price of the company's
common  stock as reported  by the OTC  Bulletin  Board on November 8, 1999,  and
$0.015, or 10%, less than the closing bid price of the company's common stock as
reported by the OTC Bulletin  Board on December  27, 1999.  This per share price
was subject to decrease upon the application of a reset  provision  contained in
the Purchase Agreement.  Due to the provision, the company recorded the purchase
price  ($500,000) plus the guaranteed  return on investment of 20% ($100,000) as
common stock  subject to resale.  At December 31, 2000 the shares were no longer
subject to a resale guarantee provision.

     Under a reset provision  contained in the Purchase  Agreement,  on June 26,
2000,  and again on September 25, 2000,  the company might have been required to
issue additional shares to one or more of Austost,  Balmore or Nesher if the sum
of certain items on those dates was less than 120% of the total  purchase  price
paid by Austost,  Balmore and Nesher for the SPA Shares.  Those items were:  (i)
the aggregate market value of the SPA Shares held by Austost, Balmore and Nesher
(based on the per share closing bid price on those dates); (ii) the market value
of any SPA Shares transferred by Austost,  Balmore and Nesher as permitted under
the Purchase  Agreement (based on the per share closing bid price on the date of
transfer);  and (iii) any amounts  realized by Austost,  Balmore and Nesher from
sales of any such shares  prior to June 26, 2000 or September  25, 2000,  as the
case may be. The number of  additional  shares of common  stock that the company
would  have been  obligated  to issue in such case  would  have been a number of
shares  having an aggregate  market  value  (based on the per share  closing bid
price on such date) that, when added to the sum of items (i), (ii) and (iii) set
forth  above,  would  equal  120% of the total  purchase  price paid for the SPA
Shares.  The 20% of the  total  purchase  price  paid  ($100,000)  was  deemed a
preferred  return over the initial reset  period.  At both June 26 and September
25, 2000,  no additional  shares were  required to be issued in accordance  with
such reset  provision and the 20% of the total purchase price paid ($100,000) is
no longer considered a preferred return.

13.  Capital Stock:

Private Placements and Stock Issuances:

     On January 25,  2000,  the Board of  Directors  designated  a new series of
preferred  stock based upon a negotiated  term sheet,  the Series G  Convertible
Preferred  Stock  ("Series G Preferred  Stock").  The Series G  Preferred  Stock
consists of 5,000 designated  shares,  par value of $0.10 per share and a stated
value of one thousand dollars  ($1,000) per share with a cumulative  dividend of
four  percent  (4%) per annum on the stated value  payable  upon  conversion  in
either cash or common stock.  On March 6, 2000,  as amended March 10, 2000,  the
company and an  accredited  investor  entered into an agreement  under which the
company sold an aggregate  stated value of $2.0 million (2,004 shares) of Series
G  Preferred  Stock,  in a private  placement  pursuant to  Regulation  D of the
Securities  Act of 1933  (the  "Securities  Act")  for an  aggregate  of  $1.750
million. The company received proceeds,  net of expenses,  of $1.7 million. Each
share  of  Series  G  Preferred  Stock  is  convertible   into  fully  paid  and
nonassessable  shares of the company's  common stock pursuant to a predetermined
conversion  formula which provides that the conversion  price will be the lesser
of (i) 20%  below the five (5) day  average  closing  bid price of common  stock
immediately  prior to the conversion date thereof;  or (ii) the fixed conversion
price of $0.71925. The company filed a registration statement on April 20, 2000,
(amended  on June 13,  2000),  to register  such shares of common  stock for the
conversion  of the  Series  G  Preferred  Stock  and  the  related  warrant.  In
connection with the Series G Preferred Stock transaction,  on March 6, 2000, the
company granted a warrant for 150,000 shares of the company's  common stock with
an  expiration  date of March 31, 2005 and an  exercise  price of  $0.71925.  In
accordance  with SFAS No. 123,  the company  estimated  the fair market value of
this warrant to be $0.1 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 6.14%, volatility of
1, and a term of three  years.  Such amount is included in the  preferred  stock
dividend requirement for the year ended December 31, 2000. During the year ended
December 31, 2000, the company issued  4,906,595  shares of the company's common
stock in connection with the conversion of 1,237 shares of the company's  Series
G Preferred Stock.

     During the year ended  December 31,  2000,  the company  issued  23,470,081
shares of the company's  common stock in connection with the conversion of 4,715
shares  of the  company's  Series  F  Convertible  Preferred  Stock  ("Series  F
Preferred  Stock")  which  had been  issued in the  third  quarter  of 1999 in a
private  placement  exempt from  registration  pursuant to  Regulation  D of the
Securities  Act.  At December  31,  2000 all Series F Preferred  Stock have been
converted to common shares of the company.

     In March 2000, 3 shares of NCT Audio Series A Convertible  Preferred Stock,
which had been issued in the third quarter of 1998 in a private placement exempt
from registration pursuant to Regulation D of the Securities Act, were exchanged
for 3,000 shares of the company's Series D Preferred Stock, which were converted
into 634,915  shares of the company's  common stock.  Subsequently,  the company
recorded a  one-time,  non-cash  charge of $0.2  million for the  impairment  of
goodwill  based  on the  valuation  of NCT  Audio.

     On March 7, 2000, the company,  Balmore and Austost agreed to amend certain
of the  terms and  conditions  of the  exchange  agreement.  Under the  exchange
agreement,  Austost  and  Balmore  were  obligated  to  return  to  the  company
13,671,362 shares of NCT common stock ("Returnable Shares").  This amendment was
agreed  to in order  to (1)  allow  Austost  and  Balmore  to  retain  3,611,111
Returnable  Shares in exchange for an additional  533 shares of NCT Audio common
stock from a third party investor (the "Third Party Shares"),  which Austost and
Balmore  would deliver to NCT, and (2)  substitute  cash payments by Austost and
Balmore to the company in lieu of Austost's and  Balmore's  obligation to return
the  remaining  Returnable  Shares  to the  company  pursuant  to  the  exchange
agreement.  Austost and Balmore would agree to pay the company up to $10,000,000
in cash subject to monthly  limitations  from proceeds Austost and Balmore would
realize from their disposition of such remaining Returnable Shares.  Balmore and
Austost would realize a 10%  commission on the proceeds from the sale of shares.
Subsequently,  the company recorded a one-time,  non-cash charge of $2.9 million
for the impairment of goodwill  based on the valuation of NCT Audio.  During the
year ended  December  31,  2000,  the  company  sold  approximately  4.2 million
Returnable  Shares totaling $1.4 million of which $0.8 million was used to repay
three  promissory notes and the balance of $0.6 million was used to meet working
capital requirements.

     In connection  with the above  exchange of 533 NCT Audio  shares,  the 1999
exchange of 559 shares of NCT Audio  common  stock and the 1998  exchange of 296
shares of NCT Audio common stock into 17.7 million and 1.1 million shares of NCT
common stock, the company recorded goodwill of $0.6 million,  $6.1 million,  and
$2.9 million during 1998, 1999 and 2000,  respectively.  The Company  recorded a
non-cash  charge of $3.1 million in each of 1999 and 2000 for the  impairment of
goodwill based on the valuation of NCT Audio.

     On July 13,  2000 at the  company's  annual  meeting of  shareholders,  the
stockholders  approved an  amendment  to increase the number of shares of common
stock the company is authorized  to issue from 325 million to 450 million.  Such
amendment became effective on July 18, 2000 when the company filed a Certificate
of Amendment to its Restated Certificate of Incorporation with the Office of the
Secretary  of State of  Delaware  to comply  with  applicable  Delaware  General
Corporation Law.

     On August 10,  2000,  the  company  entered  into an  agreement  with three
accredited  investors for the financing of its subsidiary,  Connect Clearly.com,
Inc.("CCC").  In connection  with the initial funding of CCC, the company issued
1,000 shares of CCC common stock to these  investors in  consideration  for $0.5
million in cash and conversion of promissory  notes  payable,  due to two of the
investors,  totaling $0.5 million.  These CCC common shares are exchangeable for
shares of NCT common stock. During the year ended December 31, 2000 no shares of
CCC were exchanged for shares of NCT common stock.

     On August 18, 2000, the company  acquired 100% of the  outstanding  capital
stock of TRN, through a merger with Cinema. In connection with this acquisition,
the company issued 7,405,214  restricted shares of its common stock based upon a
trailing  market price (as defined in the stock  purchase  agreement) of $0.3376
per share,  for a total  value of $2.5  million  and a 7.5%  equity  interest in
Cinema. In February 2001, due to a decline in the trailing market price prior to
the effective  registration of shares of common stock,  an additional  2,455,248
shares were issued for the  acquisition  pursuant to a fill-up  provision.  (see
Note 2).

     On August 29, 2000,  the company  acquired all of the  outstanding  capital
stock of MSI through a merger with Midcore. In connection therewith, the company
issued 13,913,355 restricted shares of its common stock. In February 2001 due to
a decline in the closing bid price of the  company's  common  stock prior to the
effective  registration of the stock, an additional 2,863,891 shares were issued
pursuant to a fill-up provision (see Note 2).

     On September 7, 2000,  the company  issued  9,523,810  shares of its common
stock having a market value of $3.0 million to ITC with respect to the Strategic
Alliance and Technology Development Amendment with ITC (see Note 5).

     As  described  in Note 2, NCT Hearing had  arranged  $1.5 million in equity
financing  for  Pro  Tech in the  form  of  convertible  preferred  stock.  Such
convertible  preferred  stock is  convertible  into shares of Pro Tech's  common
stock or  exchangeable  for  shares  of  NCT's  common  stock at the  investors'
election.

     On  September  26,  2000,  the  company's  Board of  Directors  approved an
amendment to the Series G Certificate of Designations, Rights and Preferences to
increase  the  maximum  shares of common  stock into which it  converts  from 10
million  shares to 24 million  shares.  This action was  considered  in the best
interest of the company and its investor  relationships.  The  amendment  became
effective on September 27, 2000 when the company filed it with the Office of the
Secretary of State of Delaware.

     On September 27, 2000, the company  entered into a private equity line with
Crammer Road LLC ("Crammer"), pursuant to which the company may issue its common
stock to be sold by Crammer and Crammer  would  retain a portion of the proceeds
received for NCT common stock sold. In conjunction  with this  transaction,  the
company  issued  Crammer a warrant for 250,000  shares of the  company's  common
stock. In accordance with SFAS No. 123, the company  estimated the fair value of
this warrant to be $0.1 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 6.03%, volatility of
1, and a term of three years.  The accounting for the fair value of this warrant
due not impact the  consolidated  statements of Equity at December 31, 2000. The
company and Crammer are  currently in  renegotiations  regarding  amendments  to
certain details of the Private Equity Credit Agreement.

     On  September  29, 2000,  Pro Tech  entered into a Securities  Purchase and
Supplemental  Exchange Rights Agreement with the company,  Austost,  Balmore and
Zakeni Limited (Austost,  Balmore and Zakeni Limited  collectively the "Pro Tech
Investors") to consummate the $1.5 million financing arranged by the company for
Pro  Tech in  connection  with its sale of  1,500  shares  of Pro Tech  Series A
Convertible  Preferred  Stock ("Pro Tech  Preferred") to the Pro Tech Investors.
The Pro Tech Preferred  consists of 1,500 designated shares, par value $0.01 per
share and a stated  value of one  thousand  dollars  ($1,000)  per share with an
accretion rate of four percent (4%) per annum on the stated value. Each share of
such stock, in addition to being exchangeable for shares of the company's common
stock, is convertible into fully paid and nonassessable shares of the Pro Tech's
common stock pursuant to a predetermined  conversion formula. In connection with
the  execution of the  Securities  Purchase  and  Supplemental  Exchange  Rights
Agreement,  Pro Tech issued  warrants to the Pro Tech  Investors  to acquire 4.5
million  shares of Pro Tech's common stock.  Such  warrants are  exercisable  at
$0.50 per share and expire on October 28, 2003.  In  addition,  Pro Tech has the
right to require the warrant  holders to exercise  upon a call from Pro Tech. In
accordance  with SFAS No. 123, Pro Tech estimated the fair value of this warrant
to  be  $3.6  million,   using  the  following   assumptions   in  applying  the
Black-Scholes valuation method: risk-free interest rates of 5.97%, volatility of
1, and a term of three years. In addition, the excess of the quoted market value
of the common stock assumed to be converted  over the net proceeds  received for
issuance  of  convertible  preferred  shares of $0.4  million  is  considered  a
preferred dividend with this difference being accreted over the period beginning
with the issuance of the preferred stock to the date the shares are eligible for
conversion. The aggregate of $4.0 million is included in the calculation of loss
attibutable to common stockholders on the consolidated  statements of operations
at December 31, 2000.

