UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  -------------

                                    FORM 10-K
                                  -------------


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

For the fiscal year ended December 31, 2004

                                       or

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

For the transition period from ____________ to ____________


                         Commission file number: 0-18267


                                 NCT GROUP, INC.
             (Exact name of registrant as specified in its charter)


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

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

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

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $0.01 par value
                          -----------------------------
                                (Title of class)

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. /_/

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). /_/ Yes /X/ No

The aggregate  market value of the  outstanding  common stock of the  registrant
held by  non-affiliates  of the registrant as of June 30, 2004 was approximately
$17.5 million.

Number of shares of common stock outstanding as of March 30, 2005: 641,970,392

<PAGE>

<TABLE>
<CAPTION>

                                Table of Contents

                                                                                       Page
PART I                                                                                 ----
<S>  <C>                                                                                <C>
Item 1.    Business                                                                     3
Item 2.    Properties                                                                   8
Item 3.    Legal Proceedings                                                            8
Item 4.    Submission of Matters to a Vote of Security Holders                         10

PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder
              Matters and Issuer Purchases of Equity Securities                        11
Item 6.    Selected Financial Data                                                     12
Item 7.    Management's Discussion and Analysis of Financial Condition and
              Results of Operations                                                    14
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                  29
Item 8.    Financial Statements and Supplementary Data                                 29
Item 9.    Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure                                                     29
Item 9A.   Controls and Procedures                                                     29
Item 9B.   Other Information                                                           29

PART III

Item 10.   Directors and Executive Officers of the Registrant                          30
Item 11.   Executive Compensation                                                      32
Item 12.   Security Ownership of Certain Beneficial Owners and Management              35
Item 13.   Certain Relationships and Related Transactions                              38
Item 14.   Principal Accounting Fees and Services                                      45

PART IV

Item 15.   Exhibits, Financial Statement Schedules                                     46

Signatures                                                                            S-1

</TABLE>

                                       2
<PAGE>

                                     PART I

     This Annual Report on Form 10-K contains  forward-looking  statements  that
reflect our current  estimates,  expectations  and projections  about our future
results,  performance,  prospects and opportunities.  Forward-looking statements
include all statements that are not historical facts. These statements are often
identified  by  words  such as  "anticipate,"  "believe,"  "could,"  "estimate,"
"expect,"  "intend,"  "plan,"  "may,"  "should,"  "will,"  "would"  and  similar
expressions. These forward-looking statements are based on information currently
available to us and are subject to numerous risks and  uncertainties  that could
cause our actual  results,  performance,  prospects or  opportunities  to differ
materially  from  those  expressed  in,  or  implied  by,  the   forward-looking
statements we make in this Annual Report. We have included  important factors in
the cautionary  statements  included in this Annual Report,  particularly in the
section entitled  "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations - Factors That May Affect Our Future  Results,"  that
could cause our actual results to differ materially from the results referred to
in the forward-looking  statements we make in this Annual Report. You should not
place undue  reliance on any  forward-looking  statements.  Except as  otherwise
required by federal  securities  laws,  we undertake no  obligation  to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information,  future events, changed circumstances or any other reason after the
date of this Annual Report.

     "NCT"  (which may be referred to as "we," "us," or "our")  means NCT Group,
Inc. or NCT Group, Inc. and its subsidiaries, as the context requires.

     The  NCT  Group,  Inc.  name  and  logo,  NoiseBuster(R),   ClearSpeech(R),
ProActive(R),  Sight &  Sound(R),  Artera(R)  and  Artera  Turbo(TM)  are either
registered  trademarks  or  trademarks  of NCT Group,  Inc. in the United States
and/or  other  countries.  All other  trademarks,  service  marks or trade names
referred to in this Annual Report are the property of their respective owners.

ITEM 1.   BUSINESS

General

     NCT Group, Inc. develops and licenses technologies based upon its portfolio
of  patents  and  related  rights  and  extensive   know-how  and   non-patented
technologies.  We have a strong technology base with  approximately 584 domestic
and  international  patents and related  rights.  We operate in three  segments:
communications,  media and technology. Our major focus is the development of our
communications businesses,  particularly our Artera Turbo data communication and
network  optimization  service,  and our  communications  headset  products  and
systems produced by our majority-owned subsidiary, Pro Tech Communications, Inc.

     We  have  strategic   licensing   relationships   with   manufacturers  for
integration of certain of our technologies into their products and applications,
from which we earn licensing  fees,  ongoing per unit royalties and  engineering
fees.

     Our strategy is to leverage our existing base of  proprietary  technologies
by licensing  our  technologies  and by developing  new  products,  services and
applications.  We  continue to  establish  distribution  channels  and strive to
increase  consumer  awareness  of  our  products,  services,   applications  and
technologies.  At the same time,  we continue to strive to lower the cost of our
products and services and to enhance their technological performance.

     We classify revenue  recognized from our product lines in our statements of
operations  as  technology   licensing  fees  and   royalties,   product  sales,
advertising,  and engineering and  development  services.  Our product lines and
licenses  that  comprised  more than 10% of our total  revenue in any one of the
last three years are as follows:

     o    Flat panel  transducer  technology  licensed to New  Transducers  Ltd.
          ("NXT")  was   accounted  for  in  our  media  segment  and  comprised
          approximately  29%, 44% and 39% of our total revenue in 2002, 2003 and
          2004, respectively;

     o    Product revenue from the sale of our  communications  headset products
          was  accounted  for  in  our  communications   segment  and  comprised
          approximately  23%, 24% and 22% of our total revenue in 2002, 2003 and
          2004, respectively; and

     o    Software technology licensed to Teltran  International Group, Inc. was
          accounted   for   in  our   communications   segment   and   comprised
          approximately  26%, 0% and 0% of our total  revenue in 2002,  2003 and
          2004, respectively.

                                       3
<PAGE>

     We were incorporated in Delaware in 1986 and changed our name to NCT Group,
Inc. in 1998. Our principal  executive offices are located at 20 Ketchum Street,
Westport,  Connecticut  06880,  our telephone  number is (203)  226-4447 and our
Internet address is www.nctgroupinc.com. The information on our Internet website
is not incorporated into this Annual Report.

Operations

     We operate our business through three segments:  communications,  media and
technology.  Each of our operating  segments  targets the  commercialization  of
products and technologies in specific markets. Please see Notes 24 and 25 to the
Notes to Consolidated  Financial  Statements  contained elsewhere in this Annual
Report  for  additional   information   regarding  our  operating  segments  and
geographic areas.

Communications Segment

     Our  communications  segment  includes our Artera Group,  Inc. and Pro Tech
Communications,  Inc.  subsidiaries.  Artera Group  develops and markets  Artera
Turbo, a software-based, high-speed, data communication and network optimization
service,   to  residential   users,  small  and  medium  businesses  and  larger
enterprises.   Pro  Tech   engineers,   designs   and   distributes   audio  and
communications   headset   products  and  systems   into  the  contact   center,
quick-service  restaurant and consumer audio markets. Our communications segment
also develops and markets our ClearSpeech noise and echo cancellation algorithms
and related microphones and speakers.

Artera Turbo

     Artera  Turbo is a  software-based  service  that  improves  the  effective
performance of communication  lines for Internet-based  applications such as web
browsing, e-mail and file transfers. The service accomplishes these improvements
by employing a number of patent-pending, performance enhancement techniques that
decrease  the  size and  increase  efficiencies  in the  movement,  storage  and
delivery of electronic data.

     Artera Turbo accelerates web browsing, web-based file transfers,  uploading
and downloading of all native File Transfer  Protocol (FTP) file transfers,  and
all types of e-mail from simple  web-based  e-mail systems,  such as Hotmail and
Yahoo Mail, to Post Office  Protocol3  (POP3) and Simple Mail Transfer  Protocol
(SMTP)  based  e-mail  systems,  such as Microsoft  Outlook,  Microsoft  Outlook
Express and Microsoft  Exchange.  Artera Turbo provides effective speeds of more
than five times the normal speed of a 56k dial-up line,  in other words,  speeds
comparable  to digital  subscriber  lines (DSL).  Artera Turbo also  accelerates
other connections  including cable, DSL and integrated services digital networks
(ISDN).

     Beginning in 2004, we expanded our emphasis beyond the  residential  market
to include  opportunities for Artera Turbo in the enterprise  market. We entered
into a distribution and marketing agreement with Avaya that, as amended, expires
in October 2005. Avaya designs,  builds and manages communications  networks for
more than one million businesses  worldwide.  In March 2004, Avaya announced its
Avaya  Network  Bandwidth  Optimization  (NBO)  service  based on  Artera  Turbo
technology for enterprise  users.  The service offering can create more capacity
on a company's  communications  network  and more than double data  transmission
speeds without  investing in  hardware-based  bandwidth  compression  systems or
network upgrades.  In May 2004, Avaya released NBO for general  availability and
sales training was initiated. Avaya is responsible for promoting and selling NBO
to its  clients,  while we provide  technical  and sales  support as required by
Avaya. As of February 28, 2005, no revenue has been generated as a result of our
relationship  with Avaya.  We are  pursuing  other  strategic  partnerships  for
distribution of our enterprise version of Artera Turbo in the Americas,  Europe,
the Middle East and Asia.

     During the second half of 2004, we initiated the  development  of a new web
accelerator  brand that we believe will enable us to compete more effectively in
a market fraught with competitive  pricing and distribution  pressures.  The new
brand  represents a potential new business model for us. The service is targeted
to the residential web accelerator  market,  principally  dialup users,  but the
service can also speed cable and DSL. We intend to  commercially  introduce this
new brand in the second  quarter of 2005. We also continue to develop and market
our Artera Turbo brand for residential, small business and enterprise markets.

Pro Tech

     Pro Tech  engineers,  designs  and  distributes  audio  and  communications
solutions and other products for consumers, business users and industrial users.
Pro Tech's products include:

     o    NoiseBuster active noise reduction consumer audio headphones;

                                       4
<PAGE>

     o    Apollo headsets and amplifiers for use in contact  centers,  corporate
          settings and small office/home office applications; and

     o    ProCom headsets for use in quick-service restaurants.

     Pro Tech is also  pursuing  the  development  of new  products  to  address
additional  markets  of  opportunity,  including  personal  hearing  protection,
spectator  racing,  two-way radio  communications,  aviation and  military.  For
example,  Pro Tech expects to introduce an active noise reduction safety earmuff
during  the first  half of 2005.  This  earmuff  has been  developed  to provide
hearing  protection  in high-noise  environments  by combining  passive  hearing
protection with advanced active noise reduction technology.

ClearSpeech

     Our  ClearSpeech  business  specializes in the research and  development of
signal   processing   algorithms  and  related   hardware  for  enhancing  voice
communications.  We have developed  solutions for a wide range of  communication
system  challenges,  including  third  generation  (3G)  cellular  video phones,
drive-thru service facilities,  security and surveillance equipment,  hands-free
communication  systems,  Formula 1 and NASCAR racing,  digital mobile radios and
automotive  speech  recognition  applications.  Our ClearSpeech  suite of signal
processing  technology includes echo cancellation and noise reduction algorithms
for human listeners and for speech recognition applications.

Media Segment

     Our media segment,  through our Hospital Radio Network  business,  develops
and distributes a micro broadcasting system that delivers place-based  broadcast
and billboard advertising.  We use our proprietary digital technology to deliver
advertising messages interspersed with CD-quality music programming to hospitals
and other health care  facilities.  To date, we have focused on installations in
New York City metropolitan area hospitals and outpatient health care facilities.

Technology Segment

     Our  technology   segment  consists  of  our  Advancel  Logic   Corporation
subsidiary,  which  participates  in the  native  Java  embedded  microprocessor
market.   We   have   licensed   certain   Advancel-developed    technology   to
STMicroelectronics   SA  for  smart   card   applications,   and   since   2003,
STMicroelectronics  has been  shipping  orders of its smart cards  incorporating
this technology.

Technology and Intellectual Property

     We rely on a combination of patent,  trademark,  copyright and trade secret
laws  in the  U.S.  and  elsewhere  as well as  confidentiality  procedures  and
contractual provisions to protect our proprietary technology. We also enter into
confidentiality  and  invention  assignment  agreements  with our  employees and
confidentiality  agreements with our consultants and other third parties.  As of
February 28, 2005, we held  approximately  584 patents and related rights and an
extensive library of know-how and unpatented technology. We have patent coverage
in the U.S., Canada, Japan, Europe, Korea,  Australia,  Hong Kong and Taiwan. We
hold or have rights to 312  inventions  as of December 31, 2004,  including  111
United States patents and approximately 473  corresponding  foreign patents.  We
have pending 116 U.S. and foreign patent  applications.  Our engineers have made
164 invention  disclosures  for which we are in the process of preparing  patent
applications.  Our patents have expiration dates ranging from 2005 through 2019,
with the  majority of the material  patents upon which we rely  expiring in 2011
and beyond.

     We have made  substantial  investments in our  technology and  intellectual
property  and  have  incurred  development  costs  for  engineering  prototypes,
pre-production  models and  field-testing of several products and  applications.
Our  intellectual  property  strategy  has been to  build  upon our base of core
technology that we have developed,  acquired or exclusively  licensed 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
product design and packaging.  We believe this building-block  approach provides
greater protection to us than relying solely on the core patents.

     Our core patents and advanced patents and patent  applications  include the
following technologies:

     o    Artera Turbo information and traffic optimization management;

                                       5
<PAGE>

     o    active noise control for headsets;

     o    filters for signal enhancement and speech filtering; and

     o    our method and apparatus for delivering audiovisual information.

     Our key technologies include the following:

     Information   and   Traffic   Optimization    Management   Software.    Our
patent-pending  Artera Turbo  technology  is a  subscription-based  service that
enhances the  effective  speed of Internet  activities,  including web browsing,
e-mail and file transfers,  for any residence or small to medium sized business,
educational institution,  government facility or large enterprise.  Artera Turbo
works via a series of  proprietary  data  management  techniques.  These involve
optimization  processes Artera Turbo performs on an information stream to reduce
the number of bytes transferred over the network  (reduction of the size of data
transferred). These techniques are the subject of three patents pending owned by
us. We believe that the aspects of our Artera Turbo  technology that are patents
pending  are unique to us.  While it is not  possible  to patent all of our data
optimization  technology,  our patents  pending cover the unique  implementation
techniques we have developed.

     Active Noise Reduction. Our active noise reduction technology minimizes low
frequency  acoustical noise, or rumbling sounds.  Active noise reduction creates
sound  waves that are equal in  frequency  but  opposite  in phase to the noise,
which is any unwanted  acoustical  signal.  The  anti-noise  signal  effectively
cancels the  unwanted  noise  signal.  Products  incorporating  this  technology
include our NoiseBuster consumer audio headphones.

     Signal Enhancement. Our signal enhancement technology can be used to reduce
unwanted  signals  that  enter  into a  communications  network,  such  as  when
background  noise enters  telecommunications  or radio  systems from a telephone
receiver or microphone.  We have developed a line of patented  algorithms called
ClearSpeech that perform various signal enhancement  functions.  Our ClearSpeech
Adaptive Speech Filter  algorithm  removes noise from voice  transmissions.  The
filter is effective  against a variety of stationary  noises whose amplitude and
pitch change slowly compared to the spectral variations  characteristic of human
speech.  Our ClearSpeech  Acoustic Echo Cancellation  removes acoustic echoes in
hands-free,  full duplex communication systems. Acoustic echo cancellation 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. Our ClearSpeech Reference Noise Filter isolates and
removes interfering signals, such as background radio,  television,  machine and
siren noise, so  communications  can be heard more clearly.  The reference noise
filter  algorithm was designed to remove  interference  from a desired signal in
applications where a reference signal for the interference is available.

     Digital  Broadcasting  Station System  Software.  Our digital  broadcasting
station system software technology is utilized in our micro broadcasting systems
to deliver customized music programming to each broadcasting  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.

     Protecting our  intellectual  property rights is costly and time consuming.
Maintenance  and  annuity  fees  for  our  extensive   patent  portfolio  are  a
significant  portion  of our  expenses  and  typically  range from  $300,000  to
$600,000  annually.  We incur  maintenance  fees to maintain  our  granted  U.S.
patents and annuity fees to maintain  foreign patents and the pendancy of patent
applications.  If, due to financial  constraints,  we are required to reduce our
level of  operations,  we will  not be able to  continue  to meet the  extensive
monetary  outlay for  maintenance and annuity fees to prevent all of our patents
and  applications  from  becoming  abandoned.  If this  occurs,  we will have to
prioritize our portfolio accordingly.

Research and Development

     Our  research  and  development  personnel  focus on product,  software and
algorithm  development that provides the technological  basis for our technology
licensing and commercial products,  and on basic research that helps provide the
scientific  advances that ultimately lead to new products and technology.  As of
February 28, 2005, our product and development  team consisted of  approximately
19 development engineers and scientists.

     Our research and development  expenses totaled  approximately $4.3 million,
$3.7  million and $4.1 million for the years ended  December 31, 2002,  2003 and
2004,  respectively.  We anticipate  that we will  continue to make  significant
research and  development  expenditures  to maintain and expand our  competitive
position.  This  includes  improving our current  technologies  and products and
developing newer technologies and products.

                                       6
<PAGE>

Marketing and Sales

Communications Segment

Artera Turbo

     Artera  Turbo is available in a single user  residential  version,  a small
office/home  office  (SoHo) local area network  (LAN)  version and an enterprise
version  that  can  support  250 or  more  concurrent  users  on a  LAN.  In the
residential  market, we market the service through a channel of Internet Service
Providers  (ISPs) who generally  private label the service.  We currently target
the enterprise market through our strategic partnership with Avaya.

Pro Tech

     We sell our Pro Tech  products  directly  as well as  through a network  of
distributors.  Key target markets include consumer audio, call centers and major
quick-service restaurant chains.

ClearSpeech

     We license our ClearSpeech  algorithms to manufacturers  for  incorporation
into  various  products.  Two major  customers  are Sharp Japan and OKI Electric
Industry Co., Ltd..  Sharp Japan's  Communication  Division has incorporated our
ClearSpeech  Adaptive  Speech Filter  algorithm into its new line of 3G cellular
phones. OKI incorporates our ClearSpeech noise  cancellation  algorithm into its
large-scale integrated circuits (ICs).

     Our ClearSpeech technology is also incorporated into speaker and microphone
products that are sold through a network of distributors.

Media Segment

     Our Hospital Radio Network sales  initiatives are targeted to expanding the
number of participating health care facilities and to selling advertising on its
network.  Hospital Radio Network  installs its micro  broadcasting  system at no
cost to the facility.  The facility receives a share of the advertising revenues
generated by the sale of advertising on the network.

Technology Segment

     Our Advancel  microprocessor  technology  is  incorporated  into smart card
applications developed and marketed by STMicroelectronics.

Competition

     We have a number of direct and  indirect  competitors  for our products and
services.  Our major  competition for our Artera Turbo service offering includes
Internet accelerator services offered by Propel,  Proxyconn and Slipstream.  Our
primary   competitors  for  Pro  Tech's   lightweight   telephone  headsets  are
Plantronics and GN Netcom and for Pro Tech's NoiseBuster headphones are Bose and
Sony. Our major  competition  for our  ClearSpeech  noise and echo  cancellation
algorithms  includes Lucent and Texas Instruments.  Finally,  our Hospital Radio
Networks business competes against other on-site music providers, such as Muzak,
and against other  advertising  media. In addition,  we believe that a number of
other  large  companies,  such as major  domestic  and  foreign  communications,
computer and electronics  manufacturers  have research and  development  efforts
underway that potentially could be competitive with our products and services.

     Many of our  competitors  and potential  competitors  are  well-established
companies that have  substantially  greater  financial,  technical,  production,
sales and marketing,  and product  development  resources than we do. We believe
that our  competitive  advantages  for our products  and  services  include high
performance  resulting  from our  proprietary  technology,  superior  design and
construction,  and low  cost,  but that our  competitive  disadvantages  include
limited name recognition,  limited marketing and distribution resources and long
production lead times.

Employees

     As of  February  28,  2005,  we  had  68  employees.  These  include  19 in
engineering and  development;  11 in operations and production;  12 in sales and
marketing; 11 in management and administration; and 15 in finance,

                                       7
<PAGE>

accounting,  human  resources,  legal,  information  technology and intellectual
property.  None of our employees is represented by a labor union. We believe our
employee relationships are good.

Available Information

     We file reports,  proxy  statements and other documents with the Securities
and Exchange Commission  ("SEC").  You may read and copy any document we file at
the SEC's public  reference room at Judiciary Plaza Building,  450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the public  reference room. Our SEC filings are also available to
you on the SEC's Internet site at http://www.sec.gov.

     We  maintain  an  Internet  website at  www.nctgroupinc.com.  Our  periodic
reports filed with the SEC  (including  annual  reports on Form 10-K,  quarterly
reports on Form 10-Q,  current  reports on Form 8-K and Section 16 reports)  are
available   free   of   charge   on  our   Investor   Information   website   at
www.nctgroupinc.com/investors  as soon as  reasonably  practicable  after  these
reports are  electronically  filed with the SEC. The  information  posted on our
website is not incorporated into this Annual Report.

ITEM 2.   PROPERTIES

     Our principal  executive offices and corporate  headquarters are located in
Westport,  Connecticut where we lease approximately  18,700 square feet pursuant
to a lease that expires in March 2010. We also lease  approximately 2,400 square
feet in Hanover, Maryland for certain of our engineering activities.  This lease
expires in March 2008.

     Our Artera Turbo product development  operations are located in Middlebury,
Connecticut where we lease  approximately  6,400 square feet pursuant to a lease
that expires in March 2009.

     Our European operations are conducted primarily in Cambridge, England where
we lease  approximately  4,000  square feet  pursuant to a lease that expires in
April 2007.

