SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                   FORM 10-K/A2

AMENDMENT NO. 2 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED                       DECEMBER 31, 1998

Commission File Number:                         0-18267

NCT Group, Inc.
(formerly known as
Noise Cancellation Technologies, Inc.)
(Exact name of registrant as specified in its charter)

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

1025 West Nursery Road, Linthicum, Maryland     21090
(Address of principal executive office)         (Zip Code)

(410) 636-8700
(Registrant's telephone number, including area code)





<PAGE>


                                                                    
                                     PART II

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

   Forward Looking Statements

   Statements in this filing which are not historical facts are  forward-looking
statements under provisions of the Private  Securities  Litigation Reform Act of
1995.  All  forward-looking  statements  involve  risks and  uncertainties.  The
Company wishes to caution readers that the following  important  factors,  among
others,  in some  cases  have  affected,  and in the future  could  affect,  the
Company's  actual  results and could cause its actual results in fiscal 1999 and
beyond  to  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 electronic  systems for Active Wave  Management;  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 revenues 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.

   Overview

     On April 7, 1999, the Company issued a news release  including  information
about $3.6 million of technology license fees and net profit of $0.1 million for
the first quarter of 1999. Such revenue recognition and the resulting net profit
were not audited.  In the  circumstances,  the amount that may be recognized for
such technology  license fees is dependent on a definitive license agreement and
certain valuation  considerations.  The technology  license fee consideration is
occasioned by 3,600 shares of Series E Preferred  Stock  returned to the Company
in lieu of cash consideration.

   The  Company  is  continuing  the  transition  initiated  in 1995 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  and product  sales.  Prior to 1995,  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  licensing
fees paid by such companies. The Company's strategy generally has been to obtain
technology  licensing fees when initiating joint ventures and alliances with new
strategic  partners.  In 1998,  the Company  received  approximately  13% of its
operating revenues from engineering and development funding, compared with 6% in
1997.  Revenues from product  sales were limited to sales of specialty  products
and  prototypes.   Since  1991,  revenues  from  product  sales  have  generally
increased,  although in 1996 product  sales  declined  slightly due to delays in
production  and reduced  pricing of certain  products.  In 1998,  revenues  from
product sales  resumed  their  year-to-year  increase.  Management  expects that
technology licensing fees, royalties and product sales will become the principal
source of the  Company's  revenue  as the  commercialization  of its  technology
proceeds.



<PAGE>


   As a result of the 1994  acquisition  of certain  ANVT  assets,  the  Company
became the  exclusive  licensee of ten  seminal  patents,  the Chaplin  Patents,
through its wholly-owned  subsidiary,  CPH. The Company's ability to license the
Chaplin Patents directly to unaffiliated third parties provides the Company with
a greater  ability to earn  technology  licensing  fees and royalties  from such
patents.  Further, the Company believes that its intellectual property portfolio
prevents other competitors and potential competitors in the field of Active Wave
Management from  participating in certain commercial areas without licenses from
the Company.

   Note 1 to the  accompanying  Financial  Statements  and  the  "Liquidity  and
Capital  Resources"  section which follows  describes the current  status of the
Company's available cash balances.

   As previously disclosed,  the Company implemented changes in its organization
and focus in late 1994.  Additionally,  in late 1995 the Company  redefined  its
corporate   mission  to  be  the  worldwide   leader  in  the   advancement  and
commercialization of Active Wave Management  technology.  Active Wave Management
is the electronic  and/or  mechanical  manipulation  of sound or signal waves to
reduce noise, improve  signal-to-noise  ratio and/or enhance sound quality. This
redefinition is the result of the development of new technologies, as previously
noted,  such as ASF,  TDSS,  FPT,  and the SMM,  which the Company  believes can
produce  products for fields beyond noise and  vibration  reduction and control.
These technologies and products are consistent with shifting the Company's focus
to technology  licensing  and product  marketing in more  innovative  industries
having greater potential for near term revenue  generation.  The redefinition of
corporate  mission is reflected in the revised  business plan, which the Company
began to implement  during the first quarter of 1996 and has  continued  through
1998.

   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 and product sales are forecasted to fund an increasing
share  of the  Company's  requirements.  The  funding  from  these  sources,  if
realized,  will reduce the Company's  dependence on engineering  and development
funding.  The beginning of this process is shown in the shifting  percentages of
operating revenue, discussed below.

   In January 1998, the Company  adopted a plan that  management  believed would
generate  sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets and as noted below, found it
necessary  to raise  additional  capital  to fund it's  operations  for 1998 and
beyond.  Refer to "Liquidity and Capital Resources" below and to Notes 1 and 8 -
Notes to Financial Statements.

   Success in generating  technology licensing fees, royalties and product sales
is significant and critical to the Company's 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.

   From the  Company's  inception  through  December  31,  1998,  its  operating
revenues,  including technology licensing fees and royalties,  product sales and
engineering  and  development  services,  have  consisted of  approximately  26%
product  sales,  43%  engineering  and  development  services and 31% technology
licensing fees and royalties.



<PAGE>


   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.

   The Company continues to sell NoiseBuster  Extreme!(TM) consumer headsets and
began shipping Gekko(TM) flat speakers in the third quarter of 1998. The Company
is  presently  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'  MRI  machines;  in the fourth  quarter of 1994 Ultra began  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   into  United   Airlines'
comprehensive  in-flight  entertainment  and  information  systems.   Management
believes these developments and those previously  disclosed 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.