     Pursuant to a consulting  agreement  dated as of March 15, 1999, as amended
as of June 1, 1999,  and as modified as of July 29,  1999,  between Pro Tech and
Union  Atlantic LC  ("UALC"),  Pro Tech would be  obligated to issue two percent
(2%) of its  outstanding  common stock to UALC upon the  consummation of the Pro
Tech  transaction  with NCT  Hearing.  In order to  comply  with the  consulting
agreement,  Pro Tech agreed to issue  279,688  shares and NCT Hearing  agreed to
issue 279,687  shares of Pro Tech's common stock to UALC,  totaling an aggregate
of 559,375  shares in full  settlement of all  obligations  under the consulting
agreement between Pro Tech and UALC.

     On November 27, 2000 the company sold 2.5 million shares, in the aggregate,
of its common stock at a price of $0.202 per share in a private  placement  that
provided net proceeds to the company of $0.5 million.

     On January 25, 1999, the company granted DMC an exclusive worldwide license
with respect to all of the company's relevant patented and unpatented technology
relating to DMC  products  in  consideration  for a license fee of $3.0  million
(eliminated in consolidation).  Such license fee is to be paid when proceeds are
available from the sale of DMC common stock. In addition, running royalties will
be payable to the company with respect to DMC's sales of products  incorporating
the licensed technology and its sublicensing of such technology.

     At the annual meeting of  stockholders of the company on June 24, 1999, the
stockholders  approved an  amendment  to increase the number of shares of common
stock the company is authorized  to issue from 255 million to 325 million.  This
amendment  became  effective  on July 29,  1999,  when  the  company  filed  the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.

     On June 24,  1999,  the Board of  Directors  approved the issuance of up to
15,000,000  shares of the  company's  common stock to be used to settle  certain
obligations of the company.  In 1999, the company  issued  13,154,820  shares of
common stock to suppliers and consultants to settle current  obligations of $1.8
million and future or anticipated obligations of $0.7 million.

     On August 10, 1999, the company entered into a subscription  agreement (the
"Series F Subscription  Agreement")  to sell an aggregate  stated value of up to
$12.5 million (12,500 shares) of Series F Preferred Stock in a private placement
pursuant to Regulation D of the  Securities  Act, to five  unrelated  accredited
investors  through  one  dealer  (the "1999  Series F  Preferred  Stock  Private
Placement").  On August 10, 1999, the company received $1.0 million for the sale
of 8,500 shares of Series F Preferred Stock having an aggregate  stated value of
$8.5  million.  At the  company's  election,  the  investors may invest up to an
additional  $4.0 million in cash or in kind at a future date.  Each share of the
Series F Preferred Stock has a par value of $.10 per share and a stated value of
one thousand  dollars  ($1,000) with an accretion  rate of four percent (4%) per
annum on the stated value. Each share of Series F Preferred Stock is convertible
into fully paid and non-assessable shares of the company's common stock, subject
to certain  limitations.  Each share of Series F Preferred  Stock is convertible
into a number  of  shares  of  common  stock of the  company  as  determined  in
accordance with a formula (the "Series F Conversion Formula"), as defined in the
agreement.  The  conversion  terms of the Series F Preferred  Stock also provide
that in no event shall the company be  obligated  to issue more than  35,000,000
shares of its common stock in the aggregate in connection with the conversion of
up to 12,500  shares of Series F Preferred  Stock.  In the  interest of investor
relations of the company,  the maximum number of conversion shares was increased
to 77  million  shares  of the  company's  common  stock.  The  company  is also
obligated  to pay a 4% per  annum  accretion  on the  stated  value of  Series F
Preferred Stock in either cash or common stock, at the company's  election.  The
company  registered an aggregate of 25,744,000  shares of common stock  issuable
upon  conversion  and payment for  accretion.  In  connection  with the Series F
Preferred Stock, the company may be obligated to redeem the excess of the stated
value  over the  amount  permitted  to be  converted  into  common  stock.  Such
additional  amounts will be treated as obligations of the company.  On September
10,  1999,  the company  received  $4.0  million for four DMC network  affiliate
licenses from four  accredited  investors.  While the investors  agreed upon the
exchange of 8,500  shares of Series F Preferred  Stock having  aggregate  stated
value of $8.5  million,  for  consideration  of $1.0  million,  the  company has
treated  the  additional  $4.0  million  for  the  DMC  licenses  as  additional
consideration for the Series F Preferred Stock. On December 15, 1999, 974 shares
of the  company's  Series F Preferred  Stock,  together with 5,026 shares of the
company's  Series E  Preferred  Stock,  were  exchanged  for eight  DMC  network
affiliate licenses.  As of December 31, 2000, 7,526 shares of Series F Preferred
Stock had been converted into 48,776,638 shares of the company's common stock.

     The company has certain contingent  obligations under a securities exchange
agreement,  dated as of October 9, 1999 (the  "Exchange  Agreement"),  among the
company, Austost and Balmore. Pursuant to the Exchange Agreement, on October 26,
1999 the company issued a total of 17,333,334 shares to Austost and Balmore (the
"Exchange  Shares") in exchange for 532 shares of common stock of NCT Audio held
by Austost and Balmore.  The  effective  per share price of the Exchange  Shares
received  by Austost and  Balmore  was $0.06 per share  (representing  the total
purchase price  originally  paid by Austost and Balmore for the NCT Audio shares
of $1.0  million  divided by  17,333,334).  This  effective  per share price was
$0.115,  or 65.7%, less than the closing bid price of the company's common stock
as reported by the OTC Bulletin  Board on October 25, 1999.  This  effective per
share price may be subject to increase upon the application of an exchange ratio
adjustment  provision  contained in the Exchange  Agreement on February 15, 2000
(or an earlier date agreed to by all the parties) and may be subject to decrease
upon the application of a reset provision  contained in the Exchange  Agreement,
as described below.

     On July 27, 1998, the company  entered into  subscription  agreements  (the
"Series D Subscription Agreements") to sell 6,000 shares of the company's Series
D Convertible  Preferred Stock ("Series D Preferred  Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities  Act, to six unrelated  accredited  investors  through one dealer
(the "1998  Series D  Preferred  Stock  Private  Placement").  $5.2  million net
proceeds  were  received by the company  from the 1998 Series D Preferred  Stock
Private Placement. Each share of the Series D Preferred Stock has a par value of
$.10 per share  and a stated  value of one  thousand  dollars  ($1,000)  with an
accretion rate of four percent (4%) per annum on the stated value. Each share of
Series D  Preferred  Stock is  convertible  into fully  paid and  non-assessable
shares of the company's common stock subject to certain limitations.  The Series
D  registration  statement  became  effective on October 30, 1998, and shares of
Series D Preferred Stock became convertible on that date. Each share of Series D
Preferred  Stock is  convertible  into a number of shares of common stock of the
company as determined in accordance with the Series D Conversion  Formula as set
forth in the agreement.  Including  shares of common stock issued for accretion,
as of March 12, 1999, all shares of Series D Preferred  Stock had been converted
into 12,273,685 shares of NCT common stock.

     On July 27, 1998, NCT Audio entered into subscription  agreements (the "NCT
Audio  Subscription  Agreements")  to sell 60  shares  of NCT  Audio's  Series A
Convertible  Preferred  Stock ("NCT Audio Series A Preferred  Stock")  having an
aggregate  stated  value of $6.0  million in a private  placement,  pursuant  to
Regulation  D of the  Securities  Act,  to six  unrelated  accredited  investors
through  one  dealer  (the  "1998 NCT Audio  Series A  Preferred  Stock  Private
Placement").  NCT Audio  received net proceeds of $5.2 million from the 1998 NCT
Audio Series A Preferred  Stock Private  Placement.  Each share of the NCT Audio
Series A Preferred Stock has a par value of $.10 per share and a stated value of
one hundred thousand  dollars  ($100,000) with an accretion rate of four percent
(4%) per annum on the stated  value.  Each share of NCT Audio Series A Preferred
Stock is convertible  into fully paid and  non-assessable  shares of NCT Audio's
common stock  subject to certain  limitations.  Each share of Series A Preferred
Stock is  convertible  into a number of  shares of common  stock of NCT Audio as
determined  in accordance  with the Series A Conversion  Formula as set forth in
the  agreement.  On March 30,  1999,  holders of 57 shares of NCT Audio Series A
Preferred  Stock  exercised  this  election  and  converted  their  shares  into
11,699,857  shares of the company's common stock. At December 31, 1999, 3 shares
of NCT Audio Series A Preferred Stock were outstanding. On January 10, 2000, the
remaining 3 shares of NCT Audio  Series A Preferred  Stock were  converted  into
634,915 shares of the company's common stock.

     During 1998,  the Board of Directors  authorized the issuance of a total of
125,000 shares of the company's common stock to an employee, two directors and a
consultant in connection with their services to the company.  The company valued
these shares at $97,000, representing the fair value on the date of issuance.

     On July 15, 1998 the company transferred $5,000 and all of the business and
assets of its Hearing Products  Division as then conducted by the company and as
reflected  on  the  business  books  and  records  of  the  company  to a  newly
incorporated  subsidiary company, NCT Hearing Products,  Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a  wholly-owned  subsidiary of the company.  The company also granted NCT
Hearing an exclusive  worldwide  license  with  respect to all of the  company's
relevant  patented and  unpatented  technology  relating to Hearing  Products in
consideration for a license fee of $3.0 million, eliminated in consolidation, to
be paid when  proceeds are available  from the sale of NCT Hearing  common stock
and running  royalties  payable with respect to NCT Hearing's  sales of products
incorporating  the licensed  technology and its sublicensing of such technology.
It is anticipated  that NCT Hearing will issue  additional  shares of its common
stock in  transactions  exempt from  registration  in order to raise  additional
working capital.

     On July 29, 1998, the company  initiated a plan to repurchase  from time to
time up to 10 million  shares of the  company's  common stock in the open market
pursuant to Rule 10b-18 under the Exchange Act or through  block  trades.  As of
December 31, 1998, the company had repurchased 5,607,100 shares of the company's
common  stock at per share prices  ranging  from  $0.3438 to $0.6563.  The stock
repurchase program was terminated on December 30, 1998.

     On  September  4, 1998,  the company  acquired  the issued and  outstanding
common stock of Advancel.  The  acquisition  was pursuant to the Stock  Purchase
Agreement.  The  consideration  for the acquisition of the Advancel common stock
consisted  of an initial  payment of $1.0  million  payable by the  delivery  of
1,786,991 shares of the company's  treasury stock together with future payments,
payable  in cash or in  common  stock  of the  company  at the  election  of the
Advancel  Shareholders  based on Advancel's  earnings  before  interest,  taxes,
depreciation  and  amortization  for each of the calendar years 1999, 2000, 2001
and 2002. The acquisition was accounted for as a purchase and, accordingly,  the
accompanying  consolidated financial statements include the accounts of Advancel
from the date of  acquisition.  The cost of the acquisition was allocated to the
assets acquired and liabilities assumed based on their fair value as follows:

    Current asseets                                         $   368,109
    Property and equipment                                        4,095
    Goodwill                                                  1,018,290
    Other Assets                                                 13,486
    Current liabilities                                        (485,040)
    Unearned portion of compensatory stock                      141,251
                                                            -------------
    Cost of acquisition (including expenses of $60,191)     $ 1,060,191
                                                            =============

     At the  annual  meeting  of  Stockholders  held on October  20,  1998,  the
stockholders  approved an amendment to the  company's  Restated  Certificate  of
Incorporation  to increase the authorized  number of shares of common stock from
185  million  to 255  million  shares.  Such  action  was deemed by the Board of
Directors to be in the best interest of the company to make additional shares of
the company's  common stock available for an increase in the number of shares of
common stock  covered by the 1992 Plan (see Note 14) pursuant to an amendment of
the 1992 Plan  approved  by the  stockholders  at such annual  meeting,  and for
acquisitions,  public or private financings  involving common stock or preferred
stock  or other  securities  convertible  to  common  stock,  stock  splits  and
dividends,  present and future  employee  benefit  programs and other  corporate
purposes.