     Pro Tech's  executive,  sales and  manufacturing  facilities are located in
Fort Pierce, Florida where we lease approximately 13,000 square feet pursuant to
a lease that expires in February 2006.

     We believe our facilities  provide us with adequate space for the near term
consistent with our current business plans.

ITEM 3.   LEGAL PROCEEDINGS

Production Resource Group Litigation

     In June 2001,  Production  Resource  Group,  LLC  ("PRG")  brought  suit in
Connecticut  state  court  against us for breach of  agreements  relating to the
lease of certain Sight & Sound equipment. In December 2001, we accepted an Offer
of Judgment in the suit that  required  us to pay PRG $2.0  million.  In January
2002,  outside the scope of that  judgment,  PRG amended its complaint to allege
that Michael Parrella, our Chairman and Chief Executive Officer, in dealing with
PRG on our behalf,  committed  breaches of good faith and fair  dealing,  unfair
trade  practices and fraud. In December 2003, PRG brought suit in Delaware state
court  against  us,  Michael  Parrella,  Irene  Lebovics  (our  President  and a
Director),  John McCloy II (a Director) and Sam Oolie (a  Director),  which suit
was later amended to add Cy Hammond (our Chief Financial Officer and a Director)
as a defendant. In this lawsuit, PRG sought, among other things, the appointment
of a receiver  over our business and assets.  In May 2004,  PRG brought a second
suit in  Connecticut  state  court,  this one  against  us and  Carole  Salkind,
alleging fraudulent  transfers in connection with certain collateral Ms. Salkind
holds in connection with her loans to us.

     In October 2004, in the first  Connecticut case, PRG withdrew its complaint
against Mr. Parrella (without prejudice).

     On December 3, 2004,  we were  informed by Carole  Salkind that she entered
into a written  agreement with PRG pursuant to which PRG assigned to Ms. Salkind
all of its claims  against us and our directors  and  officers.  On December 22,
2004,  we,  all of the  individual  members  of our board of  directors  and Ms.
Salkind entered into a settlement agreement.  Under this agreement,  Ms. Salkind
irrevocably  released us and our directors from and against all claims  assigned
to Ms.  Salkind  by PRG,  except as  described  below.  In  connection  with her
release,  Ms.  Salkind  has  agreed to  dismiss  (without  prejudice)  the three
lawsuits described above.

                                       8
<PAGE>

     In consideration for entering into the settlement  agreement,  we issued to
Ms. Salkind a five-year  convertible note in the principal amount of $5 million.
The note is secured by substantially all of our assets. The note bears interest,
retroactive  to December 1, 2004, at 12% per annum payable  quarterly in arrears
beginning October 1, 2005, and bears interest at a default rate of 17% per annum
on any interest or principal not paid when due. At the election of Ms.  Salkind,
the note may be  converted  into  301,204,819  shares of our  common  stock at a
conversion price per share of $0.0166 or exchanged for shares of common stock of
any of our  subsidiaries  (other than Pro Tech) that makes a public  offering of
its common stock (at the public offering price).

     The settlement  agreement  further  provides that unless there is a default
under the note,  Ms.  Salkind  may not enforce any of the PRG claims or lawsuits
described above.  Upon full  satisfaction of the note, Ms. Salkind's  release of
the PRG claims  automatically  becomes  unqualified and Ms. Salkind must dismiss
the PRG  lawsuits  described  above,  this time with  prejudice.  However,  if a
default  occurs under the note,  all PRG claims and lawsuits  against us and our
directors  may  thereafter  be enforced by Ms.  Salkind,  including the lawsuits
previously  dismissed  without  prejudice  and  including  the  judgment of $2.0
million plus accrued  interest  described above, all to the extent necessary for
full satisfaction under the note.

     During 2004,  we recorded an expense of $3.6 million for  settlement of PRG
claims.  The  settlement  expense  included  consideration  in  the  form  of  a
convertible  note payable of $5.0 million,  the fair value of warrants issued of
$1.3 million offset by $2.7 million of judgment and interest expense  previously
accrued.

     In  connection  with the issuance of the note,  we issued to Ms.  Salkind a
five-year  warrant  to  purchase  82,500,000  shares of our  common  stock at an
exercise price per share of $0.0166.

Founding Midcore Shareholder Litigation

     In April 2004,  Jerrold Metcoff and David Wilson filed a complaint  against
us  and  Michael  Parrella,   our  Chairman  and  Chief  Executive  Officer,  in
Connecticut state court, which complaint was subsequently  amended to add Carole
Salkind as a defendant.  This action arose out of the August 29, 2000  Agreement
and Plan of Merger pursuant to which Messrs.  Metcoff, Wilson and others sold to
us 100% of the  outstanding  shares of a  corporation  that was merged  into and
became our  subsidiary,  Midcore  Software,  Inc. A  lookback  provision  in the
agreement  requires us to issue additional shares of our common stock to Messrs.
Metcoff and Wilson to  guarantee  a fixed value to a prior share  issuance by us
that served as partial  consideration under the agreement.  Under the formula in
the agreement,  we are required to issue 26,193,025 shares for the lookback.  In
addition, the agreement provides for a minimum royalty amount through August 29,
2003,  with a  payment  of cash or  shares  of  common  stock by us to reach the
minimum amount for that date. On September 23, 2003, Messrs.  Metcoff and Wilson
elected to receive  this  royalty  payment in shares.  Under the  formula in the
agreement,  we are required to issue 34,166,551  shares for the royalty payment.
We did not issue any of the total of  60,359,576  shares to  Messrs.  Metcoff or
Wilson.

     The  complaint,  as  amended,  alleges  breaches  of the  August  29,  2000
agreement and related improper acts and omissions,  including (i) our failure to
issue the lookback and royalty shares;  (ii) our breach of  representations  and
warranties in or relating to the agreement;  (iii) "unjust enrichment" of Artera
Group in its use of  intellectual  property  owned  by the  entity  that  became
Midcore Software; (iv) misrepresentations by Mr. Parrella in connection with the
agreement  and the  operation of Midcore  Software  since  August 29, 2000;  (v)
tortuous  interference by Artera Group and Mr.  Parrella with Messrs.  Metcoff's
and  Wilson's  contractual  relations  with NCT and Midcore  Software;  (vi) our
failure to deliver documents pertaining to resales by Messrs. Metcoff and Wilson
of the shares of our common  stock they did  receive  under the August 29,  2000
agreement;  and (vii)  fraudulent  transfers and civil  conspiracy of us and Ms.
Salkind in a number of our  financing  transactions  and in the treatment of our
assets constituting  collateral in these financings.  The complaint, as amended,
seeks  damages,   punitive  damages,   interest  and  attorneys'  fees,  all  in
unspecified  amounts. In September 2004, the plaintiffs filed an application for
a prejudgment attachment and garnishment of the assets of us and Mr. Parrella to
the extent of  $4,200,000.  Messrs.  Metcoff and Wilson  have not  pursued  that
application,  but if they do, we intend,  and Mr.  Parrella  has told us that he
intends,  to object to it. On January 7, 2005,  the court  granted our motion to
strike one of the claims  against  Midcore  Software in the  amended  complaint,
pertaining  to Midcore's  responsibility  for our failure to issue shares of our
common  stock to Messrs.  Metcoff and  Wilson.  However,  on January  24,  2005,
Messrs.  Metcoff and Wilson moved for permission to file a substitute  complaint
that would  reformulate  this claim.  On February 22, 2005, we requested a court
order  that the  proposed  reformulated  claim,  if allowed  into this case,  be
further  revised.  On March 23, 2005,  the  plantiffs objected to our motion for
reformulation, and a decision is pending. Discovery in the case has begun.

     We have agreed to indemnify Mr.  Parrella,  to the extent  permitted by our
certificate of incorporation and applicable law, for any liabilities  (including
legal fees) Mr. Parrella may incur as a result of the claims against him

                                       9
<PAGE>

in this  action.  We have  submitted  the claims  against  Mr.  Parrella  to our
director and officer indemnification  insurance carrier, but the carrier has not
yet responded to confirm or initially deny  coverage.  Ms. Salkind has demanded,
and we have agreed,  that to the extent required in connection with her security
interests  under our secured notes to her, we will pay the legal fees she incurs
as a result of the claims in this action.  At December  31, 2004,  approximately
$19,000 in legal fees were incurred by Ms. Salkind, of which $15,000 was paid by
us in 2004 and $4,000 of which was paid by us in March  2005.  We intend to deny
and defend  against all claims  against us in the action.  Mr.  Parrella and Ms.
Salkind  have told us that each  intends to deny and defend  against  all claims
against him or her in the action.

Artera Trademark Oppositions

     In December 2002,  Altera  Corporation filed oppositions to the granting of
all of our pending U.S. trademark  registration  applications for "Artera Turbo"
and  of  some  of our  pending  U.S.  trademark  registration  applications  for
"Artera." In June 2004, Altera  Corporation filed oppositions to the granting of
our  trademark  registration  applications  for "Artera  Turbo" and  "Artera" in
Australia.  The alleged basis for all of these oppositions is, in essence,  that
the  Artera  marks  are  confusingly  similar  to Altera  Corporation's  mark of
"Altera,"  which was  registered  in a number of product and service  categories
prior to the initial  filing of the  "Artera  Turbo" and  "Artera"  applications
being opposed. We intend to defend against these oppositions vigorously.

     We believe that there are no other lawsuits,  patent  infringement  claims,
matters or unasserted  claims other than the matters  discussed above that could
have a material adverse effect on our financial  position or operating  results.
Based upon  information  currently  available  to us, we believe  that  adequate
provisions  have been  estimated  and  included  in our  consolidated  financial
statements for these matters.

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

     No  matter  was  submitted  to a vote  of  our  stockholders,  through  the
solicitation of proxies or otherwise, during the fourth quarter of 2004.

                                       10
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
          ISSUER PURCHASES OF EQUITY SECURITIES

     Our common stock currently  trades on the NASD OTC Bulletin Board under the
symbol  "NCTI." The following  table sets forth the high and low sales prices of
our common stock,  as reported on the NASD OTC Bulletin  Board,  for each of the
periods listed.

                              2003                      2004
                     ----------------------    ----------------------
                      High           Low         High          Low
                     --------     ---------    ---------    ---------
     1st Quarter     $0.075        $0.028        $0.081      $0.039
     2nd Quarter     $0.081        $0.027        $0.061      $0.025
     3rd Quarter     $0.078        $0.031        $0.039      $0.019
     4th Quarter     $0.057        $0.037        $0.026      $0.016

     As of February 28, 2005,  we had  approximately  4,200 holders of record of
our common stock, representing approximately 30,000 beneficial owners.

Dividends

     We have never declared or paid any cash  dividends on our common stock.  We
currently   anticipate   that  we  will  retain  any  future  earnings  for  the
development,  operation and expansion of our  business.  Accordingly,  we do not
anticipate  declaring  or paying any cash  dividends  on our common stock in the
foreseeable  future.  Our board of directors will have discretion in determining
whether to declare  or pay  dividends,  which  will  depend  upon our  financial
condition, operating results, capital requirements and such other factors as the
board of directors deems relevant.  In addition, we may not declare, pay or make
any dividends or other  distributions  upon our common stock unless we first pay
all accrued dividends on our series H convertible preferred stock.  Furthermore,
certain senior equity securities of our subsidiaries  contain limitations on the
payment of dividends on the common stock of these subsidiaries.

                                       11
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

     The  following  selected  consolidated  financial  data is derived from our
historical  financial  statements  and  should be read in  conjunction  with our
consolidated  financial  statements  and "Item 7.  Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  that are included
elsewhere in this Annual Report.

<TABLE>
<CAPTION>

                                                                 (in thousands of dollars, except per share amounts)
                                                                              Years Ended December 31,
                                                     -------------------------------------------------------------------------------
                                                        2000            2001             2002             2003           2004
                                                      ---------      ----------       ----------       ----------     ----------
RESULTS OF OPERATIONS AND
  LOSS PER SHARE:
REVENUE:
<S>                                                   <C>            <C>              <C>              <C>            <C>
  Technology licensing fees and royalties             $   9,928 (b)  $    5,633 (b)   $    4,493       $    3,013     $    3,422
  Product sales, net                                      2,001           4,568            2,697            1,708          1,902
  Advertising                                               828             279              105               88            147
  Engineering and development services                       83             132               24               49              4
                                                      ---------      ----------       ----------       ----------     ----------
    Total revenue                                     $  12,840      $   10,612       $    7,319       $    4,858     $    5,475
                                                      ---------      ----------       ----------       ----------     ----------
COSTS, EXPENSES AND OTHER INCOME:
  Cost of product sales                               $   2,127      $    3,340       $    1,279       $      787     $    1,089
  Cost of advertising                                       814             332               15               14             15
  Cost of engineering and development services               55               2                8               53              3
  Selling, general and administrative                    11,408          18,983 (e)       14,850           17,519 (l)      9,716 (o)
  Research and development                                4,412           5,966            4,711            3,684          4,104
  Other operating (income) expense, net                   2,661 (c)      35,841 (f)       11,439 (j)         (244)         5,932 (p)
                                                      ---------      ----------       ----------       ----------     ----------
    Operating costs, expenses and other income           21,477          64,464           32,302           21,813         20,859
Non-operating items:
  Other (income) expense, net                              (162)         16,099 (g)        7,411 (k)         (943)(m)      6,575 (q)
  Interest (income) expense, net                          1,849           6,127 (h)        7,711           14,288 (n)     42,667 (r)
                                                      ---------      ----------       ----------       ----------     ----------
    Total costs and expenses                          $  23,164      $   86,690       $   47,424       $   35,158     $   70,101
                                                      ---------      ----------       ----------       ----------     ----------

Net loss before cumulative effect
  of change in accounting principle                   $ (10,324)     $  (76,078)      $  (40,105)      $  (30,300)    $  (64,626)
Cumulative effect of change in accounting principle           -          (1,582)(i)            -                -              -
                                                      ---------      ----------       ----------       ----------     ----------

NET LOSS                                              $ (10,324)     $  (77,660)      $  (40,105)      $  (30,300)    $  (64,626)
Less:
Preferred Stock dividends                                   113             969            2,817            2,948          6,984 (s)
Beneficial conversion features                            5,667 (d)         392               46                -            104
                                                      ---------      ----------       ----------       ----------     ----------

Loss attributable to common stockholders              $ (16,104)     $  (79,021)      $  (42,968)      $  (33,248)    $  (71,714)
                                                      =========      ==========       ==========       ==========     ==========

Loss per share:                                       $   (0.06)     $    (0.20)      $    (0.10)      $    (0.06)    $    (0.11)
  Loss before cumulative effect
    of change in accounting principle                         -           (0.01)               -                -              -
                                                      ---------      ----------       ----------       ----------     ----------
  Basic and diluted net loss per share                $   (0.06)     $    (0.21)      $    (0.10)      $    (0.06)    $    (0.11)
                                                      =========      ==========       ==========       ==========     ==========
Weighted average common shares outstanding -
    Basic and diluted (a)                               292,758        377,084           446,423          563,543        645,000
                                                      =========     ==========        ==========       ==========     ==========


                                                                                  As of December 31,
                                                      -----------------------------------------------------------------------------
                                                         2000           2001             2002             2003               2004
                                                      ---------      ----------       ----------       ----------         ----------
BALANCE SHEET DATA:
 Total assets                                           $39,382        $ 20,009         $ 13,569         $ 12,775         $   5,454
 Total current liabilities                               23,386          56,959           53,542           62,927            74,781
 Total long term liabilities                              3,761           7,765            5,011            2,746             5,063
 Accumulated deficit                                   (141,799)       (219,459)        (259,564)        (289,864)         (354,490)
 Stockholders' equity (capital deficit) (t)               9,858         (53,463)         (53,673)         (61,211)          (83,035)
 Working capital deficit                                 (9,727)        (52,636)         (51,409)         (60,816)          (72,258)

</TABLE>

Notes:
------
(a)  Excludes  shares  issuable upon the exercise of outstanding  stock options,
     warrants,  convertible and exchangeable preferred stock and convertible and
     exchangeable debt since their effect would be antidilutive.

                                       12
<PAGE>

(b)  Includes revenue recognized upon licensing  activities for licenses that we
     subsequently  reacquired,  as follows:  2000 - $1.1 million and 2001 - $0.2
     million.

(c)  Includes a $3.1 million charge for the impairment of goodwill.

(d)  Includes  a  $1.0  million  adjustment  to  beneficial  conversion  feature
     previously reported by Pro Tech.

(e)  Increase in 2001 compared to 2000 was primarily due to higher  compensation
     costs,  litigation and patent  expenses,  depreciation and amortization and
     costs attributable to acquired companies.

(f)  Primarily consists of a $1.9 million charge for costs of exiting activities
     attributable to closing facilities and certain operations;  a $14.1 million
     charge for the  impairment of goodwill (net of a $2.1 million  reduction of
     deferred revenue);  $19.3 million,  net, for repurchased licenses (composed
     of an  $18.0  million  write  down for the  acquisition  of  shares  of our
     subsidiary,  DMC New York,  Inc.,  representing  repurchased  licenses  and
     accrual for obligation to acquire remaining licenses and $1.3 million,  net
     of a $2.7 million reduction of deferred revenue, for reacquisition of other
     licenses from two licensees);  and $1.5 million write down of investment in
     Top Source Automotive.

(g)  Primarily  consists of $7.0  million for  other-than-temporary  declines in
     value of  available-for-sale  securities;  $2.3  million for finance  costs
     associated with  non-registration  of shares; $2.3 million realized loss on
     sale of trading  securities (NXT); a $1.4 million decline in the fair value
     of a warrant;  $1.2  million  for  default  penalties  on debt;  and a $1.0
     million reserve for notes receivable.

(h)  Includes  $3.3  million  relating  to the  amortization  of  original  debt
     discounts;   $0.9  million  relating  to  the  amortization  of  beneficial
     conversion  features on  convertible  debt;  $0.7 million of debt  issuance
     costs; and $1.2 million of interest charges on indebtedness.

(i)  Upon the adoption of SFAS No. 138 effective  January 1, 2001, the reduction
     in the fair  value of  derivatives,  consisting  of a warrant  to  purchase
     common stock of a licensee,  was reported as a cumulative  effect of change
     in accounting principle.

(j)  Primarily consists of a $9.2 million charge for repurchased licenses due to
     additional  costs  incurred  to  acquire  12,000  shares of DMC New York in
     exchange for shares of our series H  convertible  preferred  stock,  a $2.1
     million  impairment of other  intangible  assets,  and $0.3 million for the
     impairment of goodwill.

(k)  Primarily  consists  of $6.1  million  for finance  costs  associated  with
     non-registration of shares; $0.8 million for other-than-temporary  declines
     in value of  available-for-sale  securities;  and $0.4  million  of default
     penalties on debt.

(l)  Includes a $3.8 million increase in consulting  expenses resulting from the
     issuance of options.

(m)  Primarily  consists  of $2.2  million  for finance  costs  associated  with
     non-registration of shares; $2.1 million of default penalties on debt; more
     than offset by a $5.3 million gain on litigation settlements.

(n)  Includes $5.3 million for the amortization of original debt discounts; $4.9
     million  for  the  amortization  of  beneficial   conversion   features  on
     convertible  debt; $2.9 million of interest  charges on  indebtedness;  and
     $1.1 million for amortization of additional debt discounts.

(o)  Reflects an $8.3 million decrease from prior year in consulting expenses.

(p)  Includes a $5.9 million charge for the impairment of goodwill.

(q)  Reflects a $4.6 million  increase  from prior year in default  penalties on
     convertible notes.

(r)  Primarily  attributable  to the  increase  in  immediate  expensing  of the
     relative fair value of warrants  (original  issue  discounts and beneficial
     conversion  features)  allocated  to debt.  Interest  expense  included  an
     increase  in the  amortization  of  original  issue  discounts,  beneficial
     conversion features and interest on debt we issued of $13.2 million,  $14.6
     million and $1.6 million, respectively.

(s)  Includes  liquidated  damage  provisions  of $6.0 million  triggered by our
     failure to honor valid  conversion  or exchange  requests or to comply with
     resale registration obligations or requirements.

(t)  We have never declared or paid dividends on our common stock.

                                       13
<PAGE>

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

Overview

     We design  products  and develop and  license  technologies  based upon our
portfolio of patents and related proprietary rights and extensive  technological
know-how.  Our business  operations are organized into three operating segments:
communications,   media  and  technology.  Our  operating  revenue  consists  of
technology  licensing  fees  and  royalties,  product  sales,  advertising,  and
engineering  and  development  services.  Operating  revenue  for the year ended
December 31, 2004 consisted of approximately 62.5% in technology  licensing fees
and royalties,  34.7% in product sales, 2.7% in advertising  revenue and 0.1% in
engineering and development services.  The mix of our revenue sources during any
reporting  period  may have a  material  impact  on our  operating  results.  In
particular,  our execution of technology licensing agreements, and the timing of
the revenue recognized from these agreements, has not been predictable.

Going Concern Risks

     Since  inception,  we have  experienced  substantial  recurring losses from
operations,  which  amounted to $354.5  million on a  cumulative  basis  through
December 31, 2004.  Internally generated funds from our revenue sources have not
been  sufficient  to cover our  operating  costs.  The  ability  of our  revenue
sources,  especially  technology  license  fees,  royalties,  product  sales and
advertising,  to generate significant cash for our operations is critical to our
long-term success.  We cannot predict whether we will be successful in obtaining
market  acceptance  of our new products or  technologies  or in  completing  our
current licensing agreement negotiations. To the extent our internally generated
funds are not  adequate,  we  believe  that we will  need to  obtain  additional
working capital through equity and/or debt financings.  However,  we can give no
assurance  that any  additional  financing will be available to us on acceptable
terms or at all. In addition,  in order to obtain  additional  financing through
the sale of shares of our common  stock,  we will need to obtain the approval of
our  stockholders  of an  amendment  to  our  certificate  of  incorporation  to
sufficiently  increase  the number of  authorized  shares of our  common  stock.
However,  we can  give no  assurance  that  our  stockholders  would  approve  a
sufficient increase in our authorized shares of common stock.