   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.

   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. During
1994,  the  Company   acquired  a  license  to  two  patents  in  the  field  of
micro-machined  microphones and concluded the acquisition of all of the patents,
know-how and intellectual property of a former competitor, ANVT. During 1995 the
Company  acquired  several U.S.  patents dealing with adaptive speech  filtering
which is used in the  Company's  ClearSpeech(R)  product line.  Since 1996,  the
Company has been granted 197 new patents for various  applications  in the field
of Active Wave Management.  Management believes that the Company's investment in
its  technology  has  resulted in the  expansion  of its  intellectual  property
portfolio and improvement in the functionality, speed and cost of components and
products.

   The  Company  has  become   certified  under  the   International   Standards
Organization  product  quality  program  known as "ISO 9000",  and  continues to
successfully  maintain its  certification.  Since the third quarter of 1994, the
Company  has  reduced  its  worldwide  work force by 40% from 173 to 104 current
employees as of February 28, 1999.

   NCT Audio,  a majority  owned  subsidiary  of the  Company,  has signed three
letters of intent,  one  agreement  to  purchase,  and one  definitive  purchase
agreement  pursuant to which it will  acquire 100% of the stock or assets of the
companies  outlined  below.   Management  believes  the  consummation  of  these
acquisitions will provide significant value creation opportunities. By acquiring
companies that  specialize in different  segments of the audio market in various
locations around the world,  management believes it can improve profitability of
the combined companies by sharing some resources, eliminating redundant expenses
and increasing revenue by leveraging each company's distribution channels.  Some
of the  synergistic  opportunities  that will be achieved with the  acquisitions
include the ability to (i)  leverage the  extensive  dealer  network;  (ii) gain
access to  worldwide  consumer  audio  markets and  establish  automotive  audio
aftermarket  accounts;  (iii) increase  product  distribution of all acquisition
companies in world markets; (iv) cross-sell the acquisition  companies' products
among distribution  channels;  and (v) maximize the warehousing and distribution
facilities.   Overall,   these   opportunities  are  expected  to  significantly
strengthen  the  distribution  network  of NCT  Audio's  product  line  into the
worldwide market.

   On August 14,  1998,  NCT Audio  agreed to acquire  substantially  all of the
assets of Top Source Automotive,  Inc. ("TSA"), a wholly-owned subsidiary of Top
Source Technologies,  Inc. ("TST"). TSA, located in Troy, Michigan,  specializes
in the design and  manufacture of speaker  enclosures that maximize audio output
for automotive  OEMs, Tier One suppliers,  and key aftermarket  accounts.  TSA's
systems are factory installed on Chrysler  Corporation's  ("Chrysler")  Wrangler
model line and are also offered as dealer installed accessory packages.  Earlier
on June 11,  1998 NCT  Audio had paid a  non-refundable  deposit  of  $1,450,000
towards the purchase  price.  The total purchase price is $10,000,000  and up to
$6,000,000 in possible  future  contingent  payments.  The seller has elected to
receive the possible future contingent payments in cash. The shareholders of TST
approved the transaction on December 15, 1998.

   NCT Audio then paid TST  $2,050,000  on July 31, 1998.  The money was held in
escrow with all of the necessary  securities and documents to evidence ownership
of 20% of the total equity rights and interests in TSA. When TST's  shareholders
approved the  transaction,  the $2,050,000 was delivered to TST. In return,  NCT
Audio took ownership of the documentation and securities.

   NCT Audio has an exclusive right, as extended,  to purchase the assets of TSA
through May 28, 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  the  extension  of such
exclusive right from March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST
a fee of  $350,000,  consisting  of $20,685  in cash,  $125,000  of NCT  Audio's
minority  interest in TSA earnings and a $204,315  note  payable,  due April 16,
1999.  If NCT Audio fails to pay the note by April 16,  1999,  (a) the note will
begin 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;  and (b) the  $20,685  and
$125,000 portion of the extension fee will no longer be credited toward the $6.5
million purchase consideration due at closing. NCT Audio did not pay the note by
April 16,  1999.  If NCT  Audio  fails to pay the note by April  30,  1999,  the
$204,315  portion of the  extension  fee shall no longer be credited  toward the
$6.5  million  closing  amount  due.  Further,  if NCT Audio  fails to close the
contemplated  transaction  by May 28, 1999,  NCT Audio will forfeit its minority
earnings in TSA for the period June 1, 1999 through May 30,  2000.  In addition,
due to NCT Audio's  inability to close the  transaction  by March 31, 1999,  TST
received  $100,000  of NCT Audio's  Series A  Convertible  Preferred  Stock as a
penalty premium.

     On August  17,  1998,  NCT  Audio  agreed to  acquire  all of the  members'
interest in Phase Audio LLC (doing business as Precision Power,  Inc. or "PPI").
PPI,  located in Phoenix,  Arizona,  designs and  manufactures  high performance
amplifiers,  preamplifiers,  subwoofers,  signal processors and speakers for the
automotive  audio  aftermarket.  PPI has a network of over 600  dealers  for its
products  throughout the United  States.  NCT Audio will acquire the interest in
exchange for shares of its common stock having an aggregate value of $2,000,000.
NCT Audio also agreed to pay  approximately  $8.5  million of PPI debt,  but NCT
Audio must obtain adequate financing before the transaction can be completed. In
addition,  NCT Audio provided PPI a working capital loan on June 17, 1998 in the
amount of $500,000 which is evidenced by a demand promissory note. On August 18,
1998,  NCT Audio  provided  PPI another  working  capital  loan in the amount of
$1,000,000,  which is also  evidenced by a demand  promissory  note.  The unpaid
principal  balance  of these  notes bear  interest  at a rate equal to the prime
lending rate plus one percent (1.0%).