     On  November  24,  1998,   the  company  paid  $1,000   consideration   for
incorporation  of DMC which was  formed  to  develop,  install  and  provide  an
audio/visual advertising medium within commercial/professional settings.

     On December 30,  1998,  the company  entered into a series of  subscription
agreements (the "Series E Subscription  Agreements") to sell an aggregate stated
value of up to $8.2  million  of Series E  Convertible  Preferred  Stock  (the "
Series E  Preferred  Stock")  in  consideration  of $4.0  million,  in a private
placement,  pursuant to Regulation D of the  Securities  Act, to six  accredited
investors  through  one  dealer  (the "1998  Series E  Preferred  Stock  Private
Placement").  The $4.0  million  subscription  receivable  at December  31, 1998
represents  a  receivable  due from the  Series E  Subscription  Agreements.  In
addition to the above noted Series E Subscription Agreements, the company issued
and sold an  aggregate  amount of $1.7  million of Series E  Preferred  Stock to
three accredited  investors  through the above noted dealer,  in exchange for an
aggregate stated value of $1.7 million of the company's Series C Preferred Stock
held by the three  accredited  investors.  The  company  also issued and sold an
aggregate  amount of $0.7 million of Series E Preferred Stock to four accredited
investors  through the above noted dealer,  in exchange and consideration for an
aggregate of 2.1 million  shares of the company's  common stock held by the four
accredited  investors  and received net proceeds of $1.8  million.  On April 13,
1999, the company entered into a subscription  agreement to sell 1,874 shares of
Series  E  Preferred  Stock,  with a  stated  value  of up to  $1.9  million  in
consideration of $1.9 million to four accredited  investors  through one dealer.
Each share of the Series E Preferred Stock has a par value of $.10 per share and
a stated value of one thousand  dollars  ($1,000) with an accretion rate of four
percent  (4%) per annum on the stated  value.  Each share of Series E  Preferred
Stock is convertible into fully paid and non-assessable  shares of the company's
common stock  subject to certain  limitations.  Each share of Series E Preferred
Stock is  convertible  into a number of shares of common stock of the company as
determined  in accordance  with the Series E Conversion  Formula as set forth in
the agreement.  During 1999, holders of 3,828 shares of Series E Preferred Stock
elected to convert  their shares into  26,608,942  shares of common stock of the
company.  On March 31, 1999, the company signed a license  agreement to exchange
3,600  shares  of  Series E  Preferred  Stock  for four  DMC  network  affiliate
licenses.  During  the three  months  ended  March 31,  1999,  the  company,  in
accordance with its revenue  recognition  policy,  realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock. Subsequently,  during the three months
ended June 30, 1999,  the company  adjusted  such revenue to $0.9 million due to
the valuation of additional shares of Series E Preferred Stock issued during the
period.  On December  15,  1999,  holders of the  remaining  5,026 shares of the
company's  Series E Preferred  Stock and holders of 974 shares of the  company's
Series F Preferred Stock (see below),  an aggregate  stated value of $6 million,
exchanged  such shares for eight DMC network  affiliate  licenses.  No shares of
Series E Preferred Stock were outstanding at December 31, 1999 and 2000.

     Between  October 28, 1997 and December 11, 1997, the company entered into a
series of subscription  agreements  (the "Series C Subscription  Agreements") to
sell an  aggregate  amount of $13.3  million of Series C  Convertible  Preferred
Stock (the  "Series C  Preferred  Stock") in a private  placement,  pursuant  to
Regulation D of the Securities Act, to 32 unrelated accredited investors through
two dealers (the "1997 Series C Preferred Stock Private  Placement").  The total
1997 Series C Preferred  Stock  Private  Placement was completed on December 11,
1997.  The  aggregate net proceeds to the company of the 1997 Series C Preferred
Stock Private Placement were $11.9 million. Each share of the Series C Preferred
Stock  has a par  value of $.10 per  share  and a stated  value of one  thousand
dollars  ($1,000)  with an accretion  rate of four percent (4%) per annum on the
stated value. convertible into a number of shares of common stock of the company
as determined in accordance with the Series D Conversion Formula as set forth in
the  agreement.  On December  30,  1998,  1,700 shares of the Series C Preferred
Stock were exchanged for the company's Series E Preferred Stock. At December 31,
1998,  10,850  shares  of  Series C  Preferred  Stock  had been  converted  into
20,665,000  shares of NCT common  stock.  The 700  remaining  Series C Preferred
Stock shares were subject to mandatory  conversion  as of November 30, 1999.  As
such, on November 30, 1999,  these 700 shares were converted to 1,512,000 shares
of common  stock of the company.  At December  31, 1999 and 2000,  there were no
outstanding shares of Series C Preferred Stock.


Common  shares  available  for common stock  options,  warrants and  convertible
securities:

     At December 31, 2000, the number of shares  required to be reserved for the
exercise of options and  warrants  was 67.7  million.  The  aggregate  number of
shares of common stock required to be reserved for issuance upon the exercise of
all outstanding  options and warrants granted was 67.4 million shares,  of which
options and warrants to purchase 52.6 million shares were currently exercisable.
These aggregate  reserves exclude the PRG Warrant for 6,666,667 shares (see Note
12). Certain of the company's  required  reserves are a function of the price of
the  company's  common  stock.  The  following  reserve  requirements  have been
calculated at an assumed  $0.25 common stock price or the discount  therefrom as
allowed under the exchange or  conversion  agreements.  The aggregate  number of
shares of common stock  required to be reserved for issuance upon  conversion of
issued and outstanding  shares of Series G Preferred Stock was 3.8 million.  The
company has reserved 7.1 million  shares of common stock for issuance to certain
holders of NCT Audio  common  stock upon  exchange of their  shares of NCT Audio
common stock for shares of the company's common stock. The company also reserved
27.1 million  shares of common stock for issuance  upon  conversion of the notes
and  accrued  interest  thereon.   The  reserve   requirement  for  exchange  of
outstanding  shares of common stock of ConnectClearly was 5.8 million NCT shares
and for  exchange of Pro Tech  convertible  preferred  stock was 7.6 million NCT
shares.  Pursuant to stock  purchase  agreements,  the company had a  contingent
fill-up  obligation to the former  shareholders of the Theater Radio Network and
Midcore  Software (see Note 2). Common shares issued and required to be reserved
for issuance  exceeded the number of shares  authorized  at December 31, 2000 at
the actual  year-end  common  stock price of $0.172.

14.  Common Stock Options and Warrants:

     The company  applies APB 25 in accounting  for its various  employee  stock
option incentive plans and warrants and,  accordingly,  recognizes  compensation
expense as the  difference,  if any,  between the market price of the underlying
common  stock and the  exercise  price of the  option on the date of grant.  The
effect of  applying  SFAS No.  123 on 1998,  1999 and 2000 pro forma net loss as
stated above is not  necessarily  representative  of the effects on reported net
loss for future periods due to, among other  factors,  (i) the vesting period of
the stock options,  and (ii) the fair value of additional stock option grants in
future periods. If compensation expense for the company's stock option plans and
warrants had been determined  based on the fair value of the options or warrants
at the grant date for awards  under the plans in  accordance  with SFAS No. 123,
the  company's net loss would have been $19.0  million,  $27.4 million and $17.7
million,  or $(0.16),  $(0.20)  and  $(0.08)  per share in 1998,  1999 and 2000,
respectively.  The fair value of the options and warrants  granted in 1998, 1999
and 2000 are estimated in the range of $0.24 to $0.81, $0.26 to $0.64, and $0.16
to $1.28 per share,  respectively,  on the date of grant using the Black-Scholes
option-pricing  model  utilizing the following  assumptions:  dividend yield 0%;
volatility of 1.307,  1.0 and 1.0 to 1.29 in 1998, 1999 and 2000,  respectively;
risk free  interest  rates in the range of 5.28% to 5.55%,  4.56% to 6.14%,  and
4.56% to 6.56% for 1998,  1999 and 2000,  respectively;  and expected  life of 3
years.  The weighted  average fair value of options and warrants  granted during
1998,  1999 and 2000 are  estimated in the range of $0.53,  $0.28 to $0.48,  and
$0.22  to  $0.27  per  share,   respectively,   also  using  the   Black-Scholes
option-pricing model.

Stock Options:

     The  company's  1987 Stock Option Plan (the "1987  Plan")  provides for the
granting of up to 4 million  shares of common  stock as either  incentive  stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options,  are
full-time employees  (including  officers and directors) of the company;  or, in
the case of nonstatutory stock options, are employees or non-employee  directors
of the company.  The exercise  price of all  incentive  stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable  over a ten-year  period.  The exercise price and duration of
the  nonstatutory  stock options are to be determined by the Board of Directors.
Options  granted under the 1987 Plan  generally  vest 20% upon grant and 20% per
annum thereafter as determined by the Board of Directors.

   1987 Plan activity is summarized as follows:
<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                        ----------------------------------------------------------------------------
                                                  1998                      1999                       2000
                                        ------------------------ -------------------------  ------------------------
                                                       Weighted                  Weighted                  Weighted
                                                        Average                  Average                    Average
                                                        Exercise                 Exercise                   Exercise
                                           Shares        Price       Shares        Price       Shares        Price
                                        ------------   --------- -------------   ---------  -------------  ---------
<S>                                      <C>           <C>         <C>           <C>          <C>           <C>
Outstanding at beginning of year         1,350,000     $  0.51     1,350,000     $  0.51      1,350,000     $  0.51
Options granted                                  -           -     1,350,000     $  0.51              -     $     -
Options exercised                                -           -             -           -              -           -
Options canceled, expired or forfeited           -           -    (1,350,000)    $  0.51              -     $     -
                                        ------------             -------------              -------------
Outstanding at end of year               1,350,000     $  0.51     1,350,000     $  0.51      1,350,000     $  0.51
                                        ============             =============              =============
Options exercisable at year-end          1,350,000     $  0.51     1,350,000     $  0.51      1,350,000     $  0.51
                                        ============             =============              =============
</TABLE>

     In 2000,  the Board  determined  that no future  grants of options  for the
purchase of shares would be made under the 1987 Plan.  Thus,  as of December 31,
2000,  no options for the  purchase of shares were  available  for future  grant
under the 1987 Plan.

     The  company's  non-plan  options  are  granted  from  time  to time at the
discretion of the Board of Directors. The exercise price of all non-plan options
generally  must be at least equal to the fair market value of such shares on the
date of grant and  generally are  exercisable  over a five to ten year period as
determined by the Board of Directors.  Vesting of non-plan  options  varies from
(i) fully vested at the date of grant to (ii)  multiple  year  apportionment  of
vesting as determined by the Board of Directors.