     Our  management  believes  that  currently  available  funds  will  not  be
sufficient  to sustain our  operations  at current  levels  through the next six
months.  These funds consist of available cash and the funding  derived from our
revenue sources.  Cash and cash equivalents amounted to $1.4 million at December
31, 2004 and our working capital deficit was $72.3 million. We have been able to
continue our operations by raising  additional  capital.  We have been primarily
dependent upon funding from Carole  Salkind during the last three years.  In the
event that external financing is not available or timely, we will be required to
substantially  reduce our level of operations in order to conserve  cash.  These
reductions could have an adverse effect on our relationships  with our customers
and suppliers.  Reducing operating  expenses and capital  expenditures alone may
not be adequate, and continuation as a going concern is dependent upon the level
of funding realized from our internal and external funding sources, all of which
are currently uncertain.

     Our consolidated  financial  statements have been prepared assuming that we
will continue as a going concern,  which contemplates  continuity of operations,
realization of assets and  satisfaction of liabilities in the ordinary course of
business.  Our ability to continue as a going concern is dependent  upon,  among
other things, the achievement of future profitable operations and the ability to
generate  sufficient  cash from  operations,  equity and/or debt  financings and
other funding sources to meet our obligations.  The  uncertainties  described in
the preceding  paragraphs raise substantial doubt at December 31, 2004 about our
ability to continue as a going concern. Our 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.

Critical Accounting Policies and Estimates

     The preparation of our financial statements requires our management to make
estimates  and  assumptions   that  affect  the  reported   amounts  of  assets,
liabilities,  revenue and expenses,  and related disclosure of contingent assets
and liabilities.  Management bases its estimates on historical experience and on
various  other  assumptions  that  are  believed  to  be  reasonable  under  the
circumstances, the results of which form the basis of making judgments about the
carrying  values of assets and  liabilities  that are not readily  apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions or conditions.

                                       14
<PAGE>

     An accounting  policy is deemed to be critical if it requires an accounting
estimate  to be made  based  upon  assumptions  about  matters  that are  highly
uncertain at the time the  estimate is made,  and if  different  estimates  that
reasonably could have been used, or changes in the accounting estimates that are
reasonably likely to occur  periodically,  could materially impact the financial
statements.  Management  believes the  following  critical  accounting  policies
reflect its more  significant  estimates and assumptions used in the preparation
of the consolidated financial statements.

Revenue Recognition

     Revenue is recognized when earned.  Technology licensing fees are generally
recognized  upon  execution  of the  agreement  but are  deferred  if subject to
completion of any performance criteria and later recognized once the performance
criteria have been met.  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.  Revenue from product sales is recognized
when the  product is shipped  and title has passed.  Revenue  from  subscription
services (included in product sales) is deferred and recognized ratably over the
period  when  the  service  is  provided  (subscription  period).  Revenue  from
advertising sales is recognized when the  advertisements are aired or displayed.
Revenue from  engineering and development  services is generally  recognized and
billed as the services are performed.  The mix of our revenue sources during any
reporting  period  may have a  material  impact  on our  operating  results.  In
particular,  our execution of technology  licensing agreements and the timing of
the revenue  recognized  from these  agreements  has not been  predictable.  Our
preference is to collect amounts due from the sale of our technologies, services
and products in cash. However, from time to time,  receivables may be settled by
securities transferred to us by the customer in lieu of cash payment.

     At December 31, 2004, our deferred revenue  aggregated $0.9 million.  We do
not expect to realize any additional cash in connection with recognizing revenue
from our deferred revenue.

Goodwill, Patent Rights, Other Intangible Assets

     The  excess of the  consideration  paid over the fair  value of net  assets
acquired  in business  combinations  is  recorded  as  goodwill.  We also record
goodwill  upon the  acquisition  of some or all of the  stock  held by  minority
stockholders of a subsidiary, except where such accounting is, in substance, the
purchase of licenses  previously  sold to such  minority  stockholders  or their
affiliates.

     Annually,  or if an event  occurs or  circumstances  change that would more
likely  than not reduce the fair value of a  reporting  unit below its  carrying
amount,  we test our goodwill for  impairment.  We also  recognize an impairment
loss on  goodwill  acquired  upon  the  acquisition  of stock  held by  minority
stockholders  of  subsidiaries  if the  subsidiary's  minority  interest  has no
carrying value,  the subsidiary has a capital  deficit and the projected  future
operating results of the subsidiary are not positive.

     At December 31, 2004, we evaluated  the goodwill  allocated to our Advancel
reporting unit, NCT Hearing reporting unit and Midcore/Artera reporting unit and
determined no impairment existed for Advancel or NCT Hearing.

     In  our  annual  assessment  of  the  goodwill  of  and  the  value  of the
Midcore/Artera  reporting  unit,  we  considered  the results of  operations  in
relation to previous estimates of activity,  as well as estimates of anticipated
operations.  Based  on  our  inability  to  develop  the  anticipated  lines  of
businesses  and  to  realize   results  as  budgeted,   in  part  because  of  a
reorganization  at our  enterprise  systems  business  partner  during  the last
quarter of 2004, we have determined,  for the purposes of our current assessment
of goodwill,  not to anticipate the development of additional lines of business.
Although  we are  currently  in  negotiations  with other  parties  for  further
development  and   utilization  of  our  system,   we  cannot  be  assured  such
negotiations will be successful. As a result, our assessment of the value of the
reporting  unit,  based on existing  operations,  is not sufficient to carry the
goodwill without impairment.  Based on our assessment,  as of December 31, 2004,
we concluded  that the goodwill of the  Midcore/Artera  reporting  unit is fully
impaired and we recorded an impairment of $5.9 million.

     At December 31, 2004, our goodwill, net was $1.3 million.

     Patent rights and other intangible  assets with finite useful lives,  which
include the cost to acquire  rights to patents and other rights under  licenses,
are stated at cost and amortized using the straight-line method over the

                                       15
<PAGE>

remaining  useful  lives,  ranging  from one to  seventeen  years.  Amortization
expense for the years ended December 31, 2003 and 2004 was $0.3 million and $0.1
million, respectively.

     We evaluate  the  remaining  useful life of  intangible  assets with finite
useful lives each reporting period to determine whether events and circumstances
warrant a revision to the remaining  period of  amortization.  If the evaluation
determines that the intangible  asset's  remaining useful life has changed,  the
remaining  carrying  amount of the intangible  asset is amortized  prospectively
over that revised  remaining useful life. We evaluate our intangible assets with
finite  useful  lives  for  impairment  whenever  events  or  other  changes  in
circumstances  indicate  that the carrying  amount may not be  recoverable.  The
testing for impairment  includes  evaluating the undiscounted  cash flows of the
asset and the remaining  period of amortization or useful life. The factors used
in evaluating the undiscounted cash flows include:  current  operating  results,
projected future operating results and cash flows and any other material factors
that may effect the  continuity or the  usefulness  of the asset.  If impairment
exists,  the  intangible  asset is  written  down to its fair  value  based upon
discounted  cash  flows.  At  December  31,  2004,  our patent  rights and other
intangibles, net were $1.1 million.

Recently Issued Accounting Pronouncements

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial  Accounting  Standard  No.  151,  "Inventory  Costs--an
amendment  of ARB No. 43," which is the result of its  efforts to converge  U.S.
accounting  standards for inventories with International  Accounting  Standards.
SFAS No. 151 requires idle facility expenses,  freight, handling cost and wasted
material  (spoilage) costs to be recognized as current-period  charges.  It also
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities.  SFAS No. 151 will
be effective for inventory  costs incurred  during fiscal years  beginning after
June 15, 2005. We are evaluating the impact of this standard on our consolidated
financial statements.

     In December 2004,  the FASB issued SFAS No. 153,  "Exchanges of Nonmonetary
Assets--an amendment of Accounting Principles Board Opinion No. 29," that amends
Opinion No. 29 to eliminate the exception for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
statement are  effective for  non-monetary  asset  exchanges for fiscal  periods
beginning after June 15, 2005. We believe the adoption of SFAS 153 will not have
an impact on our results of operations.

     In December 2004, FASB issued  Statement of Financial  Accounting  Standard
No. 123 (Revised 2004)  "Share-Based  Payment" ("SFAS No. 123R") that prescribes
the accounting for share-based payment  transactions in which a company receives
employee  services in exchange for (a) equity  instruments of the company or (b)
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the issuance of such equity instruments.

     SFAS No. 123R addresses all forms of share-based payment awards,  including
shares issued under  employee stock purchase  plans,  stock options,  restricted
stock and stock  appreciation  rights.  SFAS No. 123R  eliminates the ability to
account  for  share-based  compensation  transactions  using APB Opinion No. 25,
"Accounting  for Stock Issued to Employees,"  that was previously  allowed under
SFAS No. 123 as originally issued.  Under SFAS No. 123R,  companies are required
to record  compensation  expense for all share based payment award  transactions
measured at fair value.  This  statement is effective for quarters  ending after
June 15,  2005.  We have not yet  determined  the impact of applying the various
provisions of SFAS No. 123R.

Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

     Revenue.  For the year ended December 31, 2004,  total revenue  amounted to
$5.5  million,  compared to $4.9 million for year ended  December  31, 2003,  an
increase of $0.6 million, or 12.2%, due primarily to increases in our technology
licensing fees and royalties. Total revenue for the year ended December 31, 2004
consisted of  approximately  62.5% in technology  licensing  fees and royalties,
34.7%  in  product  sales,  2.7% in  advertising  and  0.1% in  engineering  and
development  services  as  compared  to the  year  ended  December  31,  2003 of
approximately 62.0% in technology licensing fees and royalties, 35.2% in product
sales, 1.8% in advertising and 1.0% in engineering and development services.

                                       16
<PAGE>

     Technology  licensing  fees and  royalties  were $3.4  million for the year
ended December 31, 2004 as compared to $3.0 million for the same period in 2003,
an increase of $0.4  million,  or 13.3%.  The increase  was due  primarily to an
increase in royalties  resulting  from the license of our  ClearSpeech  adaptive
speech filter algorithm to Sharp for use in third generation cellular phones. In
addition, our technology licensing fees increased by $0.1 million resulting from
the cross-release agreement with Infinite Technology Corporation (see Note 14 of
the Notes to Consolidated Financial  Statements).  The technology licensing fees
for the  years  ended  December  31,  2004 and 2003  were due  primarily  to the
recognition of deferred  revenue from the NXT license.  As of December 31, 2004,
our deferred  revenue  attributable to NXT was $0.5 million.  No additional cash
will be realized from our deferred revenue balance.

     For the years ended  December  31, 2004 and 2003,  product  sales were $1.9
million and $1.7  million,  respectively.  Gross profit on product  sales,  as a
percentage of product sales,  for the years ended December 31, 2004 and 2003 was
42.7% and 53.9%,  respectively.  For the years ended December 31, 2004 and 2003,
99% and  98%,  respectively,  of our  product  sales  were  attributable  to our
communications  segment.  The mix of our product sales within our communications
segment for the year ended  December 31, 2004  included 63% of Pro Tech products
and 18% of Artera Turbo  subscriptions  whereas the year ended December 31, 2003
included  70% of Pro Tech  products and 3% of Artera  Turbo  subscriptions.  Our
subscriber base that generated the Artera Turbo product sales for the year ended
December  31,  2004  consisted  of  residential  users.  In  March  2004,  Avaya
introduced its Network Bandwidth  Optimization service  incorporating our Artera
Turbo technology to enterprise  subscribers.  However,  at December 31, 2004, we
had no enterprise subscribers.

     Advertising  revenue  was  $147,000  for the year ended  December  31, 2004
compared to $88,000 for the year ended  December  31, 2003.  In both years,  all
advertising revenue was generated by our Hospital Radio Network business.

     Costs and  expenses.  Total costs and expenses for the year ended  December
31,  2004 were  $70.1  million  compared  to $35.2  million  for the year  ended
December 31, 2003, an increase of $34.9 million,  or 99.1%,  due primarily to an
$28.4 million increase in interest  expense,  net and a $7.5 million increase in
other expenses,  net,  partially  offset by a $7.9 million  decrease in selling,
general and administrative expenses.

     Cost of product sales was $1.1 million for the year ended December 31, 2004
and $0.8 million for the year ended  December 31,  2003.  The increase  resulted
from an expansion of our Artera Turbo data centers.  Cost of advertising revenue
was $15,000  for the year ended  December  31, 2004  compared to $14,000 for the
same period in 2003.  These costs include the  commissions  paid to  advertising
representative  companies and agencies and communication expenses related to the
use of Sight & Sound systems in commercial and healthcare venues.

     For the year ended December 31, 2004,  selling,  general and administrative
expenses  totaled $9.6  million as compared to $17.5  million for the year ended
December 31, 2003, a decrease of $7.9 million,  or 45.1%.  This decrease was due
primarily to an $8.3  million  decrease in  consulting  expense  resulting  from
decreased  non-cash  charges from the issuance of options that  occurred  during
2003.

     For the year ended December 31, 2004, research and development expenditures
totaled $4.1 million as compared to $3.7 million for the year ended December 31,
2003, an increase of $0.4 million,  or 10.8%. This increase was due primarily to
a $0.5 million  increase in  compensation  and benefit  costs  related to Artera
Group.  Our research and development  efforts during the year ended December 31,
2004 included development of components of our Artera Turbo service.

     As a result of our assessment of the value of the Artera  business unit, we
determined  that current  operations  are not  sufficient  to carry the goodwill
without  impairment.  As of December 31, 2004 we recorded an  impairment of $5.9
million.

     For the year ended  December  31,  2004,  other  expense,  net totaled $6.6
million as compared to other income of $0.9 million for the year ended  December
31, 2003, an increase of $7.5 million,  or 833%.  The increase was due primarily
to a $4.7 million increase in default  penalties on convertible notes and a $3.6
million  settlement  of the PRG  litigation  partially  offset by a $1.5 million
decrease  in finance  costs for  non-registration  of common  shares  underlying
convertible  notes.  Other  expense,  net  includes a $4.6  million  gain on the
dissolution and liquidation of Artera Group  International  Limited and the year
ended  December 31, 2003  included  gains on the  settlement  of lawsuits in the
amount of $5.3 million.

     For the year ended December 31, 2004,  interest expense,  net totaled $42.7
million as compared to $14.3  million for the year ended  December 31, 2003,  an
increase of $28.4 million, or 198.6%. The increase in interest

                                       17
<PAGE>

expense was primarily  attributable  to the expensing of the relative fair value
of warrants  (original  issue  discounts  and  beneficial  conversion  features)
allocated to the related debt that was due.  Interest expense for the year ended
December  31,  2004  included   amortization  of  original  issue  discounts  of
$18.5 million, amortization of beneficial  conversion  features of $19.5 million
and interest on debt issued by us of $4.6 million.

     We estimated net operating loss carryforwards of $208.0 million,  estimated
capital loss  carryforwards of $3.6 million and research and development  credit
carryforwards of  approximately  $2.6 million for federal income tax purposes at
December 31, 2004. No tax benefit for these  operating  losses has been recorded
in our  consolidated  financial  statements.  Our  ability  to  utilize  our net
operating  loss and  capital  loss  carryforwards  may be  subject  to an annual
limitation.  The limitation of these carryforwards may be triggered by ownership
changes,  specifically  any tax-free  reorganization  or a change involving a 5%
stockholder. Under contractual restrictions, many of the beneficial owners of 5%
of our common stock are prohibited from holding in excess of 9.99% of our common
stock at any given time. Carole Salkind has no such contractual restriction.  At
her  election  at any time,  she may  convert  notes  issued  by us and  accrued
interest  thereon  into  shares of our common  stock (if  sufficient  authorized
shares are available for such conversion) thereby triggering an ownership change
which would result in a limitation of our ability to utilize net operating  loss
carryforwards.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

     Revenue.  For the year ended December 31, 2003,  total revenue  amounted to
$4.9 million  compared to $7.3  million for the year ended  December 31, 2002, a
decrease of $2.4 million,  or 32.9% reflecting  decreases in most of our revenue
sources.  Total  revenue  for the year ended  December  31,  2003  consisted  of
approximately 62.0% in technology licensing fees and royalties, 35.2% in product
sales,  1.8% in advertising and 1.0% in engineering and development  services as
compared  to the  year  ended  December  31,  2002  of  approximately  61.4%  in
technology  licensing  fees and  royalties,  36.8%  in  product  sales,  1.4% in
advertising and 0.3% in engineering and development services.

     Technology  licensing  fees and  royalties  were $3.0  million for the year
ended December 31, 2003 as compared to $4.5 million for the same period in 2002,
a decrease of $1.5 million, or 33.3%. The decrease was primarily attributable to
the  absence of  licensing  fees of $1.9  million  related  to Teltran  for 2003
partially  offset by  licensing  fees of $0.4 million  related to FairPoint  for
2003. Our  recognition of technology  licensing fee revenue for both periods was
due  primarily to  recognition  of deferred  revenue from NXT.  During 2003,  we
received  $0.3 million in cash under our 2002  FairPoint  agreement.  During the
fourth quarter of 2003, the 2002 FairPoint agreement was replaced which resulted
in Artera meeting all specific performance criteria under that agreement and the
recognition of all $0.4 million of deferred  revenue.  At December 31, 2003, our
deferred  revenue  related to NXT was $2.7 million.  No additional  cash will be
realized from our NXT deferred revenue.

     For the years ended  December  31, 2003 and 2002,  product  sales were $1.7
million and $2.7  million,  respectively.  Gross profit on product  sales,  as a
percentage of product sales,  for the years ended December 31, 2003 and 2002 was
53.9% and 52.6%, respectively. The decrease was primarily due to $0.5 million of
lower product  sales  recognized  by Pro Tech due to reduced  fast-food  headset
purchases by major  distributors  and a $0.2 million decrease as a result of the
cessation of operations  of Artera  International  in March 2002.  Our principal
product customers for 2003, HM Electronics, Muzak, 3M Corporation and McDonalds,
accounted for $0.6 million of total  product  sales  compared to $0.7 million in
2002.  Sales to  Muzak,  3M  Corporation  and  McDonalds  consisted  of Pro Tech
headsets and  accessories.  Sales to HM Electronics  consisted of chips that use
our  ClearSpeech  algorithms.  Total sales to these  customers were less in 2003
compared to 2002 due to a weaker economy.

     Advertising  revenue  was  $88,000  for the year ended  December  31,  2003
compared to $105,000 for the year ended  December 31, 2002.  In both years,  all
advertising revenue was generated by our Hospital Radio Network business.

     Costs and  expenses.  Total costs and expenses for the year ended  December
31,  2003 were  $35.3  million  compared  to $47.4  million  for the year  ended
December 31, 2002,  an decrease of $12.1  million,  or 25.5%,  due  primarily to
write downs of investments and repurchased licenses of $9.2 million.

     Cost of product sales was $0.8 million for the year ended December 31, 2003
and $1.3  million for the year ended  December  31,  2002.  Cost of  advertising
revenue was $14,000 for the year ended December 31, 2003 compared to $15,000 for
the same period in 2002. These costs include the commissions paid to advertising
representative  companies and agencies and communication expenses related to the
use of Sight & Sound systems in commercial and healthcare venues.

                                       18
<PAGE>

     For the year ended December 31, 2003,  selling,  general and administrative
expenses  totaled  $17.5 million as compared to $14.8 million for the year ended
December 31, 2002, a increase of $2.7 million, or 18.2%, due primarily to a $4.2
million  increase in  consulting  expense  from the issuance of options and $0.3
million accrual for asserted minimum royalties due to a licensor.  This increase
was partially offset by an $0.8 million decrease in legal and patent expenses as
a result of  finalizing  legal  matters and a $0.1  million  decrease in each of
salary and related benefits, corporate and office related expenses relating to a
reduced workforce.

     For the year ended December 31, 2003, research and development expenditures
totaled $3.7 million as compared to $4.7 million for the year ended December 31,
2002, a decrease of $1.0 million,  or 21.3%. This decrease was due primarily to:
(i) a $0.6 million decrease in prototype parts and product development; and (ii)
a  $0.4  million  decrease  in  depreciation  and  amortization.   Research  and
development  costs consist  primarily of compensation and benefit costs (ranging
from 70% to 75% of total),  depreciation (approximately 7% of total), parts, and
development  costs and services of outside firms. Our principal  projects during
2003 included  development of other components of our Artera Turbo  subscription
service,  ClearSpeech  algorithm  development  and  development of our ProActive
safety earmuff.

     For the year ended  December  31,  2003,  other  income,  net totaled  $1.2
million as compared  to other  expense,  net of $7.1  million for the year ended
December 31, 2002, an decrease of $8.3 million, or 117%, primarily due to a $5.3
million  litigation  settlement  and an $3.9 million  decrease in finance  costs
associated with non-registration of common shares.

     For the year ended December 31, 2003,  interest expense,  net totaled $14.3
million as compared to $7.7 million for the year ended  December  31,  2002,  an
increase of $6.6  million,  or 85.7%.  This  increase  was due  primarily to the
increase  in  debt  financing  during  2003  and our  issuance  of  warrants  in
conjunction  with the debt.  Interest  includes  $5.3  million  of  amortization
related to discounts,  $4.9 million of  amortization  of  beneficial  conversion
features,  $2.9  million  of  interest  expense  on debt  and  $1.1  million  of
amortization of additional debt discounts.