     As noted,  the  transaction  is contingent on NCT Audio  obtaining  outside
financing to pay the PPI debt. On January 6, 1999, the PPI members  notified NCT
Audio that, while they remain willing to do the transaction,  they may choose at
some point to abandon the  transaction  because NCT Audio has not  obtained  the
financing in a timely  manner.  They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock,  they would insist that NCT Audio pay them
that amount in cash at any closing.

   On January 28,  1999,  NCT Audio  entered into a letter of intent to purchase
100%  of  the  common  stock  of a  premier  speaker  manufacturer  (the  "Third
Acquisition").  The  proposed  acquisition  is  subject to the  approval  by the
stockholders  of the Third  Acquisition  and certain other terms and conditions,
including   that  NCT  Audio  obtain   adequate   financing  to  consummate  the
transaction. Shareholders who hold all of the outstanding shares of common stock
of the  Third  Acquisition  have  agreed  to vote  their  shares in favor of the
proposed acquisition.

   The purchase price is approximately $36.4 million. At closing,  approximately
$24.5 million will be paid to shareholders of the Third Acquisition in cash. The
balance  of  approximately   $11.9  million  is  to  be  paid  by  a  four-year,
straight-line  amortization  seller note  (payable  quarterly)  that will have a
second lien on the assets of the Third Acquisition.

   The Third Acquisition is a premier speaker manufacturer for the home consumer
market.  Ranking among the ten largest speaker  manufacturers  in the world, the
Third  Acquisition  sells  its  well-established  speaker  lines  in over  fifty
countries worldwide. The Third Acquisition's dedication to a continuous cycle of
new products for its speaker line allows it to remain a dominant  speaker player
in the world market.

   Because the Company  did not meet its  revenue  targets for 1998,  it entered
into certain transactions, which provided additional funding as follows:

   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 of 1933, as amended  (respectively,  "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement").  The sale of 6,000 shares of
Series D Preferred  Stock  having an  aggregate  $6.0  million  stated value was
completed  on August 6, 1998.  $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  nonassessable  shares of the Company's  common
stock  subject  to  certain  limitations.  Under  the  terms  of  the  Series  D
Subscription  Agreements,  the  Company  is  required  to  file  a  registration
statement  ("the Series D  Registration  Statement")  covering the resale of all
shares of common stock of the Company  issuable upon  conversion of the Series D
Preferred Stock then outstanding  within sixty (60) days after the completion of
the 1998 Series D Preferred Stock Private Placement (respectively, the "Series D
Filing Date" and the "Series D Closing Date").  The shares of Series D Preferred
Stock  become  convertible  into shares of common  stock at any time  commencing
after the earlier of (i) ninety (90) days after the Series D Closing Date;  (ii)
five (5) days after the Company  receives a "no  review"  status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D  Registration  Statement.  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 following formula (the "Series D Conversion Formula"):

                                     [(.04) x (N/365) x (1,000)] + 1,000
                                               Conversion Price
      where

            N           = the  number of days  between  (i) the Series D Closing
                        Date, and (ii) the conversion date.

            Conversion
            Price       = The greater of (i) the amount  obtained by multiplying
                        the Conversion Percentage (which means 80% reduced by an
                        additional  2% for every 30 days  that the  Registration
                        Statement  has not  been  filed  by the  Series D Filing
                        Date) in  effect  as of the  conversion  date  times the
                        average market price for the Company's  common stock for
                        the (5) consecutive  trading days immediately  preceding
                        such date; or (ii) $0.50.

   The conversion  terms of the Series D Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 12,000,000 shares of its
common stock in the  aggregate in  connection  with the  conversion of the 6,000
shares of Series D  Preferred  Stock  issued  under the 1998  Series D Preferred
Stock Private Placement.  The Series D Subscription Agreements also provide that
the  Company  will be  required  to make  certain  payments  in the event of its
failure to effect  conversion  in a timely  manner.  Including  shares of common
stock  issued  for  accretion,  as of March  12,  1999,  all  shares of Series D
Preferred Stock have been converted to 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").  The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate  $6.0 million  stated value was  completed on August 17, 1998.  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  nonassessable  shares of NCT Audio's common
stock  subject  to  certain  limitations.  Under  the  terms  of the  NCT  Audio
Subscription Agreements,  NCT Audio is required to file a registration statement
("NCT Audio Registration Statement") covering the resale of all shares of common
stock of NCT Audio issuable upon  conversion of the NCT Audio Series A Preferred
Stock then  outstanding by a date (the "Series A Filing  Deadline") which is not
later than  thirty  (30) days after the company  becomes a  "reporting  company"
under the the Exchange  Act.  The shares of NCT Audio  Series A Preferred  Stock
become  convertible  into shares of NCT Audio common stock at any time after the
date the company  becomes a "reporting  company"  under the Exchange  Act.  Each
share of NCT Audio  Series A  Preferred  Stock is  convertible  into a number of
shares  of  common  stock of NCT  Audio as  determined  in  accordance  with the
following formula (the "NCT Audio Conversion Formula"):

                                   [(.04) x (N/365) x (100,000)] + 100,000
                                               Conversion Price

where

      N =   the number of days between (i) the date of  completion
            of the  sale of the 60  shares  of NCT  Audio  Series  A
            Preferred  Stock being offered;  and (ii) the conversion
            date.