     Non-plan stock option activity is summarized as follows:
<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                        ----------------------------------------------------------------------------
                                                  1998                      1999                       2000
                                        ------------------------ -------------------------  ------------------------
                                                       Weighted                  Weighted                  Weighted
                                                        Average                  Average                    Average
                                                        Exercise                 Exercise                   Exercise
                                           Shares        Price       Shares        Price       Shares        Price
                                        ------------   --------- -------------   ---------  -------------  ---------
<S>                                      <C>           <C>         <C>           <C>          <C>           <C>
Outstanding at beginning of year         4,319,449     $  0.36     4,319,449     $  0.36      4,284,000     $  0.33
Options granted                                  -           -             -           -              -           -
Options exercised                                -           -             -           -              -           -
Options canceled, expired or forfeited           -           -       (35,449)    $  4.86       (259,000)    $  0.70
                                        ------------             -------------              -------------
Outstanding at end of year               4,319,449     $  0.36     4,284,000     $  0.33      4,025,000     $  0.30
                                        ============             =============              =============
Options exercisable at year-end          4,319,449     $  0.36     4,284,000     $  0.33      4,025,000     $  0.30
                                        ============             =============              =============
</TABLE>

     On October 6, 1992,  the company  adopted a stock  option plan (as amended,
the "1992 Plan") for the granting of options to purchase up to 10,000,000 shares
of  common  stock  to  officers,  employees,  certain  consultants  and  certain
directors. The exercise price of all 1992 Plan options must be at least equal to
the fair  market  value of such  shares  on the date of the  grant and 1992 Plan
options are generally  exercisable  over a five to ten year period as determined
by the Board of  Directors.  Vesting of 1992 Plan options  varies from (i) fully
vested at the date of grant to (ii)  multiple year  apportionment  of vesting as
determined  by the Board of  Directors.  On October 20, 1998,  the  stockholders
approved an  amendment  to the 1992 Plan to  increase  the  aggregate  number of
shares of common  stock  reserved for grants of  restricted  stock and grants of
options to purchase shares of common stock to 30,000,000  shares.  The 1992 Plan
was also  amended  to  eliminate  the  automatic  grant of 75,000  shares of the
company's  common stock upon a new director's  initial  election to the Board of
Directors and to eliminate the automatic  grant of 5,000 shares of the company's
common  stock to each  non-employee  director  for services as a director of the
company  for each  subsequent  election.  On  January  19,  2000,  the  Board of
Directors amended the 1992 Plan,  subject to stockholder  approval,  to increase
the  aggregate  number of shares of the  company's  common  stock  reserved  for
issuance  upon the exercise of stock  options  granted  under the 1992 Plan from
30,000,000  shares to  50,000,000  shares.  Such  amendment  was approved by the
stockholders at the company's annual meeting on July 13, 2000.

     In January 2000, the Board of Directors  granted options to purchase shares
of the company's common stock to certain  officers and employees,  new employees
and certain  consultants  of the company for  services  rendered to the company,
subject to the  approval  by the  company's  stockholders  of an increase in the
number of  shares  authorized  and  subject  to the  approval  by the  company's
stockholders  of an increase  in the number of shares  covered by the 1992 Plan.
Such options  were  granted at or above the fair market  value of the  company's
common  stock on the date of grant.  The fair  value of the  option  granted  to
consultants  amounted to $0.1  million  and is included in selling,  general and
administrative expenses on the consolidated statements of operations at December
31, 2000.

     On April 21, 2000,  the Board of  Directors  approved  the  re-granting  of
replacement grants for forfeit options that would otherwise expire in 2000. Such
replacement  grants under the 1992 Plan totaled  approximately  315,000 options.
There was no financial statement impact with respect to the re-granting of these
options.

     In July  2000,  the Board of  Directors  cancelled  certain  options it had
granted in January  2000.  The Board granted new options at the then fair market
value of the common stock,  a higher  exercise  price than had been in effect in
January  2000.  There was no  financial  statement  impact  with  respect to the
re-granting of these options.


     In December 2000, the Board of Directors  granted  options to directors and
employees to acquire  11,325,000  shares of common stock  subject to  sufficient
remaining shares under the 1992 Plan and subject to shareholder approval.  These
grants exceeded the number of shares available under the 1992 Plan by 2,824,505.
As such, the grant to the company's Chief Executive  Officer and Chairman of the
Board of  Directors  was  reduced  by this  amount,  but this  award  remains an
obligation pending future  availability under the 1992 Plan or adoption of a new
stock option plan.


   1992 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                        ----------------------------------------------------------------------------
                                                  1998                      1999                       2000
                                        ------------------------ -------------------------  ------------------------
                                                       Weighted                  Weighted                  Weighted
                                                        Average                  Average                    Average
                                                        Exercise                 Exercise                   Exercise
                                           Shares        Price       Shares        Price       Shares        Price
                                        ------------   --------- -------------   ---------  -------------  ---------
<S>                                      <C>           <C>         <C>           <C>          <C>           <C>
Outstanding at beginning of year          9,029,936     $  0.72    19,831,821    $  0.52      28,024,237    $  0.47
Options granted                          21,989,000     $  0.69     9,398,538    $  0.43      35,377,071    $  0.42
Options exercised                            (1,561)    $  0.27        (5,000)   $  0.27      (1,284,907)   $  0.58
Options canceled, expired or forfeited  (11,185,554)    $  1.03    (1,201,122)   $  0.60     (12,234,206)   $  0.49
Board action                                      -     $     -             -    $     -      (2,824,505)   $  0.33
                                        ------------             -------------              -------------
Outstanding at end of year               19,831,821     $  0.52    28,024,237    $  0.47      47,057,690    $  0.43
                                        ============             =============              =============
Options exercisable at year-end          12,053,571     $  0.60    14,751,044    $  0.55      32,330,873    $  0.47
                                        ============             =============              =============
</TABLE>

     As of  December  31,  2000,  no options  for the  purchase  of shares  were
available  for future  grants of  restricted  stock  awards  and for  options to
purchase common stock under the 1992 Plan.

     On November 15, 1994,  the Board of Directors  adopted the NCT Group,  Inc.
Option Plan for Certain Directors (as amended,  the "Directors Plan"). Under the
Directors Plan,  821,000 shares have been approved by the Board of Directors for
issuance.  The options  granted  under the Directors  Plan have exercise  prices
equal to the fair market value of the common stock on the grant dates and expire
five years from date of grant.  Options  granted  under the  Directors  Plan are
fully vested at the grant date.

      Directors Plan activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                        ----------------------------------------------------------------------------
                                                  1998                      1999                       2000
                                        ------------------------ -------------------------  ------------------------
                                                       Weighted                  Weighted                  Weighted
                                                        Average                  Average                    Average
                                                        Exercise                 Exercise                   Exercise
                                           Shares        Price       Shares        Price       Shares        Price
                                        ------------   --------- -------------   ---------  -------------  ---------
<S>                                      <C>           <C>         <C>           <C>          <C>           <C>
Outstanding at beginning of year           746,000     $  0.73      746,000       $  0.73       538,000     $  0.73
Options granted                                  -           -      538,500       $  0.73             -     $     -
Options exercised                                -           -            -             -             -           -
Options canceled, expired or forfeited           -           -     (746,000)      $  0.73             -     $     -
                                        ------------             -------------              -------------
Outstanding at end of year                 746,000     $  0.73      538,500       $  0.73       538,500     $  0.73
                                        ============             =============              =============
Options exercisable at year-end            746,000     $  0.73      538,500       $  0.73       538,500     $  0.73
                                        ============             =============              =============
</TABLE>

     As of December  31, 2000,  there were  282,500  options for the purchase of
shares available for future grants under the Directors Plan.

     The following  summarizes  information  about the  Company's  stock options
outstanding and exercisable at December 31, 2000:

<TABLE>
<CAPTION>

                                              Options Outstanding                Options  Exercisable
                                   -----------------------------------------  --------------------------
                                                    Weighted
                                                     Average
                                                    Remaining      Weighted                     Weighted
                                                   Contractual     Average                     Average
                   Range of             Number        Life         Exercise       Number       Exercise
      Plan         Exercise Price    Outstanding    (In Years)       Price      Exercisable      Price
----------------- ---------------  -------------  ------------  ------------  -------------  -----------
<S>               <C>      <C>       <C>               <C>       <C>            <C>            <C>
1987 Plan         $0.50 to $0.63     1,350,000         3.09      $  0.51        1,350,000      $  0.51
                                   =============                              =============
Non-Plan          $0.27 to $0.50     4,025,000         1.28      $  0.30        4,025,000      $  0.30
                                   =============                              =============
1992 Plan         $0.16 to $0.27     6,373,678         5.89      $  0.22        3,228,118      $  0.23
                  $0.31 to $0.44    22,576,542         7.79      $  0.38       13,236,274      $  0.37
                  $0.50 to $2.88    18,107,470         2.75      $  0.58       15,866,481      $  0.59
                                   -------------                              -------------
Total 1992 Plan                     47,057,690                                 32,330,873
                                   =============                              =============
Director's Plan   $0.66 to $0.75       538,500         3.09      $  0.73          538,500      $  0.73
                                   =============                              =============
</TABLE>


Warrants:

     The company's  warrants are granted from time to time at the  discretion of
the Board of Directors.  The exercise price of all warrants generally must be at
least  equal  to the fair  market  value of such  shares  on the date of  grant.
Generally,  warrants  are  exercisable  over a three to  seven  year  period  as
determined by the Board of Directors and vest on the grant date.

     In July 1999,  in  connection  with the PRG Note,  PRG was granted a common
stock warrant  equal to either (i) the number of shares of the company's  common
stock  (6,666,667)  which may be purchased  for an aggregate  purchase  price of
$1,250,000  at the fair  market  value on July 19,  1999 or (ii) the  number  of
shares  representing  five  percent of the fully paid  non-assessable  shares of
common stock of DMC at the purchase price per share equal to either (x) if a DMC
qualified sale (a sale in one  transaction in which the aggregate sales proceeds
to DMC equal or exceed  $5,000,000)  had closed on or before  December 31, 1999,
the purchase price per share  determined by  multiplying  the price per share of
DMC common stock or security  convertible  into DMC common stock by seventy-five
percent  (75%)  or (y) if a DMC  qualified  sale  had not  closed  on or  before
December 31, 1999, at an aggregate price of $1,250,000. Such warrant expires (1)
eighteen  months  after the date of the DMC  qualified  sale or (2) in all other
cases on July 19, 2004.

     During 2000,  warrants were issued to the principals of a placement  agency
that had  assisted  in  financing  transactions  for NCT  Audio  in 1997.  These
warrants replaced warrants that had been issued to and canceled by the placement
agent.  Warrants to acquire  167,500  shares were issued in connection  with the
Series G Preferred Stock  transaction (see Note 13). Warrants to acquire 100,000
shares  of common  stock  were  issued  to an  outside  consultant  in 2000.  In
September  2000,  the company  issued  warrants for 10 million  shares of common
stock to the  placement  agent for  certain of the  company's  recent  financing
transactions.  Effective  January 11, 2001,  the holder has agreed to stand down
his right to such  shares  subject to an increase in  authorized  common  shares
approved by the company's shareholders.

     On September 27, 2000, in connection with the execution of a private equity
credit  agreement  the  company  issued a  warrant  for  250,000  shares  of the
company's  common  stock.  The fair  value of this  warrant  did not  impact the
consolidated statements of equity at December 31, 2000. The company is currently
in renegotiations  regarding amendments to certain details of the Private Equity
Credit Agreement.