Liquidity and Capital Resources

     We have  experienced  substantial  losses from operations  since inception,
which have been recurring and amounted to $354.5  million on a cumulative  basis
through December 31, 2004. These losses, which include the costs for development
of  technologies  and products for  commercial  use, have been funded  primarily
from:

     o    the issuance of our and our subsidiaries' convertible debt;
     o    the sale of our and our subsidiaries' common stock;
     o    the sale of our and our subsidiaries' convertible preferred stock;
     o    technology licensing fees;
     o    royalties;
     o    product sales;
     o    advertising revenue; and
     o    engineering and development services.

     We believe that internally  generated  funds are currently  insufficient to
meet our  short-term  and long-term  operating and capital  requirements.  These
funds include  available  cash and cash  equivalents  and revenues  derived from
technology  licensing  fees and  royalties  and  product  sales.  Our ability to
continue as a going  concern is  substantially  dependent  upon future levels of
funding  from our revenue  sources,  which are  currently  uncertain.  If we are
unable to generate sufficient revenue to sustain our current level of operations
and to execute our business plan, we will need to obtain additional financing to
maintain our current level of operations. We are attempting to obtain additional
working capital through debt and/or equity financings.  However,  we can give no
assurance that additional  financing will be available to us on acceptable terms
or at all.  Presently we do not have a sufficient  number of  authorized  common
shares to effect  conversions  of security  instruments  into common stock.  The
failure  to obtain  any  necessary  additional  financing  would have a material
adverse effect on us, including causing a substantial  reduction in the level of
our operations.  These reductions, in turn, could have a material adverse effect
on  our  relationships  with  our  licensees,   customers  and  suppliers.   The
uncertainty  surrounding  future levels of funding from our revenue  sources and
the availability of any necessary  additional financing raises substantial doubt
at December 31, 2004 about our ability to continue as a going concern.

     We have entered into financing  transactions  because internally  generated
funding sources have been  insufficient  to maintain our operations.  During the
year  ended  December  31,  2004 and to date in 2005,  we have  continued  to be
primarily dependent upon funding from Carole Salkind.  Although we do not have a
formal

                                       19
<PAGE>

agreement  requiring her to do so, we believe that Ms.  Salkind will continue to
provide  funds to us. Our belief that  funding  from her will  continue is based
primarily  upon her continued  funding of us during 2002,  2003 and 2004 despite
our failure to repay her notes as the notes matured. However, we have no legally
binding assurance that Ms. Salkind will continue to fund us in the short-term or
that the amount, timing and duration of the funding from her will be adequate to
sustain our business operations.

     Our monthly  operating cash flow needs for the year ended December 31, 2004
were  approximately  $797,000.  In the absence of a significant  infusion of new
capital,  we anticipate our monthly cash flow needs over the next 12 months will
not exceed this level,  assuming  continued funding from Carole Salkind or other
sources  to  satisfy  the  requirements  not  funded  by  increases  in  royalty
collections  and  product  sales.  Of our  monthly  requirements,  approximately
$725,000 is required to fund  payroll and  payroll-related  costs (such as taxes
and health insurance) and the balance is used for prioritized operating expenses
(with emphasis on rents, utilities,  arrearage payment arrangements and critical
vendors).

     At  December  31,  2004,  our  cash and cash  equivalents  aggregated  $1.4
million.  Our working  capital  deficit was $72.3  million at December 31, 2004,
compared to a deficit of $60.8  million at December 31, 2003,  an $11.5  million
deterioration.  Our current  liabilities  were  approximately  $74.8  million at
December 31, 2004 compared to approximately  $62.9 million at December 31, 2003.
The  increase in current  liabilities  was  primarily  due to the  issuance  and
refinancing  of  convertible  notes to Carole  Salkind of $11.9  million (net of
discounts) and an increase in accrued expenses of $4.8 million.  At December 31,
2004, our current liabilities consisted of indebtedness ($45.7 million), accrued
liabilities  ($18.6  million  - see Note 9 of Notes  to  Consolidated  Financial
Statements),  other  current  liabilities  ($7.0 million see Note 14 of Notes to
Consolidated  Financial Statements),  accounts payable ($1.9 million),  deferred
revenue  ($0.9  million  -  see  Note  12 of  Notes  to  Consolidated  Financial
Statements) and shares of subsidiary  subject to exchange rights ($0.7 million -
see Note 13 of Notes to Consolidated Financial  Statements).  We anticipate that
we may not be  required to settle all of our current  liabilities  in cash.  For
example,  we plan to issue debt or equity securities to satisfy our $4.0 million
obligation to reacquire  certain  licenses (see Note 14 of Notes to Consolidated
Financial  Statements).  In each case,  we evaluate  how the failure to meet our
obligations  as they become due will impact our ability to operate the business.
Most of our  indebtedness  (and accrued  interest  thereon) is convertible  into
shares of our  common  stock and may be  converted  to the extent we are able to
obtain  stockholder  approval of a proposal to increase the number of authorized
shares of our common stock. We owe three law firms an aggregate of approximately
$1.5 million and these firms are allowing us to make  monthly  payments  over an
extended period of time.

     At  December  31,  2004,  we were in default  of $0.5  million of our notes
payable  and  $5.1  million  of  our  convertible  notes.  The  following  table
summarizes our indebtedness in default at December 31, 2004.

<TABLE>
<CAPTION>

                                                       (In millions)

                                                     New           Defaults
                              Indebtedness        Defaults           Cured           Indebtedness
                               In Default          during           during            In Default
Notes Payable:                 12/31/03          the Period       the Period           12/31/04
                             -------------      ------------    -------------      ----------------
<S>                          <C>                <C>             <C>                <C>
Obligation to prior owner
  of Web Factory             $         2.7 (a)  $          -    $      (2.7) (c)   $        -
Former Employees / Other               0.5 (a)             -              -               0.5 (a)
                             -------------      ------------    -------------      ----------------
  Subtotal                   $         3.2      $          -    $      (2.7)       $      0.5
                             -------------      ------------    -------------      ----------------

Convertible Notes:
Carole Salkind Notes         $           -      $       67.5    $     (67.5)       $        - (a)
8% Notes                               1.0 (b)           1.6              -               2.6 (a,b)
6% Notes                               2.5 (a)             -              -               2.5 (a)
                             -------------      ------------    -------------      ----------------
  Subtotal                   $         3.5      $       69.1    $     (67.5)       $      5.1
                             -------------      ------------    -------------      ----------------
Grand Total                  $         6.7      $       69.1    $     (70.2)       $      5.6
                             =============      ============    =============      ================
</TABLE>

Notes:
-----
(a) Default due to nonpayment
(b) Default due to cross-default provision (default on other debt).
(c) Dissolution of Artera Group International Limited.

                                       20
<PAGE>

     Net cash used in operating  activities for the year ended December 31, 2004
was $9.6  million  primarily  due to funding  our fiscal  2004 net loss of $64.6
million, as adjusted to reconcile to net cash.

     Our  deferred  revenue  balance  at  December  31,  2004 was $0.9  million,
attributed  primarily  to our  license  agreement  with NXT. We do not expect to
realize any cash from our deferred revenue balance.  We recorded $8.6 million of
net deferred  revenue upon the receipt of shares of NXT common stock in 2001 and
we sold all of our NXT shares in 2001  resulting in a loss of $2.3 million.  The
value of these securities declined before we sold them. We used the net proceeds
from the sale of our NXT  shares  in  accordance  with our NXT  agreements.  The
revenue is being  recognized  over four  years.  As such,  we will not  generate
additional cash from our NXT deferred revenue balance.

     Net cash used in investing  activities  was $0.1 million for the year ended
December  31,  2004  due  to  purchases  of  capital   equipment.   The  capital
expenditures   were   primarily  for  an  Artera  Turbo  data  center  added  in
anticipation of future growth of this business.

     Net cash  provided by  financing  activities  was $9.9 million for the year
ended  December  31,  2004 and was  primarily  due to the  issuance  and sale of
convertible notes to Carole Salkind.

     At December 31, 2004, our short-term  debt was $45.7 million,  shown net of
discounts of  approximately  $13.0 million on our  consolidated  balance  sheet,
compared to $35.5 million of short-term debt, net at December 31, 2003. The cash
proceeds  from debt issued in 2004 were  primarily  used for  general  corporate
purposes.  At December  31, 2004,  our  short-term  debt was  comprised of $58.1
million of face value of convertible notes due Carole Salkind,  and $0.6 million
of outstanding  notes  payable,  shown net of discounts of  approximately  $13.0
million on the  consolidated  balance sheet and $5.0 million  classified as long
term debt.

     During the year ended  December 31,  2004,  we issued an aggregate of $91.8
million  of  convertible  notes to Carole  Salkind,  as  consideration  for $9.1
million of cash and the  refinancing  of $67.5  million in  principal of matured
convertible  notes  along with $3.4  million of  interest,  and $6.8  million of
default  penalties (10% of the principal in default).  Included in the aggregate
of $91.8 million is a five-year  convertible  note in the principal amount of $5
million we issued on December 22, 2004 in  consideration  for entering  into the
settlement  agreement releasing us and our directors from and against all claims
assigned to Ms. Salkind by PRG. The note is secured by substantially  all of our
assets.  The note bears  interest,  retroactive  to December 1, 2004, at 12% per
annum payable quarterly in arrears beginning October 1, 2005, and bears interest
at a default rate of 17% per annum on any  interest or  principal  not paid when
due

     On July 23, 2004, we issued  subordinated  secured convertible notes to two
investors for an aggregate  principal  amount of $0.9  million.  These notes are
secured by  substantially  all of our assets.  In addition,  we issued unsecured
convertible  notes to two  finders  in the  aggregate  principal  amount of $0.1
million.  The net proceeds of  approximately  $0.9 million were used for working
capital requirements.  The notes mature on July 23, 2006 and bear interest at 8%
per annum, payable at maturity.

     As described  above, as of December 31, 2004, we are in default  (primarily
from non-payment) on $5.6 million of our indebtedness.

     We  believe  that  the  level of  financial  resources  available  to us is
critical to our ability to continue as a going  concern.  From time to time,  we
may need to raise  additional  capital through equity or debt financing in order
to sustain our operations or capitalize upon business  opportunities  and market
conditions.  Presently we do not have a sufficient  number of authorized  common
shares to effect  conversions  of security  instruments  into common  stock.  We
expect that from time to time our  outstanding  short-term  debt may be replaced
with new short or long-term borrowings. Although we believe that we can continue
to access the capital markets in 2005 on acceptable  terms and  conditions,  our
flexibility with regard to long-term  financing activity could be limited by the
liquidity  of our  common  stock  on the  open  market,  our  current  level  of
short-term debt and our credit ratings.

     In  addition,  many of the  factors  that  affect our ability to access the
capital  markets,  such as the liquidity of the overall  capital markets and the
current  state  of the  economy,  are  outside  of our  control.  We can give no
assurance  that we will  continue  to have  access  to the  capital  markets  on
favorable terms. In addition, our subsidiaries are at a stage where they may not
separately be able to obtain financing or other funding based upon their lack of
or limited performance history and borrowing base assets.

     In September  2004, we entered into an amended and restated  private equity
credit agreement with Crammer Road that supersedes and replaces a private equity
credit  agreement  dated July 25, 2002.  The new credit  agreement

                                       21
<PAGE>

gives us the rights to sell to Crammer Road shares of our common stock having an
aggregate value of up to $50 million (the maximum commitment amount) pursuant to
puts made by us. The  agreement  requires us to sell to Crammer Road at least an
aggregate of $5 million of our common stock (the minimum commitment  amount), at
a 9% discount  from the market value of our common stock  determined at the time
of a put. We are  obligated  to register  for resale  shares of our common stock
sold pursuant to the September  2004 credit  agreement in an amount no less than
the number of shares for which puts are made,  but in no event less than 150% of
the  minimum  commitment  amount.  In order for us to be able to sell  shares to
Crammer Road pursuant to the agreement,  we must obtain stockholder  approval of
an amendment to our certificate of  incorporation  to sufficiently  increase the
number of authorized  shares of our common stock and must establish and maintain
an effective  registration statement with the SEC to permit the resale of shares
sold to Crammer Road pursuant to the agreement.

     We  intend  to use the  2004  private  equity  credit  agreement  to  raise
additional  cash once the conditions for doing so are  satisfied.  However,  the
equity  credit  line may not be a reliable  source of new cash  capital  for us.
Completion of the  registration  process may require an extensive amount of time
and the speed at which a registration statement is declared effective by the SEC
is not completely within our control. If the registration statement covering the
shares underlying the private equity credit agreement is not declared  effective
within  180 days  from the  date it is  filed,  or if any  blackout  period,  as
defined,  exceeds 30 days, Crammer Road may terminate its investment  obligation
under the private  equity  credit  agreement.  In addition,  we must maintain an
active  trading  market able to absorb large  quantities of traded shares of our
common stock. If the market for our common stock has an  insufficient  volume of
shares  traded,  large  quantities of shares of our common stock sold by Crammer
Road to satisfy  our puts may drive  down the price of our  common  stock due to
lack of demand for those  shares.  The  issuance of our common  stock at a price
discounted  9% from the market  price may depress our stock price and dilute the
investment  of holders of our common  stock.  Further,  the terms of our private
equity credit  agreement do not prohibit selling short. A short sale is the sale
of  securities  that are not  owned by the  seller  (typically  borrowed  from a
broker-dealer or institutional investor) but are promised to be delivered by the
seller to the lender  (selling first and buying later).  The seller plans to buy
the  securities,  which he will then turn  around  and sell,  at a price that he
hopes  will be  declining  so that the price he pays will be less than the price
for which he sells them. Our common  stockholders may be exposed to market price
risks from potential  low-risk short selling  strategies by Crammer Road.  Since
the put into our common  stock is 91% of the  average of the lowest  closing bid
price  for any  three  trading  days  during  the 10  trading  days  immediately
following  the put date,  in  anticipation  of our put our common stock could be
sold short in an effort to drive down the price of the common  stock by creating
an imbalance of sell-side interest.  Such a strategy is low risk to Crammer Road
because if the market  price of our common  stock  declines,  Crammer Road would
receive a larger number of shares for a given put amount.  Further, the discount
to market price  represented  by the put price  provides a hedge  against  price
increases.

     We have no lines of credit with banks or other  lending  institutions  and,
therefore, have no unused borrowing capacity.

Capital Expenditures

     We currently  anticipate  incurring  approximately  $0.1 million in tooling
costs,  in  connection  with our expected  release of a new  industrial  hearing
protection  product in 2005.  Other than this  expenditure,  we had no  material
commitments  for capital  expenditures  as of December  31, 2004 and no material
commitments are anticipated in the near future.

Contractual Obligations

    The following is a summary of our contractual obligations as of December 31,
    2004:

<TABLE>
<CAPTION>

                                                     (in thousands of dollars)
                                                       Payments Due by Period
                               --------------------------------------------------------------------------
                                             Less than 1                                      More than
                                  Total          Year          1 - 3 Years    3 - 5 Years     5 Years
                               ----------  ---------------   --------------  -------------  -------------
<S>                            <C>         <C>               <C>             <C>            <C>
Convertible Notes Payable      $  63,235   $      58,235     $         -     $    5,000     $       -
Notes Payable                        603             603               -              -             -
Leases                             2,936             700           1,230          1,006             -
Purchase Obligations                   -               -               -              -             -
Other Long-Term Liabilites             -               -               -              -             -
                               ----------  ---------------   --------------  -------------  -------------
     Total                     $  66,774   $      59,538     $     1,230     $    6,006     $      -
                               ==========  ===============   ==============  =============  =============
</TABLE>

                                       22
<PAGE>

Off-Balance Sheet Arrangements

     As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated  entities or financial  partnerships,
which would have been  established for the purpose of  facilitating  off-balance
sheet  arrangements or other  contractually  narrow or limited  purposes.  As of
December  31,  2004,  we  are  not  involved  in  any  material   unconsolidated
transactions.

Factors Affecting our Business and Prospects

     There are many factors that affect our business and our operating  results,
some of which are beyond our control. The following discussion describes some of
the  important  factors that may cause our actual  results in future  periods to
differ materially from those currently expected or desired.

     We do not  believe we have,  and we are  unsure  whether we will be able to
generate,  sufficient  funds to  sustain  our  operations  through  the next six
months.

     Our  management  believes  that  currently  available  funds  will  not  be
sufficient  to sustain our  operations  at current  levels  through the next six
months. Our ability to continue to operate at current levels depends upon, among
other things,  our ability to generate  sufficient revenue from the licensing of
our  technology,  the sale of our products and the receipt of continued  funding
from Carole  Salkind,  a  beneficial  owner of  approximately  91% of our common
stock.  At December 31, 2004,  we had $1.4 million in cash and cash  equivalents
and a working capital deficiency of $72.3 million.

     We have been  primarily  dependent upon funding from Ms. Salkind to sustain
our operations during the last three years. As of February 28, 2005, we owed Ms.
Salkind  approximately  $62.8  million  under  outstanding   convertible  notes.
Although Ms.  Salkind is under no obligation  to continue to provide  funding to
us, we believe that she will  continue to do so in the  immediate  future.  This
belief is based  primarily upon her continued  funding of us despite our failure
to repay our  convertible  notes upon  maturity.  Since  January  2001,  we have
generally  defaulted on the repayment of obligations owed to Ms. Salkind as they
become due. Ms. Salkind has generally  allowed us to refinance  maturing  notes,
along with  accrued  interest,  into new notes.  In  addition,  Ms.  Salkind has
continued to provide us with new funds. From time to time, we have obtained oral
assurances that Ms. Salkind will continue  funding our operations.  However,  we
have no legally binding  assurance that Ms. Salkind will continue  funding us in
the  near-term or that the amount,  timing and duration of funding from her will
be adequate to sustain our operations.

     In the  long-term,  our ability to continue as a going concern is dependent
on generating  sufficient revenue from technology  licensing fees and royalties,
product sales and advertising.  Our ability to generate significant revenue from
any of these or other sources is uncertain.  Historically,  our operations  have
not  generated  sufficient  revenue  to cover our  costs.  In the event that our
operations do not generate  sufficient  cash, we could be required to reduce our
level of operations while attempting to raise additional working capital. We can
give  no  assurance  that  additional  financing  will  be  available  to  us on
acceptable  terms or at all.  The  failure  to obtain any  necessary  additional
financing would have a material  adverse effect on us. If adequate funds are not
available or are not  available  on  acceptable  terms,  our ability to fund our
operations and any intended expansion, take advantage of business opportunities,
develop or enhance  products  or services or  otherwise  respond to  competitive
pressures would be  significantly  limited,  and we might need to  significantly
restrict or discontinue our operations.

     The report of our  independent  registered  public  accounting firm for the
year ended December 31, 2004 contains a qualification relating to our ability to
continue as a going concern.

     The report of our  independent  registered  public  accounting  firm on our
consolidated financial statements as of December 31, 2004 and for the years then
ended contains an explanatory  paragraph stating that there is substantial doubt
as to our ability to continue as a going  concern.  Our financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty. This uncertainty may affect our ability to raise additional capital
and may also  negatively  impact our  relationships  with current and  potential
suppliers, customers and licensees.

     We have incurred  substantial  losses since our inception and expect future
losses to continue for the foreseeable future.

     We have incurred  substantial  losses from operations  since our inception,
including operating losses of $40.1 million, $30.3 million and $64.6 million for
the years ended December 31, 2002, 2003 and 2004, respectively,

                                       23
<PAGE>

and we had an  accumulated  deficit of $354.5  million at December 31, 2004.  We
expect  that we will  continue  incurring  a loss  until,  at the  earliest,  we
generate sufficient revenue to offset the cost of our operations,  including our
continuing product development  efforts. Our future revenue levels and potential
profitability  depend on many  factors,  including  the demand for our  existing
products and services, our ability to develop and sell new products and services
and  our  ability  to  control  costs.  We can  give no  assurance  that we will
experience  any  significant  revenue  growth  or  that  we  will  ever  achieve
profitability.  Even if we do achieve profitability for a fiscal year, we may be
unable to sustain profitability on a quarterly or annual basis in the future. It
is possible  that our revenue will grow more slowly than we  anticipate  or that
operating expenses will exceed our expectations.

     We have  substantial  outstanding  indebtedness  and we generally have been
unable to repay our indebtedness as it becomes due.

     We have  substantial  levels of outstanding  debt. As of December 31, 2004,
our consolidated  indebtedness was approximately $50.7 million, net of discounts
with stated  interest at annual rates  ranging from 6% to 12%,  including  $45.6
million, net of discounts, of convertible notes issued to Carole Salkind. The
face amount of debt due Ms. Salkind as of December 31, 2004 is $58.1 million, of
which all but $5.0  million  will  mature  in 2005.  Our  consolidated  interest
expense, net totaled $7.7 million, $14.3 million and $42.7 million for the years
ended December 31, 2002, 2003 and 2004,  respectively,  primarily resulting from
the amortization of debt discounts  attributable to allocation of the fair value
of warrants  issued in  conjunction  with the debt. Our ability to meet our debt
service  obligations will depend on our future operations,  which are subject to
prevailing industry and other conditions,  many of which are beyond our control.
Our indebtedness to Ms. Salkind is secured by  substantially  all of our assets.
In the event of any default on our  obligations  relating to this  indebtedness,
Ms. Salkind could declare her  indebtedness  to be immediately  due and payable,
and in certain cases, she could then foreclose on our assets. A default relating
to our  indebtedness  could have a material  adverse  effect on our business and
financial condition.