Conversion
Price  =    the  greater  of  (i)  the  amount   obtained  by  multiplying   the
            Conversion  Percentage  (which means 80% reduced by an additional 2%
            for every 30 days that the NCT Audio Registration  Statement has not
            been  filed by the  Series A Filing  Deadline)  in effect as of such
            date times the average  market  price for NCT Audio's  common  stock
            for the (5)  consecutive  trading days  immediately  preceding  such
            date;  or (ii) the "Floor  Price" which means the lowest  number per
            share  that will not  cause the total  number of shares of NCT Audio
            common stock  issuable upon the conversion of 60 shares of NCT Audio
            Series A Preferred  Stock to equal or exceed twenty percent (20%) of
            the issued and  outstanding  shares of common  stock of NCT Audio on
            the date of  issuance of the NCT Audio  Series A Preferred  Stock as
            long as the  common  stock of NCT  Audio  is  listed  on the  NASDAQ
            National  Market or the NASDAQ Small Cap Market  (there is no "Floor
            Price" if such listing is not so maintained by NCT Audio).

   The conversion  terms of the NCT Audio Series A Preferred  Stock also provide
that in the event that NCT Audio has not become a "reporting  company" under the
Exchange Act by December 31, 1998, or the NCT Audio  Registration  Statement has
not been declared effective by the SEC by December 31, 1998, the holder shall be
entitled to exchange  each share of NCT Audio  Series A Preferred  Stock for 100
shares of the Company's  Series D  Convertible  Preferred  Stock and  thereafter
shall be  entitled  to all rights and  privileges  of a holder of the  Company's
Series D  Preferred  Stock.  As of  December  31,  1998,  no NCT Audio  Series A
Preferred  Stock  shareholders  have exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Preferred Stock.

     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  unrelated  accredited
investors  through  one  dealer  (the "1998  Series E  Preferred  Stock  Private
Placement").  The sale of 8,145  shares of Series E  Preferred  Stock  having an
aggregate of $8.1 million stated value was completed on March 12, 1999. In 1999,
the  Company  received  net  proceeds  of $1.8  million  from the 1998  Series E
Preferred  Stock  Private  Placement.  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.  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  nonassessable  shares of the Company's common stock subject
to certain limitations. Under the terms of the Series E Subscription Agreements,
the  Company  is  required  to file a  registration  statement  ("the  Series  E
Registration  Statement")  on (i) Form S-3 (currently not eligible to use) on or
prior to the date  which is no more than  sixty (60) days from the date that the
Company has issued a total of 7,438 shares of Series E Preferred  Stock if filed
or (ii) Form S-1 on or prior to a date  which is no more than  ninety  (90) days
from the date that the  Company  has issued a total of 7,438  shares of Series E
Preferred Stock,  covering the resale of all of the Registrable  Securities (the
"Series  E  Closing  Date").  The  shares of  Series E  Preferred  Stock  become
convertible into shares of common stock at any time commencing after the earlier
of (i)  ninety  (90) days after the  Series E Closing  Date;  (ii) five (5) days
after the Company  receives a "no review" status from the SEC in connection with
the  Registration  Statement;  or  (iii)  the  effective  date of the  Series  E
Registration  Statement.  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 following formula (the "Series E Conversion Formula"):

                                      [(.04) x (N/365) x (1,000)] + 1,000
                                               Conversion Price

      where

            N           = the  number of days  between  (i) the Series E Closing
                        Date, and (ii) the conversion date.


            Conversion
            Price       = the greater of (i) the amount  obtained by multiplying
                        the Conversion Percentage (which means 80% reduced by an
                        additional  2% for every 30 days beyond 60 days from the
                        issuance  that the  Registration  Statement has not been
                        filed by the  Company)  in effect  as of the  conversion
                        date times the average  market  price for the  Company's
                        common  stock  for  the  (5)  consecutive  trading  days
                        immediately preceding such date.

   The conversion  terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the  aggregate in connection  with the  conversion of the 10,580
shares of Series E  Preferred  Stock  issued  under the 1998  Series E Preferred
Stock Private Placement.  The Series E Subscription Agreements also provide that
the  Company  will be  required  to make  certain  payments  in the event of its
failure to effect  conversion  in a timely  manner.  As of December 31, 1998, no
shares of Series E Preferred Stock have been converted to NCT common stock.

   In connection with the Series E 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 obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.

   Cash and cash  equivalents  amounted to $0.5  million at December  31,  1998.
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,   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 and  engineering  and  development  revenue  are not  realized as
planned,  then management  believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.

   There can be no assurance that funding will be provided by technology license
fees,  royalties and product sales 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
relations  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.