     Warrant activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                        ----------------------------------------------------------------------------
                                                  1998                      1999                       2000
                                        ------------------------ -------------------------  ------------------------
                                                       Weighted                  Weighted                  Weighted
                                                        Average                  Average                    Average
                                                        Exercise                 Exercise                   Exercise
                                           Shares        Price       Shares        Price       Shares        Price
                                        ------------   --------- -------------   ---------  -------------  ---------
<S>                                      <C>           <C>         <C>           <C>          <C>           <C>
Outstanding at beginning of year         3,146,920     $  0.81      4,372,684    $  0.82       3,735,414   $  0.77
Warrants granted                         1,588,164     $  0.92      2,587,875    $  0.75      10,979,875   $  0.34
Warrants exercised                               -           -              -          -               -         -
Warrants canceled, expired or forfeited   (362,400)    $  1.16     (3,225,145)   $  0.82        (333,625)  $  0.89
                                        ------------             -------------              -------------
Outstanding at end of year               4,372,684     $  0.82      3,735,414    $  0.77      14,381,664   $  0.44
                                        ============             =============              =============
Warrants exercisable at year-end         4,172,684     $  0.86      3,735,414    $  0.77      14,381,664   $  0.44
                                        ============             =============              =============
</TABLE>

     The following table summarizes  information  about warrants  outstanding at
December 31, 2000 except the PRG Warrant described above:
<TABLE>
<CAPTION>

                                 Warrants Outstanding              Warrants Exercisable
                      -----------------------------------------  --------------------------
                                     Weighted
                                     Average
                                     Remaining      Weighted                     Weighted
                                    Contractual     Average                     Average
      Range of          Number        Life         Exercise       Number       Exercise
   Exercise Price    Outstanding    (In Years)       Price      Exercisable      Price
   ---------------  -------------  ------------  ------------  -------------  -----------
    <S>      <C>       <C>               <C>       <C>            <C>            <C>
   $0.32 to $0.34    10,250,000        2.68       $  0.32        10,250,000     $  0.32
   $0.46 to $1.66     4,131,664        3.23       $  0.74         4,131,664     $  0.74
</TABLE>

15.  Related Parties:

     Between 1993 and 1994, the company  entered into five agreements with Quiet
Power Systems, Inc. ("QSI").  Environmental  Research Information,  Inc. ("ERI")
owns 33% of QSI and Jay M. Haft,  a director of the company and former  Chairman
of the Board of Directors,  owns another 2% of QSI.  Michael J. Parrella,  Chief
Executive  Officer of the company and Chairman of the Board of  Directors,  owns
12% of the  outstanding  capital of ERI and shares  investment  control  over an
additional 24% of its  outstanding  capital.  Jonathan M. Charry,  the company's
Senior Vice President, Corporate Development, hired in January 2000, owns 20% of
the outstanding  capital stock of ERI and 3% of the outstanding capital stock of
QSI. In March 1995, the company  entered into a master  agreement with QSI which
granted  QSI an  exclusive  worldwide  license  to market,  sell and  distribute
various quieting products in the utility industry. Subsequently, the company and
QSI executed  four letter  agreements,  primarily  revising  payment  terms.  On
December 24, 1999, the company  executed a final agreement with QSI in which the
company agreed to write-off $0.2 million of indebtedness owed by QSI in exchange
for  the  return  by QSI to the  company  of its  exclusive  license  to use NCT
technology in various quieting  products in the utility  industry.  Such amount,
originally due on January 1, 1998, had been fully reserved by the company.

     The company's former Chairman of the Board of Directors,  who has continued
as a director,  received compensation from the company in 1998, 1999 and 2000 of
$96,000, $86,000 and $64,500, respectively.

     The company's Chief  Executive  Officer,  who, at December 31, 2000,  holds
options and warrants for the right to acquire an aggregate of 26,577,129  shares
of the company's  common stock,  received an incentive  bonus equal to a 1% cash
override on all the cash and cash  equivalents  received by the company upon the
execution of  agreements or other  documentation  evidencing  transactions  with
unaffiliated  parties.  For the year ended  December  31,  1998,  1999 and 2000,
approximately  $206,000,  $169,000  and  $363,000  was  paid by the  company  in
connection with this arrangement.

     The  company's  Senior  Vice  President  Chief  Financial  Officer,  who at
December  31,  2000  holds  options  and  warrants  for the right to  acquire an
aggregate of 1,533,742  shares of the company's  common stock,  through November
30, 2000 had an incentive bonus  arrangement equal to 1/2% cash override on cash
received  from  certain   transactions   entered  into  by  the  company,   with
unaffiliated  parties,  in  which  the  Chief  Financial  Officer  was  directly
involved.  Effective  December 1, 2000,  such bonus  arrangement was modified to
include all cash and cash  equivalent  transactions  entered into by the company
with   unaffiliated   parties.   Under  this   arrangement,   the  company  paid
approximately $134,000 for the year ended December 31, 2000.

     The company's Senior Vice President, Corporate Development, who at December
31, 2000 holds options for the right to acquire an aggregate of 1,378,049 shares
of the company's common stock, has an incentive bonus arrangement under which he
receives cash  compensation  for  completion of specified  events and receives a
cash  override  equal  to  1% of  the  value  of  certain  subsidiary  financing
transactions  and 1/2% of the value of licensing  agreements  and joint  venture
alliances in which he was directly involved. Under this arrangement, the company
paid $35,000 in the year ended December 31, 2000.

     On various dates in 2000, the company's  Senior Vice  President,  Corporate
Development,  entered into several  short-term  promissory notes to borrow funds
from the  company in  anticipation  of cash  overrides  due under the  incentive
compensation  arrangement  described  above.  As of  December  31,  2000,  three
promissory notes were outstanding for an aggregate  principal amount owed to the
company  of  $69,379.  The notes  bear  interest  at the prime  lending  rate as
published  in The Wall Street  Journal on the date of issuance of the notes plus
one percent,  or an annual rate of 10.5% for the notes  outstanding  at December
31, 2000.

      During 1998, 1999 and 2000, the company  purchased $0.2 million,  zero and
zero,  respectively,  of products from its various  manufacturing  joint venture
entities.

16.  Income Taxes:

     The company  provides  for income  taxes in  accordance  with  Statement of
Financial   Accounting   Standards  No.  109,  "Accounting  for  Income  Taxes".
Accordingly,  deferred tax assets and  liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the company determines that it is more
likely than not that a deferred  tax asset will not be realized.  The  company's
temporary  differences  primarily result from depreciation  related to machinery
and  equipment  and  compensation  expense  related  to  warrants,  options  and
reserves.

     The company files  consolidated  federal tax returns and separate state tax
returns.  At December 31, 2000,  the company had available  net  operating  loss
carry  forwards of  approximately  $104.8  million and research and  development
credit  carryforwards  of $2.0 million for federal  income tax purposes of which
$10.5  million  expire  within the five years ended  December 31, 2005 and $94.3
million  expire at various  dates  December 31, 2006 through  December 31, 2020.
These net operating  losses include $6.6 million of net operating  losses of NCT
Audio Products,  Inc. during a period of time when NCT Audio Products,  Inc. was
not part of the consolidated  group for tax purposes.  The company's  ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

     In addition,  the net operating losses of acquired companies prior to their
related  acquisitions  by the company have not been  included  above.  These net
operating  losses would be limited  under  Section 382 of the  Internal  Revenue
Code.

     The  difference  between the  statutory  tax rate of 34% and the  company's
effective  tax rate of 0% is due to the increase in the  valuation  allowance of
$1.4  million  and $3.3  million in 1998 and 1999,  respectively.  In 2000,  the
difference is as follows:

      Statutory rate                                 (34.0)%
      State tax net of federal effect                 (5.6)
      Permanent differences                           15.9
      Effect of adjustments to prior
        year net operating loss carryforwards        (35.5)
      Other                                            2.0
      Increase in valuation allowance                 57.2
                                                   --------
                                                         -%
                                                   ========

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation  of future  taxable  income during the period in
which those temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax planning strategies in making this assessment.

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):

                                                   December 31,
                                             -------------------------
                                                1999          2000
                                             -----------    ----------
   Accounts receivable                       $     13       $     24
   Inventory                                      180             34
   Property and equipment                          82             68
   Accrued expenses                                58            170
   Stock compensation                           2,924          3,129
   Other                                          414            541
                                             -----------    ----------
      Total temporary differences            $  3,671       $  3,996
   Federal net operating losses                30,285         35,639
   Federal research and development credits     1,747          2,006
                                             -----------    ----------
                                             $ 35,703       $ 41,611
   Less: Valuation allowance                  (35,703)       (41,611)
                                             -----------    ----------
      Deferred taxes                         $      -       $      -
                                             ===========    ==========

17.  Litigation:

     On or about June 15, 1995,  Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Mr. Valerio alleged that (1) the Company is
guilty of breach of contract;  (2) certain amounts and commissions are allegedly
owed to him; and (3) he had suffered  damage to his image and  reputation  among
other injuries alleged. The Company retained an Italian law firm specializing in
litigation  and,  through its  counsel,  filed a reply brief  responding  to Mr.
Valerio's  allegations.  The Company  argued that even if the Tribunal  were the
appropriate  forum for the suit,  Mr.  Valerio's  claim is groundless  because a
valid contract was never formed. Further, the Company argued that Mr. Valerio is
not  enrolled in the official  Register of Agents and,  thus,  under  applicable
Italian law is not entitled to any compensation.  The Tribunal of Milan, sitting
in full  bench,  heard the case on  September  22,  1998.  On May 4,  1999,  the
Company's  Italian law firm  informed the Company that the Tribunal of Milan had
granted the Company's  objection to lack of venue and had consequently  rejected
Mr.  Valerio's  claim  and  awarded  the  Company  expenses  in  the  amount  of
approximately $6,000.

     By  a  letter  dated  September  9,  1997,  counsel  to  competitor  Andrea
Electronics  Corporation  ("AECorp.") informed the company that AECorp. believed
NCT was improperly  using the term "ANR Ready" and  infringing  upon a trademark
owned by AECorp.  Representatives  of existing and/or  potential  customers also
have  informed the company that AECorp.  has made  statements  claiming that the
company's  manufacture  and/or sale of certain  in-flight  entertainment  system
products  infringe a patent  owned by the  competitor.  The  company  received a
notice  dated  March  24,  1998 from  AECorp.'s  intellectual  property  counsel
notifying  the company of its concerns but did not confirm any intention to file
suit against  NCT.  The company,  through  special  outside  counsel,  exchanged
correspondence  with AECorp.  but the parties could not come to any  resolution.
The  company was  informed  by  representatives  of  existing  and/or  potential
customers that AECorp. was continuing to infer that the company was infringing.

     On October 9, 1998, the company's Board of Directors authorized  litigation
against  AECorp.  On November  17,  1998,  the  company and NCT Hearing  filed a
complaint against AECorp.  in the U.S.  District Court,  Eastern District of New
York.  The  complaint  requested  that the court enter  judgment in our favor as
follows:  (1)  declare  that the two  AECorp.  patents at issue are  invalid and
unenforceable  and that the company's  products do not infringe  upon them;  (2)
declare that the two AECorp. patents at issue are unenforceable due to misuse by
AECorp.;  (3) award the company  compensatory damages of no less than $5 million
and punitive damages of $50 million for AECorp.'s tortious interference with the
company's prospective contractual advantages; (4) enjoin AECorp. from stating or
inferring  that  the  company's   products  or  their  use  are  infringing  any
AECorp.-owned   patents;  and  (5)  award  any  other  relief  the  court  deems
appropriate.

     On or about  December 30, 1998,  AECorp.  filed its answer to the company's
complaint.   AECorp.   generally  denied  the  above   allegations  and  brought
counterclaims  against the Company.  These include  claims that the company has:
infringed  the two  AECorp.  patents  at issue  and the "ANR  Ready"  trademark;
violated  the Lanham  Act  through  NCT's use of the  trademark,  and  unfairly,
competed with AECorp. by using the trademark.

     The company and NCT Hearing have since filed a Reply and requested that the
court dismiss the  counterclaims  and enter judgment in favor of the company and
NCT Hearing.  The company also argued that AECorp.  is prevented from recovering
under certain equitable theories and defenses.  Discovery in this suit commenced
in mid-1999  and is  continuing,  although a trial date has not yet been set. In
the opinion of management,  after consultation with outside counsel,  resolution
of this  suit  should  not  have a  material  adverse  effect  on the  company's
financial  position or operations.  However,  in the event that the lawsuit does
result in a substantial final judgment against the company,  said judgment could
have a material effect on quarterly or annual operating results.