     To date,  as our debt matures,  we generally  have been unable to repay the
principal  and interest due on the debt.  Typically,  the interest  rates on our
debt  increase  upon our failure to repay  principal  when due, with the default
rates of interest  ranging from 13% to 18% per annum.  In  addition,  all of our
debt held by Ms.  Salkind  imposes a default  penalty of 10% of the principal in
default  upon our  failure to repay the debt when due.  Of the $58.1  million in
indebtedness  held by Ms. Salkind as of December 31, 2004,  approximately  $23.2
million related to penalties and interest  resulting from our inability to repay
notes held by her upon maturity.

     We have  committed  to issue more  shares of our  common  stock than we are
currently  authorized  to issue  and we are  accruing  liquidated  damages  as a
result.

     Through the issuance of  convertible  debt,  convertible  preferred  stock,
options,  warrants and other securities, we have made commitments to reserve and
issue  shares  of our  common  stock  that  exceed  the  number of shares we are
currently  authorized to issue under our certificate of  incorporation.  Many of
the instruments  related to our derivative  securities include liquidated damage
provisions triggered by our failure to reserve a certain number of shares of our
common stock, to honor valid  conversion or exchange  requests or to comply with
resale registration obligations. As of December 31, 2004, we have received valid
conversion,  exchange and share  issuance  requests  that we have been unable to
fulfill for an aggregate of  approximately  162.8  million  shares of our common
stock.  In  addition,  we have  also  been  unable  to  comply  with our  resale
registration  obligations  as a result  of our lack of a  sufficient  number  of
authorized  shares of our common  stock.  As a result of these  failures,  as of
December  31,  2004,  we have  incurred,  but not yet paid,  liquidated  damages
totaling approximately $9.9 million, and we continue to incur liquidated damages
of  approximately  $0.9  million per month.  We intend,  at our next  meeting of
stockholders, to submit to our stockholders for approval a proposal to amend our
certificate of incorporation to increase the number of authorized  shares of our
common stock.  We intend to hold a stockholder  meeting in mid-2005,  but we can
give  no  assurance  as to the  timing  of any  stockholder  meeting,  that  our
stockholders  will approve a proposed  amendment or that, even if approved,  any
increase  in the  number  of our  authorized  shares  of  common  stock  will be
sufficient to permit us to substantially  reduce or eliminate  liquidated damage
accruals in any future period.

     We have generated  limited revenue from the licensing of our technology and
the sale of our products and services and we can provide no assurance  regarding
future revenue levels.  The markets for some or all of our key product lines may
not grow or develop.

     Although we have actively  marketed the licensing of our  technologies  and
the sale of our products and services,  our  operating  revenue has been limited
and sporadic.  Our annual revenue decreased in each year from 2000 through 2003.
Some or all of our key  product  and  service  lines,  such as our Artera  Turbo
offerings,  may not grow or customers  may decline or forego use of our products
or services in some or all of these areas. Our failure to establish  significant
demand for our  products  and  services  would  adversely  impact our  business,
financial condition,

                                       24
<PAGE>

operating results and cash flow. Currently, a significant portion of our planned
revenue growth is attributable to our Artera Turbo service  offerings.  Although
we believe that demand for these  offerings  will grow, we can give no assurance
as to any level of future demand. Lack of growth in this business will adversely
affect our revenue levels.

     We depend upon our indirect  distribution  channel to promote and sell many
of our products and services.

     In addition to marketing our products and services directly through our own
direct  sales  force,  we market  and sell our  products  and  services  through
indirect  channels.  Our indirect channel network includes master  distributors,
resellers,  finders  and  consultants.   Conducting  business  through  indirect
distribution channels presents a number of risks, including:

     o    our  distributors  and resellers can cease  marketing our products and
          services with limited or no notice and with little or no penalty;
     o    we  may  not  be  able  to  replace  existing  or  recruit  additional
          distributors or resellers if we lose any of our existing ones;
     o    our distributors and resellers may not be able to effectively sell new
          products and services that we may introduce;
     o    we do not have  control  over the  business  practices  adopted by our
          distributors and resellers;
     o    our distributors and resellers may also offer competitive products and
          services  and may not give  priority to  marketing  our  products  and
          services; and
     o    we may face conflicts  between the activities of our indirect channels
          and our direct sales and marketing activities.

     The failure of our suppliers to provide quality components or products in a
timely manner could adversely affect our results.

     Our  growth  and  ability to meet  customer  demands  depend in part on our
capability to obtain timely deliveries of components, subassemblies and products
from our  suppliers.  We buy  components  and  subassemblies  from a variety  of
suppliers and assemble them into finished products.  We also have certain of our
products  manufactured for us by third party suppliers.  The cost, quality,  and
availability  of such goods are essential to the successful  production and sale
of our  products.  Obtaining  components,  subassemblies  and finished  products
entails various risks, including the following:

     o    We obtain certain  subassemblies,  components and products from single
          suppliers  and  alternate  sources  for these  items  are not  readily
          available.  An  interruption  in supply from any of our single  source
          suppliers  in  the  future  would  materially   adversely  affect  our
          business, financial condition and operating results.
     o    Prices of components, subassemblies and finished products may rise. If
          this  occurs  and we are not able to pass  these  increases  on to our
          customers or to achieve  operating  efficiencies that would offset the
          increases,  it would have a material  adverse  effect on our business,
          financial condition and operating results.
     o    Due to the  lead  times  required  to  obtain  certain  subassemblies,
          components and products from certain foreign suppliers,  we may not be
          able to react quickly to changes in demand,  potentially  resulting in
          either  excess   inventories   of  such  goods  or  shortages  of  the
          subassemblies, components and products. Failure in the future to match
          the timing of purchases of  subassemblies,  components and products to
          demand could increase our  inventories  and/or  decrease our revenues,
          consequently  materially  adversely affecting our business,  financial
          condition and operating results.
     o    Most of our suppliers are not obligated to continue to provide us with
          components  and  subassemblies.  Rather,  we buy most  components  and
          subassemblies  on a purchase order basis. If our suppliers  experience
          increased  demand or shortages,  it could affect  deliveries to us. In
          turn,  this would affect our ability to manufacture  and sell products
          that are dependent on those components and  subassemblies.  This would
          materially  adversely  affect our  business,  financial  condition and
          operating results.

     We face significant competition from well-established companies.

     We face  formidable  competition  in each of the  industries  in  which  we
operate.   Many  of  our  competitors  have  substantially  greater  management,
technical, financial, marketing and product development resources than we do. In
addition,  many of our competitors have  substantially  greater name recognition
and shorter production and

                                       25
<PAGE>

distribution  lead times than we do. For example,  our Pro Tech  business  faces
substantial  competition from Sony, Bose and  Plantronics,  and our Artera Turbo
offering competes with other Internet accelerators offered by Propel,  Proxyconn
and  Slipstream.  While we believe that the quality of our products and services
equals or exceeds  those of our  competitors,  we can give no assurance  that we
will be able to compete effectively against these companies.

     Our success  depends  upon our ability to develop new products and services
and to enhance our existing products and services.

     The industries in which we operate are characterized by rapid technological
advances,  evolving standards,  changing customer needs and frequent new product
introductions and enhancements.  To keep pace with  technological  developments,
satisfy  increasingly  sophisticated  customer  requirements  and achieve market
acceptance, we must enhance and improve our existing products and services, such
as our Artera Turbo  service  offerings,  and we must also continue to introduce
new products and services. If we are unable to develop new products and services
or adapt our current  products and services to meet changes in the  marketplace,
if we are unable to enhance and improve our products  and services  successfully
in a timely  manner,  or if we fail to position  and/or  price our  products and
services to meet market demand,  customers may not buy our products and services
and our  business and  operating  results  will be  adversely  affected.  If our
enhancements to existing  products and services do not deliver the functionality
that our customers demand,  our business and operating results will be adversely
affected. In addition,  industry adopted and de facto standards for the Internet
are rapidly  evolving.  We can give no assurance  that the standards on which we
choose to develop new  Internet-based  products  and  services  will allow us to
compete effectively for business  opportunities as they arise in emerging areas.
Accelerated  product and service  introductions  and short  product  life cycles
require high levels of  expenditures  for research  and  development  that could
adversely affect our operating results. Further, any new products or services we
develop may not be  introduced  in a timely manner and may not achieve the broad
market acceptance necessary to generate significant revenue.

     If we cannot hire enough  qualified  employees or if we lose key employees,
it will  adversely  affect  our  ability  to manage our  business,  develop  our
products and services and increase our revenue.

     We believe any future  success  depends to a large extent on the  continued
service of our senior  management  and other key employees and the hiring of new
qualified employees.  In our industries,  substantial and continuous competition
exists for highly skilled  business,  product  development,  technical and other
personnel. We may experience increased compensation costs that are not offset by
either  improved  productivity  or higher  prices.  We may not be  successful in
recruiting new personnel and in retaining and motivating existing personnel. Any
changes  in  management  may be  disruptive  to our  operations.  We do not have
long-term employment agreements with our employees.

     We might  experience  significant  errors or security flaws in our software
offerings.

     Despite  testing  prior to  release  of our  software  offerings,  software
products  frequently  contain errors or security  flaws,  especially  when first
introduced  or when new versions are released.  Software  errors in our products
and services  could affect the ability of our products and services to work with
other hardware or software  products,  could delay the development or release of
new  products  and  services or new  versions of products and services and could
adversely affect market acceptance of our products and services.  Security flaws
in our products could expose us to claims as well as harm our reputation,  which
could impact our future  sales.  The  detection  and  correction of any security
flaws can be time  consuming and costly.  If we  experience  errors or delays in
releasing  new products or services or new versions of products or services,  we
could lose revenue.  Software errors could also subject us to product liability,
performance  and/or warranty  claims,  which could adversely affect our business
and operating results.

     We may not be able to protect our intellectual property.

     We rely on a combination of copyright,  patent,  trademark,  trade secrets,
confidentiality   procedures   and   contractual   commitments  to  protect  our
proprietary  information.  Despite our efforts,  these measures can only provide
limited  protection.  Unauthorized  third  parties  may try to  copy or  reverse
engineer  portions of our products or otherwise  obtain and use our intellectual
property.  Any  patents  owned  by  us  may  be  invalidated,   circumvented  or
challenged.  Any of our pending or future  patent  applications,  whether or not
being currently challenged, may be issued with a narrower scope of the claims we
seek, if at all. In addition, the laws of some countries do not provide the same
level of  protection  of our  proprietary  rights  as do the laws of the  United
States.  If we cannot protect our proprietary  technology  against  unauthorized
copying or use, we may not remain competitive.

                                       26
<PAGE>

     Our business may be harmed if we are found to have  infringed  intellectual
property rights of third parties.

     A third party has filed  notices of  opposition  with respect to all of our
applications  for  trademark  registration  of  the  names  "Artera  Turbo"  and
"Artera."  We intend to  vigorously  defend  the names  Artera  Turbo and Artera
against those  oppositions.  A third party has filed notices of opposition  with
respect  to two of our  applications  for  trademark  registration  of the names
"Gekko" and  "ArtGekko."  We are  defending  against the "Gekko" and  "ArtGekko"
oppositions  and a  settlement  in principle  of these  oppositions  is pending.
However,  we can give no  assurance as to the final  resolution  to any of these
oppositions.

     In addition,  in the future,  other third parties may assert claims against
us alleging that we have infringed their intellectual  property rights. If we do
not succeed in any such litigation,  we could be required to expend  significant
resources to pay damages,  develop  non-infringing  intellectual  property or to
obtain  licenses  to  the  intellectual  property  that  is the  subject  of the
litigation.  However, we cannot be certain that any such licenses,  if available
at  all,  will  be  available  to us on  commercially  reasonable  terms.  Also,
defending  these claims may be expensive  and divert the time and efforts of our
management and other employees.

     Changes in  regulatory  requirements  may  adversely  impact our  operating
results or reduce our ability to generate revenues if we are unable to comply.

     Many  of  our  products  must  meet  the  requirements  set  by  regulatory
authorities in the numerous  jurisdictions in which we sell them. As regulations
and local laws  change,  we must modify our products to address  those  changes.
Regulatory  restrictions  may increase the costs to design and  manufacture  our
products, resulting in a decrease in our margins or a decrease in demand for our
products if the costs are passed along.  Compliance with regulatory restrictions
may impact the technical  quality and  capabilities  of our  products,  reducing
their marketability.

     While we believe that we currently  have  adequate  control  structures  in
place, we are still exposed to potential risks from recent legislation requiring
companies to evaluate  controls under Section 404 of the  Sarbanes-Oxley  Act of
2002.

     We are working toward  evaluating our internal controls systems in order to
allow management to report on, and our independent registered public accountants
to attest to, our internal controls,  as required by the Sarbanes-Oxley  Act. We
are performing the system and process  evaluation and testing (and any necessary
remediation)  required in an effort to comply with the management  certification
and public  accountant  attestation  requirements of Section 404 of the Sarbanes
Oxley Act. As a result, we expect to incur additional  expenses and diversion of
management's  time.  While  we  anticipate  being  able to fully  implement  the
requirements  relating to internal controls and all other aspects of Section 404
in a timely fashion,  we cannot be certain as to the timing of completion of our
evaluation,  testing  and  remediation  actions  or the  impact  of those on our
operations since there is no precedent  available by which to measure compliance
adequacy.  If we are not able to implement the  requirements of Section 404 in a
timely manner or with adequate  compliance,  we might be subject to sanctions or
investigation  by the SEC. Any such action could adversely  affect our financial
results.

     We may experience possible future dilution from the exercise of outstanding
options,  warrants,  convertible  securities and exchange rights. Holders of our
common  stock are also  exposed to market  price risks from  potential  low-risk
short  selling  strategies  that may be adopted by the holders of certain of our
derivative securities.

     As noted  above,  through the  issuance of  convertible  debt,  convertible
preferred  stock,  options,   warrants  and  other  securities,   we  have  made
commitments  to reserve  and issue  shares of our common  stock that  exceed the
number of shares we are currently  authorized to issue under our  certificate of
incorporation.  We intend, at our next meeting of stockholders, to submit to our
stockholders  for approval a proposal to amend our certificate of  incorporation
to  increase  the  number of  authorized  shares of our  common  stock.  If this
proposal is approved,  holders of our derivative  securities will be entitled to
convert at least a portion of these  securities into shares of our common stock.
The number of shares  issuable  under many of these  derivative  securities is a
function of the price of our common stock because the number of shares  issuable
under several of our  agreements  varies with the market price.  At December 31,
2004,  based on the  closing  bid price of $0.0195  per share on that date,  our
outstanding  commitments,  including derivative securities were convertible into
an  aggregate  of  approximately  7.5 billion  shares of our common  stock.  The
issuance and sale into the market of a substantial  number of additional  shares
of our

                                       27
<PAGE>

common  stock  would  have  a  substantial   dilutive   effect  on  our  current
stockholders and could cause a significant  reduction in the market price of our
common stock.

     A substantial  number of our  convertible and  exchangeable  securities are
convertible  or  exchangeable  at a price per share that is 20% to 25% less than
the five-day average closing bid price of our common stock  immediately prior to
conversion or exchange.  In addition,  the terms of these derivative  securities
generally do not prohibit the holders of these securities from short selling our
common  stock.  Short  selling  is the act of  borrowing  stock to sell with the
expectation  of the price  dropping and the intent of buying the stock back at a
cheaper  price to replace  the  borrowed  stock.  As a result of these  factors,
holders of these derivative securities may decide to sell our common stock short
in an  effort  to  drive  down the  price of the  common  stock by  creating  an
imbalance of sell-side interest. Such a strategy involves low risk to the holder
of these  derivative  securities  due to the  discounted  conversion or exchange
prices they enjoy that provides a hedge against  potential price increases.  The
use of such a  strategy  by one or  more  of the  holders  of  these  derivative
securities could cause a significant reduction in the market price of our common
stock.

     Our stock price may be volatile and your investment could lose value.

     Historically,  the market price of our common stock has been volatile.  The
trading  price of our common  stock  could be subject  to wide  fluctuations  in
response to various factors, some of which are beyond our control. These factors
include:

     o    quarterly variations in our operating results;
     o    announcements  by us or our  competitors  of new products or services,
          significant   contracts,    commercial    relationships   or   capital
          commitments;
     o    our  reliance  on  licensing   revenue  that  is   unpredictable   and
          non-recurring;
     o    our  ability to  develop  and market  new and  enhanced  products  and
          services on a timely basis;
     o    commencement of, or involvement in,  litigation;  o concerns about our
          liquidity and viability; and
     o    general  trends  involving  the economy or OTC  Bulletin  Board traded
          companies.

     In  addition,  the stock market in general,  and the market for  technology
companies in particular,  have experienced  price and volume  fluctuations  that
have often been unrelated or  disproportionate  to the operating  performance of
those  companies.  These market and industry  factors may  seriously  affect the
market price of our common stock regardless of our actual operating performance.

     Trading in our common stock is subject to the SEC's penny stock rules.

     Trading in our common stock is currently subject to the requirements of the
"penny  stock" rules of the SEC. The penny stock rules impose  additional  sales
practice  requirements  on  broker-dealers  who sell penny stock  securities  to
persons other than established customers or accredited  investors.  For example,
the broker must make a special  suitability  determination for the purchaser and
must have received the purchaser's  written consent to the transaction  prior to
the sale. The rules also require that the broker:

     o    deliver  to  purchasers,  prior  to any  penny  stock  transaction,  a
          disclosure  schedule  explaining  the penny stock market and the risks
          involved in investing in penny stocks;
     o    disclose the broker's commissions and current quotations for the penny
          stock;
     o    disclose  whether  the broker is the sole  market  maker for the penny
          stock and, if so, the broker's presumed control over the market; and
     o    send monthly  statements  disclosing  recent price information for the
          penny stocks held in the  customer's  account and  information  on the
          limited market in penny stocks.

     These additional burdens may discourage brokers from effecting transactions
in our common  stock,  which could  severely  limit the market  liquidity of our
common  stock and the ability of  stockholders  to sell our common  stock in the
market.

                                       28
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our primary market risk exposures  include  fluctuations  in interest rates
and foreign  exchange rates. We are exposed to short-term  interest rate risk on
some of our obligations. We do not use derivative financial instruments to hedge
cash flows for these  obligations.  In the normal course of business,  we employ
established policies and procedures to manage these risks.

     Based upon a hypothetical 10% proportionate increase in interest rates from
the average level of interest  rates during the last twelve  months,  and taking
into  consideration  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 response to this item is submitted as a separate section of this Annual
Report on Form 10-K. See Item 15 and Financial Statement Index on page 51.

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

       Not applicable.

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Our management,  with the  participation of our Chief Executive Officer and
Chief Financial Officer,  evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e)  under the Securities  Exchange Act
of 1934,  as amended) as of December 31,  2004.  Based on that  evaluation,  our
Chief  Executive   Officer  and  Chief  Financial  Officer  concluded  that  our
disclosure  controls and  procedures  as of December 31, 2004 were  effective in
ensuring that information required to be disclosed by us in reports that we file
or submit under the  Securities  Exchange Act of 1934, as amended,  is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
SEC's  rules and forms.  We believe  that a control  system,  no matter how well
designed and operated,  cannot provide absolute assurance that the objectives of
the control  system are met, and no evaluation of controls can provide  absolute
assurance  that all control  issues and  instances  of fraud,  if any,  could be
detected within a company.

Changes in Internal Controls

     There were no changes in our internal control over financial reporting that
occurred  during  the  quarter  ended  December  31,  2004 that have  materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

ITEM 9B.  OTHER INFORMATION

       Not applicable.

                                       29
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  following  table sets forth  certain  information  about our executive
officers and directors as of February 28, 2005.

  Name                   Age   Position
  ----                   ---   --------

  Michael J. Parrella    57    Chief Executive Officer and Chairman of the Board
  Irene Lebovics         52    President and Director
  Cy E. Hammond          50    Senior Vice President, Chief Financial Officer,
                                  Treasurer and Director
  R. Wayne Darville      52    Chief Operating Officer of Artera Group, Inc.
  Irving M. Lebovics     53    Senior Vice President, Global Sales
  Mark Melnick           46    Senior Vice President, General Counsel and
                                  Secretary
  John J. McCloy II      67    Director
  Sam Oolie              68    Director

     No family  relationships  exist  among  any of our  executive  officers  or
directors,  except that Irving Lebovics, Senior Vice President, Global Sales, is
the spouse of Irene Lebovics, our President and a director.

     Michael J. Parrella has served as our Chief Executive  Officer since August
1995,  as our  Chairman of the Board  since  April 2000 and as a director  since
1986. He previously  served as our President from August 1995 to April 2000, our
Executive  Vice  President  from November 1994 to July 1995 and as our President
and Chief  Operating  Officer from February 1988 to November 1994. Mr.  Parrella
also serves as an officer or director of various  subsidiaries,  including  as a
director  of  Pro  Tech  Communications,  our  publicly  traded,  majority-owned
subsidiary.

     Irene  Lebovics  has  served as our  President  since  April  2000 and as a
director since April 2001. She previously served as our Executive Vice President
from  February  1999 to April  2000,  our  Secretary  from  February  1999 until
September  2001, a Senior Vice  President from January 1993 to February 1999 and
as a Vice  President  from July 1989 to January  1993.  Prior to joining us, Ms.
Lebovics held various positions in product marketing with Philon,  Bristol-Myers
and in  advertising  with McCaffrey and McCall.  Ms.  Lebovics also serves as an
officer or  director  of various  subsidiaries,  including  as a director of Pro
Tech.

     Cy E.  Hammond has served as our Senior  Vice  President,  Chief  Financial
Officer and Treasurer  since January 1996 and as a director since March 2004. He
previously  served as a Vice President from February 1994 to January 1996 and as
Controller  from January 1990 to January 1994.  Prior to joining us, Mr. Hammond
served as Treasurer and Director of Finance for Alcolac,  Inc., a  multinational
specialty  chemical  producer,  and in several senior  finance  positions at the
Research  Division of W.R. Grace & Co.,  including  management of the division's
worldwide  financial  operations.  Mr.  Hammond  also  serves as an  officer  or
director of various subsidiaries, including as a director of Pro Tech.