   On June 16,  1998,  the Nasdaq Stock  Market,  Inc.  ("Nasdaq")  notified the
Company  that the  Company's  common  stock had failed to maintain a closing bid
price of $1.00 or more for the previous thirty (30)  consecutive  trade dates in
accordance with Nasdaq's  Marketplace Rule 4450(a)(5).  Nasdaq also notified the
Company  that no  delisting  action would be initiated at that time and that the
Company  would  be  provided  ninety  (90)  calendar  days in  which  to  regain
compliance  with  Marketplace  Rule  4450(a)(5)  which  would be achieved if the
closing  bid price of the  shares  of the  Company's  common  stock  equaled  or
exceeded  $1.00 for ten (10)  consecutive  days  before  the end of  trading  on
September 14, 1998. In this regard, Nasdaq advised the Company that in the event
the Company was unable to achieve  compliance,  it may seek  further  procedural
remedies.  The Company was unable to achieve  compliance  by September 14, 1998,
and on that date delivered its request for a hearing on the matter together with
the requested fee to Nasdaq's  Hearings  Department.  Such a hearing was held on
November 5, 1998.  Under  Nasdaq's  procedures  delisting was stayed pending the
outcome of the hearing. On January 6, 1999, Nasdaq notified the Company that the
Company's  securities  were  delisted  from Nasdaq  effective  with the close of
business,  January 6, 1999. On January 20, 1999, the Company  requested a review
of the Nasdaq  decision.  On February 16, 1999,  Nasdaq advised the Company that
the  issuance  of a review  decision  will  likely  occur in July 1999.  While a
delisting of the Company's  common stock is not anticipated to have an immediate
effect  on the  Company's  operations,  it may  make it more  difficult  for the
Company to raise additional capital to fund future operations.

   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, 1998 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.

   Results of Operations

Year ended December 31, 1998 compared with year ended December 31, 1997.

   Total  revenues in 1998 decreased by 42% to $3.3 million from $5.7 million in
1997.  Total expenses  during the same period  increased by 12% or $1.9 million,
primarily  reflecting the increasing efforts in sales and marketing to introduce
new products.

   Technology  licensing fees and royalties  decreased by 78% or $2.8 million to
$0.8 million from $3.6 million in 1997.  The 1997 amount is primarily due to the
$3.0 million technology  license fee from Verity and other technology  licensing
fees aggregating $0.6 million. See Note 3 - "Notes to Financial Statements".

   Product  sales  increased in 1998 by 22% to $2.1 million from $1.7 million in
1997  reflecting the  introduction  of the Gekko(TM) flat speakers and increased
sales in the NoiseBuster(R) product line and the ClearSpeech(R) product line.

   Revenue from engineering and development  services  remained constant at $0.4
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company.

   Cost of product sales  decreased 2% to $2.2 million from $2.3 million in 1997
and the product margin increased to (7)% from (32)% in 1997. The negative margin
of $0.1 million and $0.6 million in 1998 and 1997, respectively,  were primarily
due to reserves for  inventory  slow  movement and tooling  obsolescence  in the
amount of $0.5 million and $0.7 million in 1998 and 1997, respectively,  related
to the aviation and industrial headset product lines.

   Cost of  engineering  and  development  services  remained  constant  at $0.3
million primarily due to the de-emphasis of engineering development funding as a
primary source of revenue for the Company as noted above.

   Selling,  general and administrative  expenses for the year increased by 115%
or $6.0 million to $11.2  million from $5.2 million for 1997 which was primarily
due to increased efforts in sales and marketing to introduce new products. Sales
and marketing personnel increased by 43% from 1997. In addition,  there has been
an increase in  consultants  for the  Company's  focus on  international  sales.
Advertising  increased by 227% or $1.2 million to $1.7 million from $0.5 million
primarily due to the introduction of new products through catalogs, mailings and
increased participation in trade shows.

   Research  and  development  expenditures  for 1998  increased  by 16% to $7.2
million from $6.2 million in 1997, primarily due to the acquisition of Advancel.

   Included in the  Company's  total  expenses were  non-cash  expenditures  for
depreciation and amortization of $1.0 million for 1998 and $0.9 million in 1997.

   Other  income in 1998 was $3.3  million  compared  to zero in 1997.  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 1998,  interest income increased to $0.4 million from $0.1 million in 1997
principally from funds on hand at the end of 1997.

   The  Company  has net  operating  loss  carryforwards  of $85.8  million  and
research and development credit carryforwards of $1.6 million for federal income
tax purposes at December 31, 1998. 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, 1997 compared with year ended December 31, 1996.

   Total  revenues in 1997 increased by 81% to $5.7 million from $3.2 million in
1996.  Total expenses  during the same period  increased by 11% or $1.6 million,
primarily   reflecting  the  one-time  $1.4  million  non-cash  interest  charge
associated  with the  First  Quarter  1997  Financing.  See  Note 8 - "Notes  to
Financial Statements."

   Technology  licensing fees and royalties increased by 193% or $2.4 million to
$3.6 million from $1.2 million in 1996. The 1996 amount was derived  principally
from  numerous  technology  license fees  reflecting  the  Company's  continuing
emphasis  on  expanding  technology  license  fee  revenue.  The 1997  amount is
primarily due to the $3.0 million  technology  license fee from Verity and other
technology  licensing fees aggregating $0.6 million.  See Note 3 - "Notes to the
Financial Statements".

   Product  sales  increased in 1997 by 25% to $1.7 million from $1.4 million in
1996  reflecting  increases in  NoiseBuster  Extreme!(TM)  and aviation  headset
sales.

   Engineering  and development  services  decreased by 33% to $0.4 million from
$0.5  million  in  1996,   primarily  due  to  the  de-emphasis  of  engineering
development funding as a primary source of revenue for the Company.