     On June 10, 1998, Schwebel Capital Investments,  Inc. ("SCI") filed suit in
a Maryland  state court against the company and Michael J.  Parrella,  its Chief
Executive Officer and Director. The complaint alleges that the company breached,
and Mr. Parrella  interfered  with, a purported  contract entered into "in 1996"
between  the company and SCI.  SCI claims that under the  contract,  the company
agreed to pay SCI commissions when NCT received capital from its investors.  The
complaint  further  alleged that SCI is due  commissions  totaling  $1.5 million
because the company  refused to honor  SCI's right of first  refusal.  SCI seeks
$1,673,000 in compensatory  damages,  $50,000 in punitive damages and $50,000 in
attorneys'  fees from the  company.  SCI also  seeks  $150,000  in  compensatory
damages,  $500,000 in punitive  damages and $50,000 in attorneys'  fees from Mr.
Parrella.  The company has filed and the court has granted two motions to strike
or dismiss some of the plaintiff's  claims.  The company has filed for dismissal
of case with  prejudice  due to  plantiff's  failure  to  respond  to request of
production  of  documents.  On April 2,  2001  the  court  ruled in favor of the
plantiff  setting  aside the  company's  motion to  dismiss  with  prejudice.  A
mediator  is to be  assigned  to the case and a hearing in this  matter has been
scheduled  for June  20,  2001.  Management  believes  it has  many  meritorious
defenses  and  intends  to  conduct a  vigorous  defense.  In the event the case
results in a substantial  judgment  against the company,  however,  the judgment
could have a severe material effect on quarterly or annual operating results.

     On June 25, 1998,  Mellon Bank FSB ("Mellon") filed suit against  Alexander
Wescott & Co., Inc.  ("AWC") and the company in a district court in the Southern
District  of New York.  Mellon  alleged  that  either the  company or AWC owe it
$326,000, a sum Mellon purportedly paid to both entities when it acted as escrow
agent  for the  company  in a  private  placement  of  securities  with  certain
institutional  investors.  The company retained counsel and on or about July 27,
1998, AWC filed its answer, counterclaim and cross-claim against Mellon and NCT.
AWC  specifically  requested  that  the  court:  (1)  dismiss  Mellon's  amended
complaint  against AWC; (2) grant AWC commissions  totaling $688,000 owed to AWC
by the  company;  (3) order the  company to issue  784,905  shares of its common
stock;  (4) declare that AWC is entitled to keep the $326,000  sought by Mellon;
and (5) order the delivery of a warrant to purchase  461.13 shares of the common
stock of NCT Audio.  In March  2000,  all  parties  reached a  resolution  of no
material  financial  or  other  consequence  to  the  company,  which  has  been
subsequently approved by the court, in which all matters have been resolved.

     On December 15, 1998,  Balmore Funds, S.A.  ("Balmore") and Austost Anstalt
Schaan ("Austost") filed suit against the company's  subsidiary,  NCT Audio, and
the company in the Supreme  Court of the State of New York,  County of New York.
On October 9, 1999, the company,  NCT Audio,  Balmore,  Austost and LH Financial
agreed,  in principle,  to settle all legal  charges,  claims and  counterclaims
which have  individually or jointly been asserted against the parties.  In April
2000, all parties  reached a resolution of no financial or other  consequence to
the company  which has been  subsequently  approved  by the court,  in which all
matters have been resolved.

     On September 16, 1999,  certain  former  shareholders  and  optionees  (the
"Claimants") of Advancel,  a majority-owned  subsidiary of the company,  filed a
Demand  for  Arbitration  against  the  company  with the  American  Arbitration
Association  in San  Francisco,  CA. On April 25, 2000,  both parties  reached a
resolution  of the  matter.  All  parties  withdrew  all charges and claims with
exception to the  following.  Regarding the Stock  Purchase  Agreement,  NCT and
Advancel  did not  release  the  Claimants  from any  claims  arising  out of or
relating  to  Claimants'  use,  misuse,  destruction  or  theft  of  NCT  and/or
Advancel's  property,  confidential  information,  trade secrets or intellectual
property or any claims arising out of or relating to the Proprietary Information
and Invention Agreements.  Also, NCT and Advancel did not release Claimants from
any of their  obligations  under the Non-compete  Covenants.  NCT has no further
obligations to the Claimants  under the Stock Purchase  Agreement as a result of
the resolution of this matter which was of no financial or other  consequence to
the company.

     On September 16, 1999, NCT Audio filed a Demand for Arbitration  before the
American Arbitration  Association in Wilmington,  Delaware,  against TST and TSA
(the "Respondents")  alleging,  among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio,  breach of fiduciary
duty  as a  majority  shareholder  owed  to NCT  Audio  which  holds  15% of the
outstanding  stock of TSA,  and  breach  of  obligation  of good  faith and fair
dealing.  NCT Audio seeks  recision of the  purchase  agreement  and recovery of
monies  paid to TST for  TSA's  assets.  Concurrently,  NCT  Audio  commenced  a
preliminary injunction proceeding in the Delaware Court of Chancery,  seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration  proceeding.  Such court  action was  subsequently  withdrawn by NCT
Audio.  On December 8, 1999,  Respondents  filed an answer and  counterclaim  in
connection  with  the  arbitration   proceeding.   Respondents   asserted  their
counterclaim  to  recover  (i) the monies and stock  owned  under the  extension
agreements;  (ii) the $1 million  differential  between the $9 million  purchase
price paid by Onkyo America for TSA's assets and the $10 million  purchase price
that NCT  Audio  had been  obligated  to pay;  (iii)  expenses  associated  with
extending  NCT Audio's time to close the  transaction;  and (iv)  certain  legal
expenses incurred by Respondents. There is a preliminary schedule of arbitration
for May 2001.

     The  company  believes  there  are no  other  patent  infringement  claims,
litigation,  matters or unasserted claims other than the matters discussed above
that could have a material  adverse effect on financial  position and results of
operations of the company.

18.  Commitments and Contingencies:

     Leases:

     The company is obligated for minimum annual rentals under operating  leases
for offices,  warehouse space and laboratory space,  expiring through March 2010
with various renewal options, as follows (in thousands):


                     Year Ending
                      December 31,         Amount
                -----------------------  -----------
                         2001             $  1,138
                         2002                1,147
                         2003                1,002
                         2004                  739
                         2005                  747
                      Thereafter             3,341
                                         -----------
                        Total             $  8,114
                                         ===========

     Rent expense (net of sublease  income) was $0.6  million,  $0.6 million and
$1.1 million for the years ended December 31, 1998, 1999 and 2000, respectively.

     Benefit Plan Liability:

     In April 1996,  the company  established  the Noise  Cancellation  Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage,  certain
health care benefits to employees  and directors of the company's  United States
operations.  The company  administers  this modified  self-insured  Benefit Plan
through a  commercial  third-party  administrative  health  care  provider.  The
company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million,  while combined  individual and family benefit exposure
in each Benefit Plan fiscal year is limited to $40,000. Benefit claims in excess
of these  individual  or maximum  aggregate  stop loss  limits are  covered by a
commercial  insurance  provider to which the company pays a nominal  premium for
such stop loss coverage. The company records benefit claim expense in the period
in which the benefit claim is incurred. As of April 9, 2001, the company was not
aware of any material benefit claim liability.

     Employment Contracts:

     In connection with the  acquisition of MIS by Midcore,  the company entered
into employment  agreements (the "agreements") with Jerry Metcoff,  David Wilson
and Barry  Marshall-Johnson,  the principal  shareholders of MSI. The agreements
are each for a term of three years.  Compensation and benefits called for in the
agreements  for Jerry  Metcoff  and David  Wilson are an annual  base  salary of
$100,000,  an annual bonus of at least  $50,000,  subject to the  achievement of
certain bonus  criteria and at the  discretion of the board of directors of NCT,
granting  of  incentive   stock  options  to  purchase  common  shares  of  NCT.
Compensation and benefits called for in the agreement for Barry Marshall-Johnson
include an annual base salary of (pound)  52,236,  commissions of 5% of the face
amount of purchase  orders for  Midcore's  or  affiliates'  products or services
derived from a  predetermined  territory  and at the  discretion of the board of
directors of NCT, and granting of  incentive  stock  options to purchase  common
shares of NCT.

     In connection  with the acquisition of TRN, on August 24, 2000, the company
entered into separate  employment  agreements (the "TRN  agreements") with Allan
Martin, former CEO and shareholder of TRN, as CEO of DMC Cinema, Inc. and Robert
Crisp,  former  President and shareholder of TRN, as President of DMC Cinema and
Executive V.P. Sales of DMC and  subsidiaries.  The TRN agreements  shall have a
term expiring on June 30, 2003. For Mr. Martin,  compensation  called for in the
TRN  agreements  is an annual base salary of $135,000,  with an  incentive  cash
award  of up to 75%  of his  salary  based  upon  the  satisfaction  of  targets
established  by  management  and  approved by the DMC board of  directors  on or
before January 31 of each year for such year. For Mr. Crisp, compensation called
for in the  TRN  agreements  is an  annual  base  salary  of  $120,000,  with an
incentive cash award to be further negotiated during the second quarter of 2001.
Mr. Crisp shall also receive as additional  compensation,  sales  commissions on
gross  advertising  revenue  as  follows;  (a) 5% of  the  gross  amount  of all
advertising  procured by Mr.  Crisp and (b) 3% of the gross  amount of all other
advertising  sales with  respect to the  business of DMC and  subsidiaries..  In
addition,  in exchange for industry  knowledge,  DMC granted  "Founder's"  stock
equal to 4 1/16% of DMC Cinema's  fully paid and  non-assessable  voting  common
stock to each.  Benefits  granted to each include medical benefits in accordance
with NCT corporate  policy, a monthly  automobile  allowance of $450.00 and four
(4) weeks,  paid vacation,  accrued in accordance with the provisions of the TRN
agreements.  The TRN  agreements  also  state  that DMC stock  options  shall be
granted at the  discretion  of the board of directors of DMC to purchase  common
shares of DMC.


     Minimum Royalty Commitments:

     As of December 31, 2000, the company is obligated under various  agreements
for minimum royalty payments of $60,000 for each of the years ended December 31,
2001, 2002, 2003 and 2004.
<PAGE>

   19.Business Segment Information:
<TABLE>
<CAPTION>
                                                                 (In thousands of dollars)
                                                                            Segment
                                ----------------------------------------------------------------------------------
                                                                              Total                        Grand
                                    Media    Communications    Technology    Segments         Other        Total
                                ----------------------------------------------------------------------------------
For the year ended
December 31, 2000:
<S>                              <C>           <C>            <C>           <C>            <C>         <C>
Net Sales - External             $   1,145     $   1,255      $      -      $    2,400     $    512    $   2,912
Net Sales - Other Operating
  Segments                             331           887             -           1,218       (1,218)           -
License Fees and Royalties           2,065         2,988         3,550           8,603        1,325        9,928
Interest Income/(Expense), net        (286)          (52)          (27)           (365)      (1,484)      (1,849)
Depreciation/Amortization              203           277            17             497        1,517        2,014
Operating Income (Loss)             (3,333)       (2,740)        2,986          (3,087)      (7,237)     (10,324)
Segment Assets                      12,786        19,218         5,743          37,747        1,635       39,382
Capital Expenditures                    27            75             -             102          220          322

For the year ended
December 31, 1999:
Net Sales - External             $     856     $     712      $  1,069      $    2,637     $    874    $   3,511
Net Sales - Other Operating
  Segments                               4           866             -             870         (870)           -
License Fees and Royalties           1,356           157         1,100           2,613          939        3,552
Interest Income, net                   167             1             -             168         (142)          26
Depreciation/Amortization               14            43            16              73        1,897        1,970
Operating Income (Loss)            (13,418)       (3,328)       (1,453)        (18,199)      (5,572)     (23,771)
Segment Assets                       3,191         1,955           728           5,874        7,503       13,377
Capital Expenditures                    26             4             3              33           18           51

For the year ended
December 31, 1998:
Net Sales - External             $     383     $   1,219         $ 69       $    1,671     $    851    $   2,522
Net Sales - Other Operating
  Segments                               2         1,136            -            1,138       (1,138)           -
License Fees and Royalties             350            86          200              636          166          802
Interest Income, net                   110            15            -              125          313          438
Depreciation/Amortization                5            38            8               51          979        1,030
Operating Income (Loss)             (4,359)       (3,709)        (658)          (8,726)      (5,457)     (14,183)
Segment Assets                       6,752         2,667          922           10,341        5,124       15,465
Capital Expenditures                    33           110           34              177          371          548
</TABLE>


MEDIA:


     NCT Audio:

     NCT Audio is engaged in the design,  development and marketing of products,
which  utilize  innovative  flat  panel  transducer  technology.   The  products
available  from NCT Audio  include the Gekko(TM)  flat speaker and  ArtGekko(TM)
printed grille  collection.  The Gekko(TM) flat speaker is marketed primarily to
the  home  audio  market,  with  potential  in  other  markets,   including  the
professional  audio  systems  market,  the  automotive  audio  aftermarket,  the
aircraft industry,  other  transportation  markets and multimedia  markets.  The
principal   customers  are  DMC,   end-users,   automotive   original  equipment
manufacturers ("OEMs") and manufacturers of integrated cabin management systems.