     R. Wayne Darville has served as Chief Operating  Officer of our subsidiary,
Artera  Group,  since August 2002.  He  previously  served as Chief  Information
Officer of Artera  Group from May 2002 to August 2002.  Prior to joining  Artera
Group,  Mr.  Darville  served as Vice  President of Technology  and  Information
Systems and as Vice President of Networks of Interoute Telecommunications, Inc.,
from March 1999 to January 2002. From September 1995 to February 1999, he served
as Vice  President of  Westinghouse  Communications,  overseeing  operations and
security of that company's  international  networks.  From August 1989 to August
1995,  he served as General  Manager of CC&S  Services,  Inc., a  subsidiary  of
Frontier Communications,  where he directed the creation of data centers serving
information technology systems for incumbent local exchange carriers.

     Irving M.  Lebovics has served as our Senior Vice  President,  Global Sales
since June 1999. He previously  served as our Vice  President,  Worldwide  Sales
from  February  1998 to June 1999.  Prior to  joining  us,  Mr.  Lebovics  was a
principal of Enhanced Signal Processing, which exclusively sold our technologies
to large original equipment  manufacturers,  from January 1996 to February 1998.
From 1993 to 1996,  Mr.  Lebovics  served as Vice  President  of Sales of Kasten
Chase Applied Research, a wide area network hardware and software provider.

     Mark Melnick has served as a Senior Vice  President  since October 2004 and
as our General  Counsel and Secretary  since September 2001. He also served as a
Vice President from September 2001 to September  2004.

                                       30
<PAGE>

Prior to joining  us, Mr.  Melnick  served as Counsel,  Senior  Counsel and then
Assistant General Counsel of CBS Cable and its predecessor-in-interest,  Group W
Satellite  Communications (a division of Westinghouse  Broadcasting Co.), in the
cable television field, from 1989 to 2000. From 1982 to 1988, Mr. Melnick was in
private legal practice at various law firms.

     John J. McCloy II has served as a director since 1986. He previously served
as our Chief  Executive  Officer  from  September  1987 to  November  1994,  our
Chairman of the Board from September 1986 to November 1994, our Chief  Financial
Officer from November 1990 to February 1993 and as our Secretary-Treasurer  from
October  1986 to  September  1987.  Since  1981,  Mr.  McCloy 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 Gravitas Technology, Inc.
and is a director of the Sound  Shore Fund,  Inc.,  Ashland  Management  and the
American Council on Germany.

     Sam Oolie has served as a director since 1986. He has served as Chairman of
Oolie Enterprises,  a private investment company,  since 1985 and as Chairman of
the  Board,  Chief  Operating  Officer  and Chief  Financial  Officer  of NoFire
Technologies,  Inc., a manufacturer of high performance fire retardant products,
since  August  1995.  Mr.  Oolie  currently  serves as a  director  of  Comverse
Technology,  Inc., a manufacturer  of voice storage and  forwarding  systems and
message management computer services.

Board of Directors and Audit Committee

     Our board of directors currently consists of five directors. In March 2004,
the board of directors  filled a vacancy on the board by appointing  Mr. Hammond
to serve as a  director  until the  election  of  directors  at the next  annual
meeting of stockholders.

     Our board has a standing audit committee  consisting of Messrs.  McCloy and
Oolie.  The  audit  committee   oversees  our  independent   registered   public
accountants  and  oversees our  management  on matters  relating to  accounting,
financial reporting and disclosure,  internal controls and compliance with laws,
regulations  and  corporate  policies.  Although  the  board  of  directors  has
determined that both audit committee  members are "independent" as defined under
the rules of the Nasdaq Stock Market for general board purposes, Mr. McCloy does
not satisfy the additional  independence  criteria applicable to audit committee
members because of a consulting relationship between us and a company controlled
by Mr. McCloy.  See "Item 13. Certain  Relationships and Related  Transactions -
SpringerRun,  Inc." below.  In addition,  the board of directors has  determined
that Mr. McCloy qualifies as an "audit committee financial expert" as defined by
the SEC.

Code of Ethics

     We have  adopted  a Code of Ethics  that  applies  to our  Chief  Executive
Officer and all senior  financial and accounting  officers,  including our Chief
Financial Officer,  or persons performing similar functions.  The Code of Ethics
is filed as Exhibit 14 to this Annual Report.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
our  directors  and  executive  officers  and persons who own more than 10% of a
registered  class of our equity  securities to file reports of ownership of, and
transactions  in,  our  securities  with the  SEC.  These  directors,  executive
officers  and  stockholders  are also  required to furnish us with copies of all
Section  16(a) forms they file.  Based solely on a review of the copies of forms
furnished to us, and written  representations from certain reporting persons, we
believe that our  directors,  executive  officers and 10%  stockholders  met all
applicable filing  requirements  during the fiscal year ended December 31, 2004,
except that Carole  Salkind,  a  beneficial  owner of  approximately  91% of our
common  stock,  filed  21 late  Form  4s  during  2004  covering  a total  of 32
transactions  and R. Wayne  Darville  filed one late Form 4 during 2004 covering
the grant of a stock award.

                                       31
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

Summary Compensation Table

     Set forth below is information for the three years ended December 31, 2004,
2003 and 2002 relating to compensation  received by our Chief Executive  Officer
and our other four most highly compensated executive officers whose total annual
salary and bonus for the fiscal year ended  December 31, 2004 exceeded  $100,000
(collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>

                                                                                                Long-Term Compensation
                                                                                        --------------------------------------
                                                 Annual Compensation                                   Awards
                                      ----------------------------------------------    --------------------------------------
                                                                                          Restricted           Securities
    Name and Principal                                              Other Annual            Stock              Underlying
         Position             Year    Salary ($)  Bonus ($)(a)    Compensation($)(b)      Awards (#)       Options/SARs (#)(c)
---------------------------- ------   ----------  -------------   ------------------    --------------     -------------------

<S>                          <C>     <C>          <C>                <C>                                       <C>
Michael J. Parrella          2004    $  320,016   $ 902,444  (d)     $  20,688              -                  8,805,000
    Chief Executive          2003       320,016     433,412  (e)        20,688              -                  9,260,000
    Officer and Chairman     2002       320,016     136,473  (f)        20,688              -                 14,000,000
    of the Board

Irene Lebovics               2004       200,000     300,397  (d)        12,000              -                  3,800,000
    President                2003       200,000     143,526  (e)        12,000              -                  4,000,000
                             2002       200,000      45,036  (f)        12,000              -                  2,350,000

Cy E. Hammond                2004       180,000     451,222  (d)        12,000              -                  3,425,000
    Senior Vice President,   2003       180,000     216,706  (e)        12,000              -                  3,600,000
    Chief Financial Officer  2002       180,000      68,237  (f)        12,000              -                  1,950,000
    and Treasurer

R. Wayne Darville (g)        2004       200,000     100,000  (d)           -            120,000  (h)             800,000
   Chief Operating Officer,  2003       200,000        -                   -                -                    800,000
   Artera Group, Inc.        2002       118,750        -                   -                -                    680,000

Mark Melnick                 2004       181,250      5,000   (d)         2,250              -                    950,000
    Senior Vice President,   2003       180,000        -                   -                -                  1,000,000
    General Counsel and      2002       180,000        -                   -                -                  1,000,000
    Secretary

</TABLE>

Notes:
-----
(a)  The bonus  amounts  listed in this column  indicate the bonuses  earned and
     accrued with respect to each Named Executive Officer in the year indicated.
     The bonus amounts actually paid to each Named Executive  Officer in each of
     the three years ended December 31, 2002, 2003 and 2004, whether for amounts
     earned in the given or prior years, are as follows:

                             Bonus Amounts Paid During the Year Ended
                                           December 31,
                            -------------------------------------------
                               2002            2003            2004
                            -----------    -------------    -----------
    Michael J. Parrella     $        -      $         -     $   655,000
    Irene Lebovics              26,455           74,000          37,000
    Cy E. Hammond               25,500          127,500          56,000
    R. Wayne Darville                -                -               -
    Mark Melnick                     -                -               -
                            -----------    -------------    -----------
                            $   51,955      $   201,500     $   748,000
                            ===========    =============    ===========


(b)  Other  annual  compensation   consists  of  automotive  lease  payments  or
     automotive allowances paid to the Named Executive Officers.

(c)  The options were granted  subject to  stockholder  approval of a sufficient
     increase in the number of authorized  shares of our common stock and shares
     available for issuance under our 2001 Stock and Incentive Plan.

                                       32
<PAGE>

(d)  Bonus  amounts  accrued and unpaid as of December 31, 2004 and the years in
     which the amounts were earned are as follows:

                    Amounts Accrued and Unpaid at December 31, 2004 Relating to:
                    ------------------------------------------------------------
                             2003             2004              Total
                        --------------   --------------   ------------------
 Michael J. Parrella    $            -   $      878,925   $      878,925
 Irene Lebovics                 71,434          300,397          371,831
 Cy E. Hammond                 106,741          451,222          557,963
 R. Wayne Darville                   -          100,000          100,000
 Mark Melnick                        -            5,000            5,000
                        --------------   --------------   ------------------
                        $      178,175   $    1,735,544   $    1,913,719
                        ==============   ==============   ==================

     In March 2005, four of the five Named Executive Officers received shares of
our series I convertible preferred stock in exchange for of a portion of bonuses
accrued but unpaid as of December  31,  2004 as follows:  Michael J.  Parrella -
$125,000;  Irene  Lebovics -  $46,000;  Cy E.  Hammond -  $72,000;  and R. Wayne
Darville  -  $100,000.   See  "Item  13.  Certain   Relationships   and  Related
Transactions - Series I Preferred Stock."

     In March 2005,  Messrs.  Parrella  and Hammond  and Ms.  Lebovics  waived a
portion of their bonus  amounts  accrued and unpaid as of December 31, 2004,  as
follows:  Michael J. Parrella - $326,011;  Irene Lebovics - $106,504;  and Cy E.
Hammond - $158,256,  The 2004 bonus amounts for these Named  Executive  Officers
presented in the tables above do not reflect these waivers.

(e)  Bonus  amounts  accrued and unpaid as of December 31, 2003 and the years in
     which the amounts were earned are as follows:

                    Amounts Accrued and Unpaid at December 31, 2003 Relating to:
                    ------------------------------------------------------------
                           2001            2002            2003          Total
                      -------------   --------------   ------------   ----------
Michael J. Parrella   $      61,597   $      136,473   $    433,412   $  631,482
Irene Lebovics                    -                -        108,434      108,434
Cy E. Hammond                     -                -        162,741      162,741
                      -------------   --------------   ------------   ----------
                      $      61,597   $      136,473   $    704,587   $  902,657
                      =============   ==============   ============   ==========

(f)  Bonus  amounts  accrued and unpaid as of December 31, 2002 and the years in
     which the amounts were earned are as follows:

                    Amounts Accrued and Unpaid at December 31, 2002 Relating to:
                    ------------------------------------------------------------
                              2001             2002            Total
                         --------------   -------------    --------------
Michael J. Parrella      $       61,597   $     136,473    $   198,070
Irene Lebovics                        -          38,908         38,908
Cy E. Hammond                     5,298          68,237         73,535
                         --------------   -------------    --------------
                         $       66,895   $     243,618    $   310,513
                         ==============   =============    ==============

(g)  Mr. Darville became Chief Information Officer of Artera Group effective May
     1, 2002 and was promoted to Chief Operating Officer in August 2002.

(h)  As of December 31, 2004,  the  aggregate  value of the shares of restricted
     stock held by Mr.  Darville  was  $2,340  (120,000  shares).  All shares of
     restricted  stock held by Mr.  Darville were awarded on September 30, 2004,
     subject to stockholder  approval of a sufficient  increase in the number of
     authorized  shares of our common  stock and shares  available  for issuance
     under our 2001 Stock and Incentive Plan.

                                       33
<PAGE>

Option Grants in 2004

     The  following  table  summarizes  options  granted to the Named  Executive
Officers during 2004.

<TABLE>
<CAPTION>

                                          Individual Grants
                      ----------------------------------------------------------
                                                                                     Potential Realized Value
                      Number of         Percent of                                       at Assumed Annual
                      Securities      Total Options                                    Rates of Stock Price
                      Underlying        Granted to      Exercise                   Appreciation for Option Term (b)
                       Options          Employees        Price      Expiration    ---------------------------------
      Name            Granted (a)        in 2004       Per Share       Date             5%                  10%
-------------------   -----------     ---------------  -----------  ------------  ---------------     -------------
<S>                   <C>                 <C>            <C>          <C>  <C>        <C>             <C>
Michael J. Parrella   8,805,000           37.1%          $0.048       3/17/11         $172,057        $400,966

Irene Lebovics        3,800,000           16.0%          $0.048       3/17/11           74,255         173,046

Cy E. Hammond         3,425,000           14.4%          $0.048       3/17/11           66,927         155,969

R. Wayne Darville       800,000            3.4%          $0.048       3/17/11           15,633          36,431

Mark Melnick            950,000            4.0%          $0.048       3/17/11           18,564          43,261
-----------------------------------------------------                                               -------------

</TABLE>

Notes:
-----
(a)  These options are subject to stockholder  approval of a sufficient increase
     in the number of authorized shares of our common stock and shares available
     for issuance  under our 2001 Stock and Incentive  Plan.  These options were
     originally scheduled to vest over time in accordance with specified vesting
     schedules.  On December 31, 2004,  the vesting  schedules of all non-vested
     options held by our employees and  directors,  including the options listed
     in the table above, were accelerated to immediately vest all such options.

(b)  The dollar amounts in these columns are the result of  calculations  of the
     exercise price at the assumed 5% and 10% rates of  appreciation  compounded
     annually  through the expiration  date.  Actual gains realized,  if any, on
     stock  option  exercises  and common stock  holdings  are  dependent on the
     future performance of our common stock and overall market conditions.

2004 Option Exercises and Year-End Option Values

     The following table sets forth  information with respect to the exercise of
options  during  2004  and the  unexercised  options  held by each of the  Named
Executive Officers as of December 31, 2004. There were no unexercisable  options
at December  31,  2004.  On December  31,  2004,  the vesting  schedules  of all
non-vested  options held by our employees and  directors,  including the options
listed  in the  table  below,  were  accelerated  to  immediately  vest all such
options.  Similar  option  accelerations  also  occurred  on October  25,  2002,
September 10, 2003 and March 17, 2004.

<TABLE>
<CAPTION>

                                                              Number of Shares
                           Number of                            Underlying                      Value of Unexercised
                            Shares                         Unexercised Options at              In-the-Money Options at
                           Acquired                           December 31, 2004                   December 31, 2004
                              On            Value     ------------------------------------   ----------------------------
       Name              Exercise (#)     Realized    Exercisable (#)    Unexercisable (#)   Exercisable    Unexercisable
-------------------     --------------   -----------  ---------------    -----------------   -------------  -------------
<S>                                                     <C>
Michael J. Parrella           -              -          56,729,634                -               -               -

Irene Lebovics                -              -          14,092,073                -               -               -

Cy E. Hammond                 -              -          10,939,024                -               -               -

R. Wayne Darville             -              -           2,280,000                -               -               -

Mark Melnick                  -              -           3,350,000                -               -               -
</TABLE>

                                       34
<PAGE>

Compensation Arrangements with Certain Executive Officers

     Certain of our executive officers are eligible to receive an incentive cash
bonus  consisting  of a percentage of the value,  in cash or  otherwise,  of the
transactions  consummated by us with third parties.  In 2004, these transactions
consisted  primarily  of an  aggregate  principal  amount  of $86.8  million  in
financing   transactions  with  Carole  Salkind   (including  $77.7  million  in
refinancings  involving  matured  and demand  notes  payable  to Ms. Salkind) an
aggregate principal amount of $1.0 million in financing  transactions with other
third  parties  and an  aggregate  amount of $2.6  million in product  sales and
royalty and licensing revenue. The participants included in this arrangement and
the percentages used to calculate their incentive bonuses are as follows:

                Participant              Percentage
          ------------------------     -------------

            Michael J. Parrella            1.00%
              Irene Lebovics               0.33%
               Cy E. Hammond               0.50%

     In March 2005, due to our current financial condition, Messrs. Parrella and
Hammond and Ms.  Lebovics  waived a portion of their bonus  amounts  accrued and
unpaid as of December  31,  2004,  as follows:  Michael J.  Parrella - $326,011;
Irene Lebovics - $106,504; and Cy E. Hammond - $158,256.

Compensation of Directors

     Directors  who are also  full-time  employees of ours receive no additional
compensation  for serving as a director.  Our  non-employee  directors,  Messrs.
McCloy  and  Oolie,  also did not  receive  any cash fees for their  service  as
directors during 2004, but each was granted options to purchase 1,285,000 shares
of our common stock at an exercise price of $0.048 per share, which was the fair
market  value of our common  stock on the date of grant  (March 17,  2004).  The
options expire seven years from the date of grant. These options originally were
scheduled  to vest as  follows:  50% on the date of grant  and 50% on the  third
anniversary of the date of grant,  subject to specific  acceleration  events. On
December 31, 2004, the vesting  schedules of all non-vested  options held by our
employees  and  directors,  including  the options  granted to our  non-employee
directors in 2004, were accelerated to immediately vest all such options.  These
option grants to our non-employee  directors are subject to stockholder approval
of a sufficient  increase in the number of shares of our authorized common stock
and in the  number of shares  available  for  issuance  under our 2001 Stock and
Incentive Plan.

Compensation Committee Interlocks and Insider Participation

     During  2004,   John  McCloy  and  Sam  Oolie  served  as  members  of  the
compensation committee of our board of directors. Mr. McCloy served as our Chief
Executive  Officer from  September  1987 to November 1994 and as our Chairman of
the Board from September  1986 to November  1994. In addition,  he served as our
Chief  Financial  Officer  from  November  1990  to  February  1993  and  as our
Secretary-Treasurer  from  October  1986 to  September  1987.  Mr.  McCloy  also
currently serves as the Chairman of SpringerRun,  Inc, a company we have engaged
to perform consulting  services for us. See "Item 13. Certain  Relationships and
Related  Transactions  -  SpringerRun,  Inc." During 2004, no executive  officer
served on the compensation committee or the board of directors of another entity
whose executive officer served on our compensation committee.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information  regarding  beneficial ownership
of our common stock as of February 28, 2005 by:

o    each person known by us to beneficially own more than 5% of our outstanding
     common stock;

o    each of our Named Executive Officers and directors; and

o    all of our executive officers and directors as a group.

     Beneficial ownership is determined in accordance with the rules of the SEC.
These rules generally  attribute  beneficial  ownership of securities to persons
who possess  sole or shared  voting  power or  investment  power with respect to
those  securities  and include shares of common stock issuable upon the exercise
or conversion of options, warrants,  convertible preferred stock and convertible
notes that are  immediately  exercisable or  convertible  or are  exercisable or
convertible  within 60 days.  Except as otherwise  indicated,  all of the shares
reflected in the table are

                                       35
<PAGE>

shares of  common  stock and all  persons  listed  below  have sole  voting  and
investment power with respect to the shares  beneficially owned by them, subject
to applicable  community  property  laws.  The  information  is not  necessarily
indicative  of  beneficial  ownership for any other  purpose.  The  calculations
assume  sufficient  authorized  shares of our  common  stock are  available  for
issuance upon conversion or exchange of derivative securities.

                                             Shares of
                                            Common Stock
                                            Beneficially           Percent
             Beneficial Owner                  Owned               of Class
 -------------------------------------      ---------------        ---------

 Executive Officers and Directors (a):
 Michael J. Parrella                         61,614,260  (b)          8.8%
 Irene Lebovics                              18,852,347  (c)          2.9%
 Cy E. Hannmond                              11,154,789  (d)          1.7%
 Sam Oolie                                    6,131,825  (e)             *
 John J. McCloy                               5,847,012  (f)             *
 Mark Melnick                                 3,350,000  (g)             *
 R. Wayne Darville                            2,400,000  (h)             *
 All Current Executive Officers and
 Directors as                               109,350,233  (i)         14.6%
    a Group (8 persons)

 5% or Greater Stockholders:
 Carole Salkind                           6,292,146,596  (j)         91.0%
 Crammer Road LLC                         1,368,263,755  (k)         68.3%
 Acme Associates, Inc.                      240,500,000  (l)         27.3%
 Alpha Capital Aktiengesellschaft           235,124,659  (m)         27.0%
 Libra Finance S.A.                         103,222,370  (n)         14.0%
 Balmore S.A.                               100,895,493  (o)         14.2%
 Austost Anstalt Schaan                      95,422,838  (p)         13.2%

Notes:
-----
*  Less than one percent.

(a)  Includes  options and shares of  restricted  stock  subject to  stockholder
     approval of a sufficient increase in the number of authorized shares of our
     common stock and shares  issuable under our 2001 Stock and Incentive  Plan.
     The business address of our officers and directors named in the table above
     is 20 Ketchum Street, Westport, CT 06880.

(b)  Includes   56,729,634  shares  issuable  upon  the  exercise  of  currently
     exercisable options, 13,333 shares held by or in custody for Mr. Parrella's
     children,   3,000,000  shares  issuable  upon  the  exercise  of  currently
     exercisable  options that were transferred by Mr. Parrella to his children,
     1,258,000  shares  issuable  upon the  exercise  of  currently  exercisable
     options  held by his son,  Michael J.  Parrella,  Jr., an officer of Artera
     Group,  and 612,893  shares held by Mr.  Parrella's  spouse.  Mr.  Parrella
     disclaims  beneficial  ownership  of the  shares  held  by his  spouse  and
     children.