   Cost of product sales increased 44% to $2.3 million from $1.6 million in 1996
and the  product  margin  decreased  to (32)% from (15)% in 1996.  The  negative
margin of $0.6  million in 1997 was  primarily  due to  reserves  for  inventory
movement and tooling  obsolescence  in the amount of $0.7 million related to the
industrial  headset product lines. The negative margin in 1996 was primarily due
to a  lower  sales  price  of  the  NoiseBuster(R)  and a  reserve  for  tooling
obsolescence in the amount of $0.3 million.

   Cost of engineering  and development  services  increased 26% to $0.3 million
from $0.2  million  in 1996  primarily  due to the  de-emphasis  of  engineering
development  funding  as a primary  source of revenue  for the  Company as noted
above.

   Selling,  general and administrative expenses for the year increased by 7% or
$0.3 million to $5.2 million from $4.9 million for 1996 which was  primarily due
to increased professional fees and related expenses.

   Depreciation and amortization included in selling, general and administrative
expenses decreased from $0.5 million in 1996 to $0.4 million primarily due to an
increase in fully depreciated machinery and equipment.

   Research  and  development  expenditures  for 1997  decreased  by 11% to $6.2
million  from $7.0  million in 1996,  primarily  due to limited  cash  resources
during most of 1997 to fund internal development projects.

   In 1997,  interest  income  increased  to $0.1 million from near zero in 1996
reflecting the increase in late 1997 of available funds to invest.

   Under all of the Company's  existing  joint venture  agreements at the end of
1997,  the Company was not  required to fund any capital  requirements  of these
joint ventures beyond its initial capital contribution.  In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its  investment  and the Company has no obligation or intention to
fund such additional  losses, the Company suspends applying the equity method of
accounting for its investment.


<PAGE>

   The  Company  has net  operating  loss  carryforwards  of $76.9  million  and
research and development credit carryforwards of $1.3 million for federal income
tax purposes at December 31, 1997. 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.

   Liquidity and Capital Resources

   The  Company's  proceeds  from the  exercise of stock  purchase  warrants and
options were nominal in 1998, $1.1 million in 1997 and $1.0 million in 1996.

   In January 1998, the Company  adopted a plan that  management  believed would
generate  sufficient funds for the Company to continue its operations into 1999.
The Company did not meet the plan's revenue targets for 1998 and as noted below,
found it necessary to raise additional  capital to fund it's operations for 1998
and beyond (refer to Notes 1 and 8 Notes to Financial Statements.).

   Because the Company  did not meet its  revenue  targets for 1998,  it entered
into certain transactions, which provided additional funding as follows:

   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 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 (1) a
license fee of $3,000,000  to be paid when proceeds are available  from the sale
of NCT Hearing common stock, and (2) 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 27, 1998, the Company  entered into  subscription  agreements to sell
6,000  shares of the  Company's  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 sale of 6,000 shares of Series D Preferred  Stock  having an aggregate  $6.0
million stated value was completed on August 6, 1998.  $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  nonassessable  shares of the
Company's  common stock subject to certain  limitations.  Under the terms of the
Series D Subscription Agreements, the Company is required to file a registration
statement  covering  the  resale of all  shares of common  stock of the  Company
issuable upon conversion of the Series D Preferred Stock then outstanding within
sixty  (60) days  after the  completion  of the 1998  Series D  Preferred  Stock
Private  Placement.  The shares of Series D Preferred  Stock become  convertible
into  shares of common  stock at any time  commencing  after the  earlier of (i)
ninety (90) days after the Series D Closing  Date;  (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the Series
D  Registration  Statement;  or  (iii)  the  effective  date  of  the  Series  D
Registration Statement.  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
Conversion Formula described above under "Overview".

   The conversion  terms of the Series D Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 12,000,000 shares of its
common stock in the  aggregate in  connection  with the  conversion of the 6,000
shares of Series D  Preferred  Stock  issued  under the 1998  Series D Preferred
Stock Private Placement.  The Series D Subscription Agreements also provide that
the  Company  will be  required  to make  certain  payments  in the event of its
failure to effect  conversion  in a timely  manner.  Including  shares of common
stock  issued  for  accretion,  as of March  12,  1999,  all  shares of Series D
Preferred Stock have been converted to 12,273,685 shares of NCT common stock.


<PAGE>

   On July 27, 1998, NCT Audio  distributed  subscription  agreements to sell 60
shares of NCT Audio's 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
sale of 60 shares of NCT Audio Series A Preferred Stock having an aggregate $6.0
million  stated value was completed on August 17, 1998.  NCT Audio  received net
proceeds  of $5.2  million  from  the  1998  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
nonassessable shares of NCT Audio's common stock subject to certain limitations.
Under the terms of the NCT Audio Subscription Agreements,  NCT Audio is required
to file a  registration  statement  covering  the resale of all shares of common
stock of NCT Audio issuable upon  conversion of the NCT Audio Series A Preferred
Stock then  outstanding by a date which is not later than thirty (30) days after
the company becomes a "reporting  company" under the Exchange Act. The shares of
NCT Audio Series A Preferred Stock become  convertible  into shares of NCT Audio
common  stock  at any time  after  the date the  company  becomes  a  "reporting
company"  under the  Exchange  Act.  Each share of Series A  Preferred  Stock is
convertible  into a number of shares of Series D Preferred  Stock of the Company
as determined in accordance  with the Conversion  Formula  described above under
"Overview".