     DMC:

     DMC provides  place-based  broadcast  and billboard  advertising  through a
microbroadcasting    network   of   Sight   and   Sound(TM)    systems    within
commercial/professional  settings.  The Sight and Sound(TM)  systems  consist of
flat  panel  transducer-based  speakers  (provided  by NCT  Audio),  a  personal
computer containing DMC's Sight and Sound DBSS software, telephone access to the
Internet,  amplifiers  and  related  components.  The  DBSS  software  schedules
advertisers'  customized  broadcast  messages,  which  are  downloaded  via  the
Internet, with the respective music genre choice to the  commercial/professional
establishments.  DMC will  develop  private  networks for large  customers  with
multiple outlets such as large fast food chains and retail chains.

     Cinema:

     Cinema  provides  entertainment  audio  programming  in  multiplex  cinemas
nationwide All programming now being delivered to each theater will be converted
to the Sight and Sound system which  allows for remote  delivery of  programming
and  advertising  to all sites,  improving  efficiency  and  enabling  the quick
execution of programming  changes.  The Sight and Sound system also  continually
adjusts volume based on background noise so that the audio is always  maintained
at a foreground level.

COMMUNICATIONS:

     NCT Hearing:

     NCT Hearing  designs,  develops and markets active noise reduction  ("ANR")
headset products to the communications  headset market and the telephony headset
market.  The product  lines  include  the  NoiseBuster(R)  product  line and the
ProActive(R)   product  line.  The   NoiseBuster(R)   products  consist  of  the
NoiseBuster  Extreme!(TM),  a consumer  headset,  the NB-PCU, a headset used for
in-flight  passenger  entertainment  systems;  and  communications  headsets for
cellular,  multimedia and telephony.  The ProActive(R) products consist of noise
reduction   headsets   and   communications   headsets   for  noisy   industrial
environments.  The  majority  of  NCT  Hearing's  sales  are in  North  America.
Principal  customers consist of end-users,  retail stores,  OEMs and the airline
industry.

     Pro Tech:

     The  principal  activity  of  Pro  Tech  is  the  design,  development  and
manufacture   of   light-weight   telecommunications   headsets  and  new  audio
technologies  for  applications  in fast-food,  telephone  and other  commercial
applications.  It currently has marketing agreements with major companies in the
fast food  industry  and catalog and  Internet  site  distributors  of telephone
equipment, primarily in North America.

     Europe:

     The  principal  activity of NCT Europe is the  provision  of  research  and
engineering  services in the field of active  sound  control  technology  to the
company. NCT Europe provides research and engineering to NCT Audio, NCT Hearing,
DMC and other business units as needed. NCT Europe also provides a marketing and
sales support service to the company for European sales.

     Midcore:

     The principal activity of Midcore is as a developer of innovative  software
based  solutions  that address the  multitude of  challenges  facing  businesses
implementing  Internet strategies.  Midcore is the provider of MidPoint Internet
infrastructure  software  that  allows  multiple  users  to share  one  Internet
connection without degrading  efficiency and provides on-demand  connections,  a
software router, a  high-performance  shared cache,  content control,  scheduled
retrieval of  information  and e-mail and usage  accounting.  Midcore  sales are
derived from North America and Europe.

     ConnectClearly:

     CCC was established  for the purpose of focusing on the  telecommunications
market  and  in  particular  the  hands-free  market.  The  technology  includes
ClearSpeech(R)-Acoustic  Echo  Cancellation and  ClearSpeech(R)-Compression  and
Turbo    Compression   and    ClearSpeech(R)    Adaptive    Speech    Filter(R).
ClearSpeech(R)-Acoustic  Echo Cancellation removes acoustic echoes in hands-free
full-duplex communication systems. Applications for this technology are cellular
telephony,  audio and video teleconferencing,  computer telephony and gaming and
voice recognition.  ClearSpeech(R)-Compression maximizes bandwidth efficiency in
wireless,  satellite and intra- and Internet  transmissions and creates smaller,
more efficient voice files while  maintaining  speech quality.  Applications for
this   technology  are  intranet  and  internet   telephony,   audio  and  video
conferencing,  PC  voice  and  music,  telephone  answering  devices,  real-time
multimedia  multitasking,  toys and games and  playback  devices.  CCC  products
include  the  ClearSpeech(R)-Microphone  and  the  ClearSpeech(R)-Speaker.   The
majority of CCC's sales are in North America.  Principal markets for CCC are the
telecommunications   industries  and  principal   customers  are  OEMs,   system
integrators and end-users.


TECHNOLOGY:

     Advancel Logic Corporation:

     Advancel is a participant in the native  Java(TM)  (Java(TM) is a trademark
of Sun Microsystems,  Inc.) embedded  microprocessor  market. The purpose of the
Java(TM) platform is to simplify application development by providing a platform
for the same  software to run on many  different  kinds of  computers  and other
smart devices.  Advancel has been developing a family of processor cores,  which
will execute  instructions written in both Java bytecode and C/C++ significantly
enhancing  the  rate  of  instruction   execution,   which  opens  up  many  new
applications.  The potential for  applications  consists of the next  generation
home  appliances  and  automotive  applications,  smartcards  for a  variety  of
applications,  hearing  aids and mobile  communications  devices.

     Other:

     The Net Sales - Other Operating  Segments primarily consist of intercompany
sales  and  items   eliminated  in   consolidation.   Other  also  includes  the
telecommunications   market  and  in  particular  the  hands-free  market.  The
communications technology includes ClearSpeech(R)-Acoustic Echo Cancellation and
ClearSpeech(R)-Compression.

     Certain  items  are  maintained  at the  company's  corporate  headquarters
(Corporate) and are not allocated to the segments.  They primarily  include most
of the company's debt and related cash and  equivalents and related net interest
expense,  certain litigation liabilities and certain non operating fixed assets.
With  respect to  depreciation  and  amortization  the  differences  between the
segment  totals  and  consolidated   totals  relates  to  assets  maintained  at
corporate.


20.  Geographical Information (by country of origin) -
     Total Segments (in thousands):

                                             December 31,
                              -------------------------------------------
                                 1998          1999           2000
                              ------------  ------------  -------------
     Revenues
        United States          $   3,209     $   3,174     $  11,322
        Europe                        71         3,755         1,250
        Far East                      44           134           268
                              ------------  ------------  -------------
             Total             $   3,324     $   7,063     $  12,840
                              ============  ============  =============
     Net (Income) Loss
        United States          $  13,728     $  23,353     $  10,133
        Europe                        12           (86)         (117)
        Far East                     443           504           308
                              ------------  ------------  -------------
           Total               $  14,183     $  23,771     $  10,324
                              ============  ============  =============
     Identifiable Assets
         United States         $  15,166     $  13,174     $  39,237
         Europe                      218           164           145
         Far East                     81            39             -
                              ------------  ------------  -------------
             Total             $  15,465     $  13,377     $  39,382
                              ============  ============  =============


21.      Subsequent Events (unaudited):

     On January 9, 2001, our subsidiary,  Artera Group, Inc.,  formerly known as
NCT Networks,  Inc.,  entered into a subscription  agreement with six accredited
investors  pursuant to a private  placement of $5.0  million of its  convertible
notes.  Artera  plans to use the  proceeds  from the  issuance  of the notes for
working capital purposes.  The consideration  from investors for the convertible
notes aggregated  approximately $2.5 million and consisted of cash,  nonrecourse
notes secured by Teltran  common stock and  1,190,476  shares of Pro Tech common
stock. The Artera  convertible notes mature January 9, 2002 and bear interest at
6% per annum,  payable at maturity.  Such convertible notes are convertible into
shares of Artera  common stock by dividing the principal to be converted by 100%
of the  average of the three  lowest  closing  bid prices for the Artera  common
stock on the  principal  market or  exchange  where the Artera  common  stock is
listed or traded for the 10 trading days prior to the conversion. Pursuant to an
exchange  rights  agreement  entered  into by NCT and the  holders of the Artera
convertible  notes,  such notes are  exchangeable for shares of NCT common stock
from and after May 9, 2001 at an exchange price per share of 100% of the average
closing  bid price of NCT common  stock for the five  trading  days prior to the
exchange.  NCT  registered  20  million  shares of common  stock that NCT may be
obligated to issue upon the exchange of the Artera convertible notes.

     On January 23,  2001,  Artera  entered  into an  agreement  with Teltran to
acquire all of the  capital  stock of  Teltran's  subsidiary,  the Web  Factory,
Limited,  a U.K. based company  involved in  Internet-based  communications  for
small companies,  and certain other assets. Artera agreed to pay Teltran and its
investors up to $0.4 million in cash and up to 4,940,000  stated value in pounds
sterling of Artera's Series A Convertible  Preferred Stock. Artera completed its
acquisition of the Web Factory in March 2001.

     On January 25,  2001,  NCT  defaulted  on the  repayment of $1.0 million of
secured  convertible notes. Under the terms of default provision of the note the
company may be  obligated  to issue  1,034,972  shares of common stock (see Note
10).

     On April 14,  2001,  NCT  defaulted  on the  repayment  of the $0.5 million
promissory note entered into on February 13, 2000 (see Note 10).

     On January 11,  2001,  the  company,  DMC and PRG entered into a resolution
agreement,  known as the Agreement,  to exercise the NCT warrant issued pursuant
to the  warrant  agreement  as  modified,  and to exchange  common  stock in NCT
("Warrant  Stock") in  exchange  therefore:  (i) the terms  under which NCT will
register the stock received upon the exercise of such warrant for sale, (ii) the
terms  under  which  PRG will  purchase  4% of the  common  stock of DMC for the
consideration  provided  herein,  (iii) the terms under  which the parties  will
settle  certain  invoices  and (iv) the terms under which NCT will  purchase the
equipment covered by the lease agreement.  NCT will file to register the Warrant
Stock as provided in the  agreement  and PRG or the escrow  agent will sell such
stock with  proceeds to be  distributed  as provided (1) DMC shall pay PRG on or
before May 31, 2001 $0.9 million in  satisfaction  of the Promissory  Note dated
November  30,  2000.  (2) DMC  shall  pay PRG $0.1  million  for the  documented
invoices  ("invoices") in excess of the $0.9 million satisfied in (1) above. DMC
shall pay PRG $0.8  million for the purchase of 105 DBS Systems and 680 speakers
currently  under lease.  Provided  that PRG  receives at least  one-third of the
total amount payable no later than each of January 31, 2001,  March 31, 2001 and
May 31,  2001 lease  payments  will  continue  through  January  31, 2001 at the
current rates  provided  under the lease  agreement  and will  terminate at such
time. Such payments will be applied first to the equipment purchase, next to the
lease payments  through January 31, 2001 (or subsequent  thereto if NCT defaults
on its  obligation  hereunder)  next to the  payment  of  invoices,  next to the
payment of interest  and  principal on the  convertible  note.  Finally,  to the
amount,  if any, due with respect to the warrant  shares  residual  value.  Upon
satisfaction of all the terms of the resolution agreement,  PRG releases NCT and
DMC from any and all  obligations  including but not limited to  exclusivity  of
service and source  requirements and all agreements  between the parties will be
terminated.  Upon  completion of payments  provided  within the  agreement,  the
warrant stock shall be deemed to be cancelled and PRG's rights  thereunder shall
have no further effect.  The company has not paid the January 31, 2001 and March
31, 2001 installments and is currently in default of the Agreement.