(c)  Includes   14,092,073  shares  issuable  upon  the  exercise  of  currently
     exercisable  options  and 590,517  shares  owned  jointly  with her spouse,
     Irving  Lebovics,  our Senior Vice President,  Global Sales.  Also includes
     3,998,415  shares  issuable  upon the  exercise  of  currently  exercisable
     options held by Mr. Lebovics, as to which Ms. Lebovics disclaims beneficial
     ownership.

(d)  Includes   10,939,024  shares  issuable  upon  the  exercise  of  currently
     exercisable options.

(e)  Includes   5,792,012   shares  issuable  upon  the  exercise  of  currently
     exercisable  options,  20,000  shares  owned by Oolie  Enterprises,  75,000
     shares  owned by Mr.  Oolie's  spouse and 44,313  shares  held by the Oolie
     Family Support Foundation.  Mr. Oolie disclaims beneficial ownership of the
     shares owned by his spouse and the foundation.

(f)  Includes   5,542,012   shares  issuable  upon  the  exercise  of  currently
     exercisable options and 300,000 shares held by the John J. McCloy II Family
     Trust for which Mr. McCloy's spouse serves as trustee,  and as to which Mr.
     McCloy disclaims beneficial ownership.

(g)  Consists of  3,350,000  shares  issuable  upon the  exercise  of  currently
     exercisable options.

                                       36
<PAGE>

(h)  Includes  120,000 shares of restricted  stock and 2,280,000 shares issuable
     upon the exercise of currently exercisable options.

(i)  Includes  106,981,570  shares  issuable  upon  the  exercise  of  currently
     exercisable options.

(j)  Ms.  Salkind's  address is 18911 Collins Ave., Apt. 2403 Sunny Isles Beach,
     Florida 33160.  Includes  3,633,277,025 shares issuable upon the conversion
     of  convertible  notes in the aggregate  principal  amount of $62.8 million
     (assuming  full   conversion  of  the  notes  and  accrued   interest)  and
     2,272,215,753 shares issuable to Ms. Salkind upon the exercise of currently
     exercisable  warrants.  Also includes 5,000 shares owned by Morton Salkind,
     Ms.  Salkind's  husband and a former director of NCT, and 1,875,000  shares
     issuable  upon the  exercise of currently  exercisable  options held by Mr.
     Salkind,  shares as to which Ms. Salkind  disclaims  beneficial  ownership.
     Also includes  240,500,000  shares  issuable upon the exercise of currently
     exercisable options held by Acme Associates, Inc. (see footnote (l) below);
     23,000,000  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Motorworld,  Incorporated;  23,000,000 shares issuable upon
     the  exercise of  currently  exercisable  options  held by  Inframe,  Inc.;
     24,500,000  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Avant  Interactive,  Inc.;  22,550,000 shares issuable upon
     exercise of currently exercisable options held by Turbo Networks, Inc.; and
     23,000,000  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Maple Industries,  Inc. Ms. Salkind is the sole stockholder
     of Acme Associates,  Motorworld, Inframe, Avant Interactive, Turbo Networks
     and Maple  Industries.  Also includes  8,350,000  shares  issuable upon the
     exercise of currently  exercisable  options held by Leben Care, Inc. (whose
     sole stockholder is Ms. Salkind's son, Steven Salkind) and 3,375,000 shares
     issuable  upon the exercise of currently  exercisable  options held by Stop
     Noise,  Inc. (whose sole  stockholder is Steven  Salkind),  as to which Ms.
     Salkind disclaims beneficial ownership.

(k)  Crammer Road LLC's business address is Cayside,  2nd Floor,  P.O. Box 30592
     SMB, George Town, Grand Cayman, Cayman Islands,  British West Indies. David
     Sims of Navigator  Management  Ltd. has voting and  dispositive  control of
     these  shares on behalf of  Crammer  Road.  Includes  1,360,089,286  shares
     issuable upon the  conversion of our series H preferred  stock,  along with
     accretion.  Also includes  1,250,000  shares  issuable upon the exercise of
     currently  exercisable  warrants.  Pursuant  to a  contractual  restriction
     between Crammer Road and us, Crammer Road is prohibited  from  beneficially
     owning more than 9.9% of our common stock at any given time.

(l)  Acme Associates,  Inc.'s business address is 322 Green Pond Road, Hibernia,
     New Jersey  07842.  As noted in footnote (j) above,  Carole  Salkind is the
     sole  stockholder  of  Acme  Associates.  Consists  of  240,500,000  shares
     issuable upon the exercise of currently exercisable options.

(m)  Alpha Capital  Aktiengesellschaft's  business  address is Pradafant 7, 9490
     Furstentums,  Vaduz, Liechtenstein.  Konrad Ackermann, Director, has voting
     and  dispositive  control  of these  shares  on  behalf  of Alpha  Capital.
     Includes   19,455,556  shares  issuable  upon  the  exercise  of  currently
     exercisable  warrants,  103,637,454  shares  issuable  upon the exchange of
     various  convertible  notes  issued by Artera  Group,  along  with  accrued
     interest,  34,604,470 shares issuable upon the exchange of shares of series
     B preferred stock of Pro Tech, along with accretion,  and 71,503,008 shares
     issuable upon the conversion of convertible  notes issued by us, along with
     accrued  interest.  Pursuant  to  contractual  restrictions  between  Alpha
     Capital and us, Alpha Capital is prohibited from  beneficially  owning more
     than 9.99% of our common stock at any given time.

(n)  Libra Finance  S.A.'s  business  address is c/o Trident Trust Company (BVI)
     Limited,  Trident  Chambers,  Box 146, Road Town,  Tortola,  British Virgin
     Islands.  Seymour Braun has voting and dispositive  control of these shares
     on behalf of Libra Finance.  Includes  5,000,000  shares  issuable upon the
     exercise of currently exercisable warrants, 61,064,167 shares issuable upon
     the exchange of shares of series A preferred  stock of Artera Group,  along
     with  accretion,  and  31,437,013  shares  issuable upon the  conversion of
     convertible notes issued by us, along with accrued interest.

(o)  Balmore S.A.'s business address is c/o Trident Chambers, P.O. Box 146, Road
     Town,  Tortola,  British  Virgin  Islands.  Gissela  Kindle  has voting and
     dispositive  control  of  these  shares  on  behalf  of  Balmore.  Includes
     65,766,108  shares  issuable  upon  the  exchange  of  shares  of  series A
     preferred stock of Artera Group, along with accretion, and 2,313,783 shares
     issuable  upon the exchange of a  convertible  note issued by Artera Group,
     along with accrued interest.

(p)  Austost  Anstalt   Schaan's   business   address  is  Landstrasse  8,  9496
     Fuerstentum,   Balzers,   Liechtenstein.   Thomas   Hackl  has  voting  and
     dispositive  control  of  these  shares  on  behalf  of  Austost.  Includes
     65,766,108  shares  issuable  upon  the  exchange  of  shares  of  series A
     preferred  stock of Artera  Group,  along with  accretion,

                                       37
<PAGE>

and  17,873,573  shares  issuable upon exchange of a convertible  note issued by
Artera Group, along with accrued interest.

Equity Compensation Plan Information

         The following table summarizes certain information with respect to our
equity compensation plans as of December 31, 2004.

<TABLE>
<CAPTION>

                        Number of securities
                          to be issued upon            Weighted-average
                             exercise of              exercise price of            Number of securities
         Plan            outstanding options         outstanding options         remaining available for
       Category              and rights                   and rights                 future issuance
 -------------------   ------------------------     -----------------------     --------------------------
<S>                          <C>                           <C>
 Equity compensation         56,921,799                    $0.2977                         -
 plans approved by
 stockholders

 Equity compensation
 plans not approved
 by stockholders                      -                          -                         -
                             ----------                   ---------                   -----------

     Total                   56,921,799                    $0.2977                         -
                             ==========                   =========                   ===========
</TABLE>

     Excluded  from the table above are an  additional  77,766,753  shares to be
issued upon exercise of options granted under our 2001 Stock and Incentive Plan,
at a weighted average exercise price of $0.0618, subject to stockholder approval
of a sufficient  increase in the number of authorized shares of our common stock
and shares available for issuance under our 2001 Plan.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Secured Convertible Notes and Warrants Issued to Carole Salkind

     Beginning in 1999, we have issued  convertible  notes to Carole Salkind,  a
beneficial  owner of  approximately  91% of our common stock and the spouse of a
former  director of NCT. At February 28, 2005, the aggregate  principal  balance
outstanding of these notes was approximately $62.8 million. Substantially all of
our assets  secure the notes.  We have  sustained our  operations  over the last
three  years  primarily  from the  funding  received  from Ms.  Salkind  and are
dependent  upon this funding to continue  operations.  Although we do not have a
formal  agreement  requiring  her to do so, we  believe  that Ms.  Salkind  will
continue to provide  funds to us. Our belief that funding from her will continue
is based primarily upon her continued  funding of us to date despite our failure
to repay her notes as the notes matured. Since January 2001, we have established
a history of defaulting on the repayment of  obligations  owed to Ms. Salkind as
these  obligations  become due. Ms. Salkind has allowed us to roll over maturing
notes, along with accrued interest  (including  interest at a default rate equal
to the note's stated rate plus 5% after  default) and a default  penalty (10% of
the principal in default),  into new notes that generally mature six months from
the date of the  rolled-over  note.  In  addition to the  financing  provided by
rolling over maturing  notes,  Ms.  Salkind has continued to provide us with new
funds. From time to time, we have obtained oral assurances that Ms. Salkind will
continue  funding us.  However,  we have no legally  binding  assurance that Ms.
Salkind will continue funding us.

     At Ms.  Salkind's  election,  the notes are convertible  into shares of our
common  stock at fixed  conversion  prices  representing  the fair  value of our
common stock on the date of issuance.  In addition,  the notes are  exchangeable
for shares of common stock of any of our subsidiaries (other than Pro Tech) that
makes a public offering of its common stock (at the public offering price).  The
notes  contain  various  events of default,  the  occurrence of any one of which
provides,  at Ms. Salkind's election,  that the outstanding  principal,  accrued
interest  and  default  penalty  become  immediately  due  and  payable.  We are
obligated  to use our best  efforts  to  register  for  resale the shares of our
common  stock  into  which the notes are  convertible  within  six months of the
respective note issuance dates.

     Of the debt owed to Ms.  Salkind as of February  28,  2005,  $36.1  million
represents  cash loans made by Ms.  Salkind  (rather than non-cash items such as
interest  and default  penalties  rolled into new notes).  Through  February 28,
2005,  Ms. Salkind has loaned us a total of $36.8 million in cash. She converted
one  $500,000  note into shares of our common  stock and was repaid one $250,000
note.

                                       38
<PAGE>

     Listed  below are the  convertible  notes  issued to Ms.  Salkind  that are
outstanding as of February 28, 2005:

                                                                Conversion
    Issue Date          Due Date            Principal             Price
    ----------          --------            ---------             -----
     09/02/04           03/02/05        $    400,000            $0.0210
     09/14/04           03/14/05             400,000             0.0200
     09/14/04           03/14/05           1,351,034             0.0200
     10/01/04           04/01/05             400,000             0.0200
     10/15/04           04/15/05             425,000             0.0190
     10/21/04           04/21/05             479,393             0.0190
     11/08/04           05/08/05             425,000             0.0190
     11/23/04           05/23/05             400,000             0.0180
     11/23/04           05/23/05             479,901             0.0190
     12/02/04           06/02/05             400,000             0.0170
     12/17/04           06/17/05             400,000             0.0166
     12/22/04           06/22/05          13,933,585             0.0166
     12/22/04           12/22/09           5,000,000             0.0166
     12/31/04           06/30/05             400,000             0.0180
     12/31/04           06/30/05           8,968,594             0.0180
     01/26/05           07/26/05             400,000             0.0172
     01/26/05           07/26/05          11,291,006             0.0172
     02/09/05           08/09/05             400,000             0.0180
     02/09/05           08/09/05          15,986,794             0.0180
     02/16/05           08/16/05             400,000             0.0184
     02/21/05           08/21/05             457,762             0.0195
                                      ---------------
                                        $ 62,798,069
                                      ===============

     Between  January 1, 2004 and  December  31,  2004,  we issued  Ms.  Salkind
convertible notes in the aggregate  principal amount of $91.8 million in a total
of 39 loan  transactions.  Of these notes,  $86.8 million (38 loan transactions)
bore  interest  at 8% per annum and $5.0  million  (one loan  transaction)  bore
interest at 12% per annum.  The $5.0 million note is described under the heading
"Settlement  Agreement with Carole  Salkind"  below.  Of the $86.8 million in 8%
convertible notes, $13.6 million (12 loan transactions) were due upon demand and
$73.2  million  (26  loan  transactions)  were due six  months  from the date of
issuance.  In addition,  of the $86.8 million in notes, $9.1 million were issued
in exchange  for $9.1  million in cash from Ms.  Salkind and $77.7  million were
issued to refinance matured notes.  During 2004, Ms. Salkind demanded  repayment
of all  outstanding  demand notes (an aggregate of $16.7  million,  representing
$13.6 million of notes issued in 2004 and $3.1 million of notes issued in 2003).
In  2004,  we did  not  repay  any of the  indebtedness  due  Ms.  Salkind,  but
refinanced matured notes and notes for which she had demanded repayment into new
notes. The aggregate  principal  amount of the refinancing  notes represents the
principal refinanced ($67.5 million), default penalties (10% of the principal in
default, or $6.8 million) and accrued interest ($3.4 million).

     Between  January 1, 2005 and February 28,  2005,  we issued Ms.  Salkind 8%
convertible notes in the aggregate  principal amount of $28.9 million in a total
of six loan transactions. The notes mature six months from the date of issuance.
Of the $28.9  million in notes,  $1.2  million  were issued in exchange for $1.2
million in cash from Ms.  Salkind and $27.7  million  were  issued to  refinance
matured  notes.  The  aggregate   principal  amount  of  the  refinancing  notes
represents the principal  refinanced  ($24.3  million),  default penalty (10% of
principal in default, or $2.4 million) and accrued interest ($1.0 million).

     In connection  with the issuance of convertible  notes to Ms.  Salkind,  we
have  issued to her  warrants  to  purchase  shares of our common  stock.  As of
February  28,  2005,  we have  issued to Ms.  Salkind  warrants  to  purchase an
aggregate of  2,272,215,753  shares of our common  stock at a weighted  exercise
price per share of $0.0279,  including warrants that were issued between January
1, 2004 and February 28, 2005 to purchase an aggregate of  1,990,250,000  shares
of our common stock at a weighted average price of $0.0246.

     In addition, on January 11, 2002, we granted Ms. Salkind a five-year option
to acquire a 10% equity  interest in our  subsidiary,  Artera Group,  Inc. at an
exercise  price of 10% of the pre-money  enterprise  value  attributed to Artera
Group,  Inc.  in the first  transaction  following  January 11, 2002 in which an
unrelated investor purchases or commits to purchase an equity interest in Artera
Group for payment of at least $5 million.  For example, if an unrelated investor
pays $20 million to purchase a 20% equity interest in Artera Group,  Ms. Salkind
may acquire a 10% equity interest for $10 million.

                                       39
<PAGE>

Settlement Agreement with Carole Salkind

     On December 3, 2004,  we were  informed by Carole  Salkind that she entered
into a written  agreement with Production  Resource Group, LLC pursuant to which
PRG  assigned  to Ms.  Salkind  all of its  claims  pending  against  us and our
directors and officers.  These claims  included  those  asserted by PRG in three
pending  lawsuits,  two in Superior Court of the State of Connecticut and one in
the Court of Chancery of Delaware. In one of the Connecticut cases, PRG's claims
included a claim of collection  on a $2.0 million  Offer of Judgment  previously
accepted by us. In the  Delaware  case,  PRG sought,  among  other  things,  the
appointment of a receiver over our business and assets.

     On December 22,  2004,  we, all of the  individual  members of our board of
directors  and Ms.  Salkind  entered  into a  settlement  agreement.  Under this
agreement,  Ms.  Salkind  irrevocably  released  us and our  directors  from and
against all claims assigned to Ms. Salkind by PRG, except as described below. In
connection with her release,  Ms. Salkind agreed to dismiss (without  prejudice)
the three lawsuits described above.

     In consideration for entering into the settlement  agreement,  we issued to
Ms.  Salkind  a  five-year  convertible  note in the  principal  amount  of $5.0
million.  The note is secured by substantially all of our assets. The note bears
interest, retroactive to December 1, 2004, at 12% per annum payable quarterly in
arrears  beginning  October 1, 2005, and bears interest at a default rate of 17%
per annum on any interest or principal not paid when due. If the interest is not
paid when due, a penalty amount equal to 10% of the then  outstanding  principal
shall become due and payable.  At the election of Ms.  Salkind,  the note may be
converted  into shares of our common  stock at a  conversion  price per share of
$0.0166  or  exchanged  for  shares of common  stock of any of our  subsidiaries
(other than Pro Tech) that makes a public  offering of its common  stock (at the
public offering price).

     The settlement  agreement  further  provides that unless there is a default
under the note,  Ms.  Salkind  may not enforce any of the PRG claims or lawsuits
described above.  Upon full  satisfaction of the note, Ms. Salkind's  release of
the PRG claims  automatically  becomes  unqualified and Ms. Salkind must dismiss
the PRG  lawsuits  described  above,  this time with  prejudice.  However,  if a
default  occurs under the note,  all PRG claims and lawsuits  against us and our
directors  may  thereafter  be enforced by Ms.  Salkind,  including the lawsuits
previously  dismissed  without  prejudice  and  including  the  judgment of $2.0
million plus accrued  interest  described above, all to the extent necessary for
full  satisfaction  under the note. In connection with the issuance of the note,
we issued to Ms. Salkind a five-year  warrant to purchase  82,500,000  shares of
our common stock at an exercise price per share of $0.0166.

Consulting Agreements with Affiliates of Carole Salkind

     From time to time,  we have entered  into  consulting  agreements  with the
following entities that are affiliates of Carole Salkind: Acme Associates, Inc.;
Leben Care, Inc.; Stop Noise, Inc.;  Motorworld,  Incorporated;  Inframe,  Inc.;
Avant  Interactive,  Inc.; Turbo Networks,  Inc. and Maple Industries,  Inc. Ms.
Salkind is the sole stockholder of Acme Associates,  Motorworld,  Inframe, Avant
Interactive,  Turbo Networks and Maple  Industries.  Ms.  Salkind's son,  Steven
Salkind,  is the sole  stockholder  of Leben Care and Stop  Noise.  All of these
agreements  expired  by their  terms  during  2004 or  early  2005,  except  our
agreement with Turbo Networks,  which,  expires in April 2005, and our agreement
with Maple Industries, which expires in June 2005. The consultants have provided
on-going  consulting  services and advice in a number of areas pertaining to our
business  affairs as we have reasonably  requested from time to time,  including
the  following:  (1) advising on our  strategic  direction;  (2) assisting us in
corporate  development;  (3) evaluating  merger,  acquisition  and joint venture
opportunities;  (4)  developing  and refining  business  plans;  (5)  developing
business and growth  strategies;  (6)  advising on  recruiting;  (7)  discussing
product development issues and expansion; (8) serving as a marketing liaison and
facilitator;  (9) evaluating  marketing  plans;  and (10) assisting with various
contract  negotiations.  We believe that the  consulting  agreements  with these
companies are on terms no less favorable to us than those that could be obtained
from unaffiliated parties. The actual consulting services under these agreements
have been performed primarily by Ms. Salkind's spouse, Morton Salkind, acting on
behalf  of the  consultants.  Mr.  Salkind  served  as a member  of our board of
directors  from July 1997  until  January  1999.  Mr.  Salkind  is a  successful
businessman who has vast experience in various industries, including among other
things, experience as an entrepreneur, ownership of various companies, seasoning
as a  businessman  who has served as chief  executive  officer of many  business
ventures, active oversight of the performance of companies, determination of the
strategic  and  tactical  direction  of companies  and an  understanding  of our
proprietary technologies and the marketplace.

     The business purpose for having the consulting services be provided through
corporations rather than through direct contracts with Mr. Salkind is that it is
only with the liability and other protections and benefits of the corporate form
that the  consulting  services were  offered.  The  arrangements  have been with
multiple  corporations  rather than one because that is the only manner in which
the services were offered to us.  Although some overlap

                                       40
<PAGE>

exists in the consulting periods and fees, the consulting services are different
in each case and are based on our evolving needs and objectives.  The consulting
entities  have  material  business  purposes  other  than  providing  consulting
services to us.

     As compensation for these consulting services,  we have generally agreed to
pay cash fees and to grant  stock  options  to the  consulting  entities  and to
provide health insurance to Mr. Salkind.  We have not paid any cash fees, but we
have  accrued  $482,500 in fees as of December  31, 2004 and expect to accrue an
additional  $27,500 through June 2005. In addition,  we have granted  five-year,
fully vested stock options to the  consultants  that are exercisable at the then
market price of our common stock on the date of grant.  As of February 28, 2005,
we have granted  options to purchase an aggregate of  368,275,000  shares of our
common  stock  at a  weighted  exercise  price  per  share of  $0.0454  to these
consultants.  Finally,  we have paid health insurance  premiums on behalf of Mr.
Salkind of  approximately  $1,600,  $2,200  and  $4,100 in 2002,  2003 and 2004,
respectively.  We have not paid any  cash or  non-cash  consulting  compensation
directly to Carole  Salkind or Morton Salkind or to any members of their family.
The  consulting  engagements  and  compensation  of entities  represented by Mr.
Salkind is not dependent upon the ongoing funding provided by Ms. Salkind.