   The conversion  terms of the NCT Audio Series A Preferred  Stock also provide
that in the event that NCT Audio has not become a "reporting  company" under the
Exchange Act by December 31, 1998, or the NCT Audio  Registration  Statement has
not been declared effective by the SEC by December 31, 1998, the holder shall be
entitled to exchange  each share of NCT Audio  Series A Preferred  Stock for 100
shares of the Company's  Series D  Convertible  Preferred  Stock and  thereafter
shall be  entitled  to all rights and  privileges  of a holder of the  Company's
Series D  Preferred  Stock.  As of  December  31,  1998,  no NCT Audio  Series A
Preferred  Stock  shareholders  have exercised their right to exchange NCT Audio
Series A  Preferred  Stock into the  Company's  Series D  Convertible  Preferred
Stock.

   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, 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 among the Company,  Advancel and
certain  shareholders of Advancel.  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 (as defined in the Stock Purchase
Agreement) for each of the calendar years 1999,  2000, 2001 and 2002. While each
earnout  payment may not be less than $250,000 in any earnout year,  there is no
maximum  earnout  payment for any earnout  year or for all earnout  years in the
aggregate.  To  determine  the number of shares of the  Company's  common  stock
issuable in connection  with an earnout  payment,  each earnout payment is to be
calculated using the average of the closing prices of the Company's common stock
for each of the  twenty  (20)  business  days  following  the 21st day after the
release of Advancel's  audited year-end  financials for an earnout year. At that
time,  Advancel  Shareholders  will elect to  receive  payment in cash or common
stock of the  Company.  In the event that the Company is unable to maintain  the
registration  statement covering the resale of 1,786,991 shares effective for at
least thirty (30) days, each Advancel  Shareholder  shall have the right,  until
April 15,  1999,  to have the  Company  redeem up to  one-third  of the  initial
payment shares acquired by such Advancel  Shareholder by paying in cash therefor
a sum  calculated by using the formula used to determine the number of shares of
the Company's  common stock to be delivered in payment of the initial payment of
$1.0  million.  The cost of the  acquisition  has been  allocated  to the assets
acquired and liabilities assumed based on their fair values as follows:


<PAGE>

   Asset acquired and liabilities assumed:

     Current assets                                      $      368,109
     Property, plant 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
                                                          =============

   The  acquisition has been accounted for as a purchase and,  accordingly,  the
accompanying  consolidated Financial Statements include the accounts of Advancel
from the date of acquisition.

   On  November  24,  1998,  the  Company  paid  $1,000 in  consideration  for a
wholly-owned subsidiary,  DistributedMedia.com,  Inc. ("DMC"). DMC 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  to sell an aggregate  stated value of up to $8.2 million of Series E
Preferred  Stock in  consideration  of $4.0  million,  in a  private  placement,
pursuant to  Regulation D of the  Securities  Act, to six  unrelated  accredited
investors  through  one dealer.  The sale of 8,145  shares of Series E Preferred
Stock having an aggregate  of $8.1 million  stated value was  completed on March
12, 1999.  In 1999,  the Company  received net proceeds of $1.8 million from the
1998 Series E Preferred Stock Private Placement.  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.  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  nonassessable  shares of the
Company's  common stock subject to certain  limitations.  Under the terms of the
Series E Subscription Agreements, the Company is required to file a registration
statement  covering  the  resale of all  shares of common  stock of the  Company
issuable upon conversion of the Series E Preferred Stock then outstanding within
sixty  (60) days  after the  completion  of the 1998  Series E  Preferred  Stock
Private  Placement.  The shares of Series E Preferred  Stock become  convertible
into  shares of common  stock at any time  commencing  after the  earlier of (i)
ninety (90) days after the Series E Closing  Date;  (ii) five (5) days after the
Company  receives  a "no  review"  status  from the SEC in  connection  with the
Registration Statement; or (iii) the effective date of the Series E Registration
Statement.  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
Conversion Formula described above under "Overview".

   The conversion  terms of the Series E Preferred Stock also provide that in no
event shall the Company be obligated to issue more than 30,000,000 shares of its
common stock in the  aggregate in connection  with the  conversion of the 10,580
shares of Series E  Preferred  Stock  issued  under the 1998  Series E Preferred
Stock Private Placement.  The Series E Subscription Agreements also provide that
the  Company  will be  required  to make  certain  payments  in the event of its
failure to effect  conversion  in a timely  manner.  As of December 31, 1998, no
shares of Series E Preferred Stock have been converted to NCT common stock.

   In connection with the Series E 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 obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.

   On January 26,  1999,  Carole  Salkind,  spouse of a former  director  and an
accredited  investor (the "Holder"),  subscribed and agreed to purchase  secured
convertible  notes of the  Company  in an  aggregate  principal  amount  of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable.  The Holder shall have 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 shall be the lesser of (i) the average of the closing bid
prices 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 $0.237.  In no event will the
conversion  price be less than $0.15 per share.  The Holder  shall  purchase the
remaining $3.0 million  principal amount of the secured  convertible notes on or
before June 30, 1999.


<PAGE>

   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,   royalties  and  product  sales  and  engineering
development  revenue.  Reducing operating expenses and capital expenditure alone
may not be sufficient and  continuation as a going concern is dependent upon the
level of realization of funding from technology  licensing  fees,  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 and  engineering  and  development  revenue  are not  realized as
planned,  then management  believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.