     On February 5, 2001, a former  shareholder  of TRN filed suit against TRN's
former Chief Executive Officer and President and TRN in the Circuit Court of the
Sixth Judicial District for Pinellas County,  Florida. The plaintiff's complaint
alleges that TRN breached an alleged  oral escrow  agreement  arising out of the
sale of TRN stock to  Cinema by TRN's  shareholders  to the  plantiff  and seeks
unspecified  damages. On March 7, 2001, TRN filed a motion to provide additional
time to respond to the complaint through April 6, 2001, which was granted by the
court on March 13,  2001.  On April 4, 2001 the company  filed for  dismissal of
case with prejudice due to plantiff's failure to state a claim upon which relief
may be granted. TRN denies the material allegations of the complaint and intends
to vigorously defend the action.

     On January 29, 2001,  NCT Video  received  formal written notice of default
from ADT of a material  obligation  with respect to the product  development and
license agreement,  known as the agreement,  entered into on September 28, 2000,
by the two  companies.  Upon  receipt of this notice of  default,  NCT Video has
sixty (60) days to cure its default as described in the agreement.  In the event
NCT Video  fails to cure the  default,  the  agreement  and the letter  addendum
thereto  will automatically  terminate upon the conclusion of the sixtieth (60)
day,  and ADT  shall  have no  further  obligations  thereunder.  As part of the
company's effort to cure the default, on February 20, 2001 the company agreed to
issue 187,500 shares of Pro Tech common stock in payment of $75,000. Such amount
represents  one-half of the initial  installment of the  development  fee due to
ADT.

     On March 30, 2001,  NCT and NXT plc ("NXT"),  a fully listed company on the
London Stock  Exchange,  entered into an  agreement to  reorganize  the existing
cross license agreements between the two companies.  The agreements,  that began
in 1997, relate to flat panel speaker technology.  Under the new agreements, NCT
will receive 2 million ordinary NXT shares in consideration for the cancellation
of the 6%  royalty  payable by NXT to NCT Audio  Products.  The NXT shares to be
issued have a value of approximately  $9.2 million.  Additionally,  ownership of
certain intellectual  property, the rights to which were previously granted NXT,
has been  transferred  to NXT. NXT has licensed  NCT and its  subsidiaries  with
certain  NXT and all NCT  developed  intellectual  property.  NXT will  design a
low-cost  flat  panel  speaker  for  use  by   Distributed   Media   Corporation
International, Ltd. (DMCI) a wholly-owned subsidiary of DMC formed in 2001. Also
under the new agreements, NXT will transfer its 4.8% equity holding in NCT Audio
to NCT in settlement of the exercise price otherwise  payable on the exercise of
the option NXT has on 3.9 million shares of NCT's common stock (see Note 5).

     On April 12,  2001,  the  company  entered  into  certain  agreements  with
Crammer.  The private  equity  credit  agreement  and  associated  warrant dated
September  27,  2001 (see Note 13),  were  cancelled  and  replaced by a private
equity credit agreement and warrant with terms similar to those of the September
27, 2001 agreement. The company's obligation to issue its common stock under the
new private  equity credit  agreement is subject to  stockholder  approval of an
increase  in the  number of  authorized  shares of the  company's  common  stock
issuable.  The  company  also  entered  into  (1) an  exchange  agreement  and a
securities purchase agreement to acquire from Crammer $4.0 million of the common
stock of DMC New York,  Inc.,  known as DMC-NY,  in exchange for $1.0 million in
cash,  approximately  13.3 million shares of the comapny's  common stock,  and a
$1.0  million  convertible  note  payable to Crammer,  and (2) two  registration
rights  agreements,  one relating to the private equity credit agreement and the
other  relating to to the  exchange  agreement  and the shares of the  company's
common stock which may be issued in payment of the above  mentioned  convertible
note.  The  company  has also  agreed to  acquire  from  Crammer in July 2001 an
additional  $1.0  million of common  stock of DMC-NY for $1.0 million in cash or
other marketable securities. Furthermore, NCT Video Displays, Inc., known as NCT
Video,  has issued a $0.5 million note  payable to Crammer in  consideration  of
$0.5 million in cash  previously  received from  Crammer.  The NCT Video note is
convertible  into  the  common  stock  of NCT  Video  or  exchangeable  into the
company's  common  stock  pursuant to the  provisions  of the note and a related
exchange rights agreement.

22.         Selected Quarterly Financial Data (Unaudited):

     The following  tables contain  selected  quarterly  financial data for each
quarter of 1999 and 2000.  The company  believes that the following  information
reflects all normal recurring  adjustments  necessary for a fair presentation of
the information for the periods presented. The operating results for any quarter
are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>

                                                                                   Year Ended December 31, 2000
                                                                     1st Quarter  2nd Quarter  3rd Quarter  4th Quarter    Total
                                                                     ----------- ------------ ------------ ------------- ----------
<S>                                                                  <C>          <C>          <C>          <C>          <C>
Net revenue                                                          $     568    $    835     $   8,009    $  3,428     $  12,840
Gross profit (loss)                                                        (55)        467         7,127       2,305         9,844
Net loss attributable to common stockholders                            (7,211)     (3,284)        (319)      (4,296)      (15,110)
Loss attributable to common stockholders per basic/diluted share     $   (0.03)   $  (0.01)    $  (0.00)    $  (0.01)    $   (0.05)


                                                                                 Year Ended December 31, 1999
                                                                     1st Quarter 2nd Quarter  3rd Quarter  4th Quarter    Total
                                                                     ----------- ------------ ------------ ------------- ----------
Net revenue                                                          $   4,183    $   1,721    $     710    $    449     $   7,063
Gross profit (loss)                                                      3,241          677         (685)     (1,153)        2,080
Net loss attributable to common stockholders                            (7,256)      (6,461)     (12,413)     (8,702)      (34,832)
Loss attributable to common stockholders per basic/diluted share     $   (0.05)   $   (0.04)   $   (0.06)   $  (0.03)    $   (0.18)

</TABLE>

<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE II




Board of Directors
NCT Group, Inc.


We have audited the basic consolidated  financial  statements of NCT Group, Inc.
and  Subsidiaries  for the year ended December 31, 2000. Our audit was conducted
for the purpose of forming an opinion on those financial  statements  taken as a
whole.  The  information  included  on  Schedule  II is  the  responsibility  of
management,  and although not considered  necessary for a fair  presentation  of
financial  position,  results of  operations,  and cash flows is  presented  for
additional analysis and has been subjected to the auditing procedures applied in
the audit of the basic consolidated  financial  statements.  In our opinion, the
information included on Schedule II relating to the year ended December 31, 2000
is fairly stated in all material respects, in relation to the basic consolidated
financial  statements taken as a whole.  Also, such schedule presents fairly the
information  set forth  therein in  compliance  with the  applicable  accounting
regulations of the Securities and Exchange Commission.



/s/ GOLDSTEIN GOLUB KESSLER LLP
--------------------------------
    Goldstein Golub Kessler LLP

New York, New York
April 9, 2001

<PAGE>

INDEPENDENT AUDITORS' REPORT ON SCHEDULE II

Board of Directors and Stockholders of
NCT Group, Inc.

Our audits  were  conducted  for the  purpose of forming an opinion on the basic
consolidated financial statements of NCT Group, Inc. as of December 31, 1999 and
for each of the years in the two-year  period ended December 31, 1999 taken as a
whole.  The  information  included on Schedule II is  presented  for purposes of
additional  analysis  and is not a  required  part  of  the  basic  consolidated
financial  statements.  Such  information  has been  subjected  to the  auditing
procedures applied in the audits of the basic consolidated  financial statements
and, in our opinion,  is fairly  stated in all material  respects in relation to
the basic consolidated financial statements taken as a whole.

/s/ RICHARD A. EISNER & COMPANY, LLP
------------------------------------
Richard A. Eisner & Company, LLP

New York, New York
February 25, 2000


<PAGE>

                                    SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of
dollars)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
        Column A                      Column B            Column C               Column D      Column E
-----------------------------------------------------------------------------------------------------------
                                                   Charged     Charged to
                                       Balance at   in costs     other                           Balance at
                                      beginning       and      accounts-         Deductions-     end of
       Description                    of period    expenses   describe          describe        period
------------------------------------  -----------  ---------  -------------     ------------   ------------
<S>                 <C> <C>           <C>            <C>          <C>      <C>                     <C>
Year ended December 31, 1998          $    38     $  232      $   (42)     (2)   $     -       $   228
Year ended December 31, 1999              228         77          (83)     (2)      (139)           83
Year ended December 31, 2000              102(7)      25          (22)     (2)       (35) (3)       70
Allowance for doubtful accounts

Year ended December 31, 1998          $   472     $  365      $  (329)     (1)   $     -       $   508
Year ended December 31, 1999              508         21            -      (1)         -           529
Year ended December 31, 2000              529        100         (529)     (6)         -           100
Allowance for inventory obsolescence

Year ended December 31, 1998          $ 3,447     $  482      $     -            $  (655) (4)  $ 3,274
Year ended December 31, 1999            3,274        410            -                  -         3,684
Year ended December 31, 2000            4,042(7)     334            -                (24) (8)    4,352
Accumulated depreciation

Year ended December 31, 1998          $     -     $   68      $     -            $     -       $    68
Year ended December 31, 1999               68        970        3,125      (5)         -         4,163
Year ended December 31, 2000            4,163      1,019            -                  -         5,182
Accumulated Amortization of goodwill

Year ended December 31, 1998          $ 1,813     $  480      $     -            $     -       $ 2,293
Year ended December 31, 1999            2,293        585            -                  -         2,878
Year ended December 31, 2000            2,878        658            -                  -         3,536
Accumulated Amortization of patents
</TABLE>

Attention  is  directed  to  the  foregoing  accountants'  reports  and  to  the
accompanying Notes to Financial Statements.

(1)  To write off reserves applied to prior year-end inventory.

(2)  To write off fully reserved accounts receivable deemed uncollectible.

(3)  To reduce reserve for accounts collected.

(4)  To write off tooling against reserve.

(5)  To write down goodwill to estimated net realizable value.

(6)  To apply to specific prior year-end inventory items.

(7)   Increase from year-end due to acquisitions.

(8)   To write off fixed asset dispositions against reserve.
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirement  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

NCT GROUP, INC.


By:   /s/ MICHAEL J. PARRELLA                           Date: April 16, 2001
      -------------------------------
          Michael J. Parrella,
          Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

          Signature                   Capacity          Date
 -------------------------------------------------------------------------


 /s/ MICHAEL J. PARRELLA          Chairman of the Board    April 16, 2001
------------------------------    of Directors and Chief
     Michael J. Parrella          Executive Officer
                                  Director (Principal
                                  Executive Officer)

 /s/ IRENE LEBOVICS               President and Secretary  April 16, 2001
 -----------------------------
     Irene Lebovics

 /s/ CY E. HAMMOND                Senior Vice President    April 16, 2001
 -----------------------------    and Chief Financial
     Cy E. Hammond                Officer (Principal
                                  Financial and
                                  Accounting Officer)

 /s/ JAY M. HAFT                      Director             April 16, 2001
 -----------------------------
     Jay M. Haft

 /s/ JOHN J. McCLOY II                Director             April 16, 2001
 -----------------------------
     John J. McCloy II


 /s/ SAMUEL A. OOLIE                  Director             April 16, 2001
 -----------------------------
     Samuel A. Oolie