   There can be no assurance that funding will be provided by technology license
fees,  royalties and product sales and engineering and development  revenue.  In
that  event,  the  Company  would  have to  substantially  cut back its level of
operations.  These  reductions  could  have an adverse  effect on the  Company's
relations  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  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, 1998 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.

   The  Company  has  incurred  substantial  losses  from  operations  since its
inception,  which  have been  recurring  and  amounted  to $107.7  million  on a
cumulative  basis through  December 31, 1998.  These  losses,  which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock,  including the exercise of warrants or options to
purchase  common  stock,  and  by  technology   licensing  and  engineering  and
development  funds  received  from joint venture and other  strategic  partners.
Agreements with joint venture and other  strategic  partners  generally  require
that a portion of the initial cash flows,  if any,  generated by the ventures or
alliances be paid on a preferential  basis to the Company's  co-venturers  until
the license fees and engineering  and development  funds provided to the venture
or the Company are recovered.

   In early 1999, the Company implemented a plan that management believes should
generate sufficient  additional funds for the Company to continue its operations
into 1999.  Under this plan, the Company needs to generate  approximately  $22.7
million to fund its operations in 1999. Included in such amount is approximately
$10.8  million  in sales of new  products  and  approximately  $11.9  million of
technology  licensing fees and royalties.  This amount  excludes any revenues or
cash  inflows  from  the  anticipated  pending  acquisitions  of  the  Company's
subsidiary,  NCT Audio.  The Company  believes that it can generate  these funds
from 1999  operations,  although  there is no  certainty  that the Company  will
achieve this goal. Success in generating  technology  licensing fees,  royalties
and  product  sales is  significant  and  critical to the  Company's  ability to
succeed.  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.  If,  during the course of 1999,
management  of the Company  determines  that it will be unable to meet or exceed
the plan  discussed  above,  the Company will  consider cost  reductions  and/or
additional  financing  alternatives.  The Company will  monitor its  performance
against  the plan on a monthly  basis  and,  if  necessary,  reduce its level of
operations  accordingly.  The Company  believes  that the plan  discussed  above
constitutes a viable plan for the  continuation  of the Company's  business into
2000. See "Forward Looking Statements" above.


<PAGE>

   There  can be no  assurance  that  additional  funding  will be  provided  by
technology  licensing  fees,  royalties  and product sales and  engineering  and
development revenue 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 Financial Statements.

   At December  31,  1998,  cash and cash  equivalents  were $0.5  million.  The
available resources were invested in interest bearing money market accounts. The
Company's  investment  objective  is  preservation  of capital  while  earning a
moderate rate of return.

   The Company's  working  capital  decreased from $11.7 million at December 31,
1997, to $(1.2) million as of December 31, 1998. This decrease was due primarily
to a decrease in cash and cash equivalents due to increasing  efforts to develop
and introduce new product lines and to fund operations.

   During 1998,  the net cash used in operating  activities  was $12.8  million.
This  utilization  reflects the emphasis on the  commercial  development  of its
technology  into  several  product   applications,   which  were  scheduled  for
introduction in 1998 and 1999.

   The net cash used in investing  activities  amounted to $6.4 million. Of this
amount,  $5.1 million was attributable to the acquisition  related activities of
the Company's subsidiary,  NCT Audio. Such investments included $3.5 million for
a 20% interest in TSA and a total of $1.5 million, which was loaned to PPI under
two demand  promissory notes. The Company has signed letters of intent from both
TSA and PPI. See "Overview" above for further information. The net cash provided
by  financing  activities  amounted  to $7.2  million  primarily  from  the 1998
financings noted above.

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

   The Company believes that the level of financial resources available to it is
an  essential  competitive  factor.  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.

   Capital Expenditures

   The Company intends to continue its business strategy of working with supply,
manufacturing,   distribution  and  marketing   partners  to  commercialize  its
technology.  The benefits of this strategy  include:  (i) dependable  sources of
electronic and other  components,  which  leverages on their  purchasing  power,
provides  important  cost savings and accesses the most  advanced  technologies;
(ii) 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  (iii)  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, 1998, and no material commitments are anticipated in the near future.

   Year 2000 Compliance

   The Company  believes  the cost of  administrating  its Year 2000  Compliance
program will not have a material adverse impact on future earnings. However, the
potential  costs and  uncertainties  associated  with any Year  2000  Compliance
program will depend on a number of factors, including software, hardware and the
nature of the industry in which the Company,  its  subsidiaries,  suppliers  and
customers  operate.  In addition,  companies must coordinate with other entities
with which they electronically interact, such as customers, suppliers, financial
institutions,  etc. The Company  estimates that potential  costs will not exceed
$0.1 million.

   Although the Company's  evaluation of its systems is still in process,  there
has been no indication  that the Year 2000  Compliance  issue,  as it relates to
internal  systems,  will have a material  impact on future  earnings.  While the
Company  is not  aware  of any  material  Year  2000  Compliance  issues  at its
customers and suppliers,  such potential problems remain a possibility and could
have a material  adverse  impact on the Company's  future  results.  The Company
estimates completion of the evaluation process by September 30, 1999.
<PAGE>

                                   SIGNATURES

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

                                                NCT GROUP, INC.


                                                By: /s/ CY E. HAMMOND
                                                    -----------------
                                                    Cy E. Hammond
                                                    Senior Vice President,
                                                    Chief Financial Officer

May 3, 1999