     On January 7, 2005, we entered into a three-year  consulting agreement with
Morton Salkind to provide us ongoing financial and consulting  advisory services
as we may  reasonably  request  from  time to time.  As  compensation  for these
consulting services,  we have agreed to pay to Mr. Salkind a monthly $5,000 cash
fee payable at the end of the term of the agreement  and to provide Mr.  Salkind
with  the use of an  automobile  owned  or  leased  by us,  together  with  auto
insurance  coverage,  through the term of the  agreement.  Our expected costs to
provide this automobile are $10,800 per year.

Series I Preferred Stock

     On March 16, 2005, we entered into preferred  stock purchase  agreements to
issue an aggregate of  approximately  975.6 shares of our newly created series I
convertible  preferred  stock  to four  of our  executive  officers,  one of our
non-executive officers, a holder of shares of preferred stock of our subsidiary,
Artera Group Inc., and Steven Salkind, the son of Carole Salkind, the beneficial
owner of  approximately  91% of our  common  stock.  The  consummation  of these
transactions  occurred on March 22,  2005.  The series I  preferred  stock has a
stated  value of $1,000  per share.  No  dividends  are  payable on the series I
preferred  stock. The series I preferred stock is junior in rank to our series H
convertible  preferred  stock,  but senior in rank to our  common  stock and has
preferences  over the common  stock with respect to  distributions  and payments
upon our  liquidation,  dissolution  or  winding  up.  The  holders  of series I
preferred  stock have no voting rights (except as may be required by law).  Each
share of series I  preferred  stock is  convertible  into  approximately  47,619
shares of our common  stock,  determined  by dividing the $1,000 stated value by
the fixed conversion price of $0.0210 per share. The approximately  975.6 issued
and  outstanding  shares of our series I preferred  stock are  convertible  into
approximately  46,455,127  shares of our  common  stock.  However,  the series I
preferred stock is not convertible until 20 days after our stockholders  approve
an increase in the number of authorized shares of our common stock.

     Of the approximately  975.6 shares, we issued an aggregate of approximately
305.6 shares of our series I preferred stock to four executive  officers and one
non-executive  officer as payment for accrued but unpaid  incentive cash bonuses
of $490,000 (before income tax withholding). The specific terms of each of these
five agreements are as follows:

<TABLE>
<CAPTION>

                                                                                   Net Bonus
                                                                        Gross        Amount
                                                                        Bonus       After Tax      Shares
  Holder                                                                Amount     Withholding    Purchased
  ------                                                             ----------    -----------    ---------
<S>                                                                  <C>           <C>                   <C>
  Michael J. Parrella, Chief Executive Officer and Chairman          $  125,000    $    81,000           81
  Irene Lebovics, President                                              46,000         27,000           27
  Cy E. Hammond, Senior Vice President and Chief Financial Officer       72,000         41,000           41
  R. Wayne Darville, Chief Operating Officer, Artera Group, Inc.        100,000      63,332.52     63.33252
  Non-Executive Officer                                                 147,000      93,225.14     93.22514
</TABLE>

     We also issued 160 shares of series I preferred  stock to an  individual in
exchange for 271 shares of series A convertible preferred stock of Artera Group.

     In March 2005, we issued 510 shares of our series I  convertible  preferred
stock to Steven Salkind as payment of an aggregate of accrued consulting fees of
$510,000  including  amounts  due  through  June  12,  2005,   representing  all
consulting fees payable to the consulting  entities.  These  consulting fees had
previously been assigned to Steven Salkind by these entities.

                                       41
<PAGE>

SpringerRun, Inc.

     In July 2003, we entered into a consulting agreement with SpringerRun, Inc.
John McCloy II, a director of NCT, is Chairman of the Board of Directors,  Chief
Executive  Officer and a 40% stockholder of  SpringerRun.  John McCloy II's son,
John  McCloy III,  is  President,  Treasurer,  Secretary,  a Director  and a 25%
stockholder  of  SpringerRun.  John  McCloy  II's  son,  Rush  McCloy,  is a 25%
stockholder  of  SpringerRun.  Under  this  consulting  agreement,   SpringerRun
provides consulting services to us, consisting  primarily of raising capital and
debt  financing,  identifying  potential  joint  ventures  and  other  strategic
transactions and finding distributors,  licensees and end users for our products
and  technologies.  The initial term of the SpringerRun  agreement was one year,
but was automatically  extended for additional  one-year terms unless terminated
prior to the start of any one-year term by either party. Under the agreement, we
have agreed to pay SpringerRun the following  compensation:  6% of the amount of
any equity  financing  arranged by SpringerRun plus 5% of this amount payable in
warrants to purchase  shares of our common  stock;  1% of the amount of any debt
financing  arranged by  SpringerRun;  and 7% of our net revenues  resulting from
joint  ventures  or  distribution,  license or end user  agreements  arranged by
SpringerRun for the first three years of these agreements and 5% of net revenues
resulting  from  these  agreements  thereafter.  In  lieu of  cash,  some of the
compensation  described above may, at SpringerRun's  request and if agreed to by
us, be paid in shares of our common stock or in the shares of any joint  venture
entity entered into by us. The material terms and conditions of this  agreement,
including the  compensation  formulas,  are  comparable to those used by us with
similarly situated,  unrelated  consultants.  We have paid expenses  aggregating
approximately  $7,000 on behalf of  SpringerRun  through  February 28, 2005. The
compensation earned by SpringerRun under the agreement through February 28, 2005
was $1,033 and has been  offset  against  the  expenses  paid by us on behalf of
SpringerRun.

Kambrium, AB

     On May 20,  2004,  we entered  into a one-year  consulting  agreement  with
Kambrium,  AB, a Swedish  consulting  firm.  Under this  agreement,  Kambrium is
assisting us in establishing distribution  relationships,  large end user sales,
resellers,   capital  funding,   joint  venture  partners  and  private  network
opportunities  for our Artera Group business and our Artera Turbo product lines,
primarily in Scandinavia.  We paid Kambrium an up-front, one-time engagement fee
of  $32,800 to cover  Kambrium's  first-year  expenses  for their  provision  of
services to us. In addition,  our agreement  with  Kambrium  provides for future
pay-for-performance consideration that is generally based on a percentage of the
value  of the  revenue  or  funding  received  by us as a result  of  Kambrium's
efforts. Kambrium is currently developing several significant business prospects
for our Artera Group  business and our Artera Turbo product  lines.  Jonathan M.
Charry,  Ph.D.,  our former Senior Vice President,  Corporate  Development,  was
engaged by Kambrium to provide  Kambrium  with product  expertise to  facilitate
Kambrium's efforts on our behalf.

Manatt Jones Global Strategies, LLC

     On July 1, 2004, we entered into a sixteen-month  consulting agreement with
Manatt Jones Global  Strategies,  LLC, a consulting  firm. Under this agreement,
Manatt Jones is assisting us in establishing distribution  relationships,  large
end user sales,  resellers,  capital funding, joint venture partners and private
network opportunities for our Artera Group business and our Artera Turbo product
lines,  primarily in Mexico, Latin America and Asia through the firm's extensive
contacts in those regions,  but also in the United States and elsewhere  through
the firm's extensive contacts in the Washington,  D.C. area. For example, two of
the principals of Manatt Jones, one a former United States  ambassador to Mexico
and the other a former  United  States  ambassador  to Malaysia,  are  currently
pursuing  business  opportunities  on our behalf.  Manatt Jones also provides us
with  use of their  Washington,  D.C.  and New York  City  offices.  Under  this
agreement,  we pay a monthly fee of $16,250 to Manatt Jones for these  services.
Manatt  Jones  recruited  Dr.  Charry to serve as a Managing  Director  in which
capacity he is able to support Manatt Jones's  efforts on our behalf as a result
of his availability and his experience with our Artera Group business.

                                       42
<PAGE>

LightSpeed Networks, Inc.

     On July 30, 2004,  we entered  into a two-year  consulting  agreement  with
LightSpeed Networks,  Inc., a consulting firm. Under this agreement,  LightSpeed
will  assist  us, in  particular  Artera  Group,  in  establishing  distribution
relationships  and securing capital,  funding and joint ventures.  Our agreement
with LightSpeed provides for future  pay-for-performance  consideration (after a
threshold  is met) that is generally  based on a percentage  of the value of the
revenue or  funding  received  by us as a result of  LightSpeed's  efforts.  Dr.
Charry is the President and sole stockholder of LightSpeed.  In addition,  under
the agreement with LightSpeed, we agreed to waive the expiration of Dr. Charry's
options  that  otherwise  would have expired  three  months  after Dr.  Charry's
resignation  from  employment  with  us and to  accelerate  the  vesting  of any
unvested  options  then  held by Dr.  Charry,  in order to  provide  Dr.  Charry
additional incentive to further our business objectives through his efforts with
LightSpeed.

Spyder Technologies Group, LLC

     In October 2003, Artera Group entered into a master  distributor  agreement
with Spyder  Technologies  Group, LLC under which Spyder  distributes the Artera
Turbo service in Puerto Rico, the U.S.  Virgin Islands and a number of countries
in the Caribbean  region.  This agreement  superseded a prior agreement  entered
into in October 2002.  Jonathan  Parrella,  the son of Michael J. Parrella,  our
Chairman and Chief Executive Officer,  is President of and holds a 25% ownership
interest in Spyder. Michael J. Parrella, Jr., the son of Michael J. Parrella and
an  officer  of  Artera  Group,  holds  a  17%  ownership  in  Spyder.   Bulldog
Communications,   Inc.  holds  a  20%  ownership  interest  in  Spyder.  Bulldog
Communications,  Inc. is owned 20% by each of Michael J.  Parrella  and his wife
and three children: Karen Parrella, Michael Parrella, Jr., Jonathan Parrella and
Daniel  Parrella.  Michael J.  Parrella is also the  Chairman of the Board,  and
Karen  Parrella is the  President,  of Bulldog  Communications.  The term of the
agreement  is through  February  2008.  The  agreement  includes a  compensation
structure  based on  royalties  payable  by Spyder  to Artera  Group on sales to
distributors  by Spyder.  The royalties  are  calculated on a per unit basis and
vary based upon the size and  category  of the end user of the  product  and the
support services  provided by Artera Group. The material terms of the agreement,
including the compensation  structure and royalty rates were comparable to those
used by  Artera  Group at the time with  similarly  situated,  unrelated  master
distributors.  On August  1,  2004,  Artera  Group and  Spyder  entered  into an
amendment and waiver with respect to this agreement.  Among other things, Spyder
granted a limited  waiver of its exclusive  distribution  rights in exchange for
the right to certain  finder's  fees and the royalty  amounts  payable under the
agreement were amended. The finder's fee and the new royalty amounts payable are
comparable with those currently payable to similarly situated, unrelated finders
and master distributors,  respectively.  In March 2005, pursuant to the terms of
this  agreement,  we  exercised  our right to convert all of Spyder's  exclusive
rights under the agreement into  non-exclusive  rights effective March 23, 2005.
Spyder earned no finder's  fees under the terms of the August 1, 2004  amendment
and waiver during the term of Spyder's exclusive distribution rights.

     In September 2003, Artera Group entered into a master distributor agreement
with Spyder  under which  Spyder  distributes  the Artera  Turbo  service in the
United  States,  Canada,  South  America and  Central  America.  This  agreement
superseded  a prior  agreement  entered  into in October  2002.  The term of the
agreement is five years. The agreement  includes a compensation  structure based
on  royalties  payable  by Spyder to Artera  Group on sales to  distributors  by
Spyder. The royalties are calculated on a per unit basis and vary based upon the
size  and  category  of the end user of the  product  and the  support  services
provided by Artera Group.  The material  terms of the  agreement,  including the
compensation  structure  and royalty  rates,  were  comparable  to those used by
Artera Group at the time with similarly situated, unrelated master distributors.
On August 1, 2004,  Artera and Spyder  amended this  agreement  to amend,  among
other things,  the royalty  amounts payable under the agreement to be comparable
with  those  currently   payable  to  similarly   situated,   unrelated   master
distributors.

     Also in September 2003, Artera Group entered into a reseller agreement with
Spyder under which Spyder resells the Artera Turbo service in the United States,
Canada,  South  America and Central  America.  Spyder is to pay Artera Group per
unit royalties that vary based upon the size and category of the end user of the
product.  The term of the agreement was one year,  with possible  renewals.  The
material  terms of the  agreement,  including  the  compensation  structure  and
royalty  rates,  were  comparable to those used by Artera Group at the time with
similarly situated,  unrelated  resellers.  On August 1, 2004, Artera and Spyder
amended this agreement to amend, among other things, the royalty amounts payable
under the agreement to be comparable with those  currently  payable to similarly
situated, unrelated resellers.

     On August 1, 2004,  Artera and Spyder entered into a finder agreement under
which  Spyder  will  assist  Artera  Group in finding  master  distributors  and
resellers for Artera's  Artera Turbo  service.  Artera will pay Spyder a monthly
commission based upon agreements with master  distributors or resellers  reached
by Artera as a result of

                                       43
<PAGE>

Spyder's  performance.  The commission structure and other material terms of the
agreement  are  comparable  to those  used by Artera  with  similarly  situated,
unrelated finders.

     Under all of the Spyder agreements,  Spyder earned aggregate commissions of
$143,  $3,017,  and $2,614 for the years ended December 31, 2002, 2003 and 2004,
respectively.  Though  February 28,  2005,  Spyder has not paid Artera Group any
royalties.

     In addition,  from time to time on an "as needed"  basis,  Spyder  provides
technical  consulting services to Artera Group pertaining to Artera Turbo, for a
fee of $20 per hour per person.  Spyder earned  aggregate  technical  consulting
fees of $12,330,  $86,840 and $115,206 the years ended  December 31, 2002,  2003
and 2004.

Alpha Capital Aktiengesellschaft and Libra Finance, S.A.

     In July 2004,  we issued a  subordinated  secured  convertible  note in the
aggregate  principal amount of $400,000 to Alpha Capital  Aktiengesellschaft,  a
beneficial  owner  of  more  than  5% of our  common  stock,  and  an  unsecured
convertible note in the aggregate  principal amount of $40,000 to Libra Finance,
S.A., a third party finder and a beneficial  owner of more than 5% of our common
stock.  The notes mature on July 23, 2006 and bear interest at 8% per annum. The
notes are convertible  into shares of our common stock at a conversion price per
share equal to the lesser of $0.0232 or 80% of the average  closing bid price of
our common  stock for the five  trading  days prior to  conversion.  We would be
required  to make  certain  liquidated  damages  payments if we fail to effect a
requested  conversion in a timely manner. In connection with the issuance of the
note to Alpha  Capital,  we  issued  to Alpha  Capital a  five-year  warrant  to
purchase  5,555,556  shares of our common  stock at an exercise  price per share
equal to the  conversion  price  of the  note.  We also  have an  obligation  to
register for resale the shares of our common stock  issuable upon  conversion of
the notes and exercise of the warrant.

Crammer Road LLC

     In May 2004,  we sold 27 shares of our series H preferred  stock to Crammer
Road LLC, a beneficial  owner of more than 5% of our common stock, for $230,000.
We received the cash in advance of the  issuance of the shares  ($65,000 in July
2002 and  $165,000 in March  2003).  Our series H  preferred  stock has a stated
value of  $10,000  per share and a  cumulative  dividend  of 4% per annum on the
stated  value  payable  upon  conversion  in either cash or shares of our common
stock at our  election.  The series H  preferred  stock is senior in rank to our
common  stock  and has  preferences  with  respect  to  dividends  and as to our
liquidation,  dissolution  or winding up. Crammer Road is the sole holder of our
series H  preferred  stock.  The holder of our series H  preferred  stock has no
voting rights (except as may be required by law).  The series H preferred  stock
is convertible into shares of our common stock at 75% of the average closing bid
price of our common  stock for the five trading  days prior to  conversion.  The
series  H  preferred  stock  is also  redeemable  by us in cash at any time at a
redemption  price that is a function  of the time  between the date the series H
was originally  issued and the redemption date. We are obligated to register for
resale shares of our common stock  issuable upon the  conversion of our series H
preferred  stock.  At December  31,2004,  1,752 shares of our series H preferred
stock were outstanding.

     On  September  30, 2004,  we entered  into an amended and restated  private
equity credit agreement with Crammer Road that supersedes and replaces a private
equity credit  agreement dated July 25, 2002. The new credit  agreement gives us
the  rights  to sell to  Crammer  Road  shares  of our  common  stock  having an
aggregate value of up to $50 million (the maximum commitment amount) pursuant to
puts made by us. The  agreement  requires us to sell to Crammer Road at least an
aggregate of $5 million of our common stock (the minimum commitment  amount), at
a 9% discount  from the market value of our common stock  determined at the time
of a put. We are  obligated  to register  for resale  shares of our common stock
sold pursuant to the September  2004 credit  agreement in an amount no less than
the number of shares for which puts are made,  but in no event less than 150% of
the  minimum  commitment  amount.  In order for us to be able to sell  shares to
Crammer Road pursuant to the agreement,  we must obtain stockholder  approval of
an amendment to our certificate of  incorporation  to sufficiently  increase the
number of authorized  shares of our common stock and must establish and maintain
an effective  registration statement with the SEC to permit the resale of shares
sold to Crammer Road pursuant to the agreement.

Indebtedness of Former Executive Officer

     On various dates commencing in 2000, Jonathan M. Charry,  Ph.D., our former
Senior Vice President Corporate Development,  entered into short-term promissory
notes to borrow funds from us in  anticipation  of cash bonuses due him under an
incentive  compensation  arrangement.  Effective May 1, 2002, the borrowed funds
had not been repaid but were  consolidated  with  interest  into an  outstanding
promissory  note due  January  15, 2003 with an  aggregate  principal  amount of
$107,960.  This note went into  default on January  15,  2003 and we continue to
seek

                                       44
<PAGE>

collection on the note. The note bore interest at an annual rate of 6.0% through
its due  date  of  January  15,  2003,  and  bears  interest  at  prime  plus 5%
thereafter.  In 2004, we recorded an allowance of approximately $0.1 million for
the  portion of a May 1, 2002 note  receivable  from Dr.  Charry  (plus  accrued
interest)  exceeding the amount we owed to Dr. Charry.  As of February 28, 2005,
the total  amount  outstanding  under this note,  including  accrued  but unpaid
interest through the date a reserve was recorded was $126,603.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit and Non-Audit Fees

     The following  table sets forth the aggregate  fees billed or accrued by us
for the audit and other  services  provided  by Eisner  LLP for the years  ended
December 31, 2003 and 2004.


                                       Year Ended December 31,
                                   -------------------------------
                                        2003             2004
                                   --------------   --------------
    Audit Fees (a)                   $ 272,000        $ 282,000
    Audit-Related Fees                       -                -
    Tax Fees (b)                        65,000           55,000
    All Other Fees                           -                -
                                   --------------   --------------
         Total                       $ 337,000        $ 337,000
                                   ==============   ==============


Notes:
-----
(a)  Represents fees billed and accrued for  professional  services  rendered in
     connection with the annual audit and quarterly  review of our  consolidated
     financial  statements  included  in our  annual  reports  on Form  10-K and
     quarterly  reports  on Form  10-Q  and in  connection  with our  filing  of
     registration  statements  with the SEC.

(b)  Represents  fees billed for  professional  services  rendered in connection
     with  federal  and  state tax  return  preparation  and other tax  matters.
     Includes   $3,250  in  each  of  2003  and  2004   allocated  to  Pro  Tech
     Communications,  a publicly traded subsidiary  included in our consolidated
     tax returns.


Audit  Committee  Policy  on  Pre-Approval  of Audit and  Permissible  Non-Audit
Services of Independent Registered Public Accountants

     The audit  committee  has  pre-approved  all audit  services and  permitted
non-audit services provided by our independent registered public accountants and
the  compensation,  fees and terms for these  services.  The audit committee has
also  determined  not to adopt any  blanket  pre-approval  policy but instead to
require  that the audit  committee  pre-approve  the  compensation  and terms of
service  for  audit  services  provided  by the  independent  registered  public
accountants and any changes in terms and compensation  resulting from changes in
audit scope,  company  structure or other matters.  The audit committee has also
determined to require  pre-approval by the audit  committee of the  compensation
and terms of  service  for any  permitted  non-audit  services  provided  by the
independent  registered public  accountants.  Any proposed non-audit services in
excess  of  pre-approved  levels  require  further  pre-approval  by  the  audit
committee.  Our Chief Financial Officer reports regularly to the audit committee
on the services performed and fees incurred by the independent registered public
accountants for audit and permitted non-audit services during the prior quarter.

                                       45
<PAGE>

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)  Financial Statements

The following financial statements are filed as part of this Annual Report:

<TABLE>

                                                                                           Page
                                                                                           ----
<S>                                                                                          <C>
 Report of Independent Registered Public Accounting Firm                                   F-1
 Consolidated Balance Sheets as of December 31, 2003 and December 31, 2004                 F-2
 Consolidated Statements of Operations and Consolidated Statements of                      F-3
     Comprehensive Loss for the years ended December 31, 2002, 2003 and 2004
 Consolidated Statements of Capital Deficit for the years                                  F-4
     ended December 31, 2002, 2003 and 2004
 Consolidated Statements of Cash Flows for the years ended December 31, 2002,
     2003 and 2004                                                                         F-5
 Notes to the Consolidated Financial Statements                                            F-6

(a)(2)   Financial Statement Schedules

The following financial statement schedule is filed as part of this Annual
Report:

                                                                                           Page
                                                                                           ----
Report of Independent Registered Public Accounting Firm, on Schedule II                    F-54
Schedule II.  Valuation and Qualifying Accounts                                            F-55

All other  schedules  are omitted  because they are not required or the required
information is shown in the financial statements or notes thereto.
</TABLE>

(a)(3)   Exhibits

The following  exhibits are filed herewith or are  incorporated  by reference to
exhibits previously filed with the SEC:

Exhibit
Number            Description of Exhibit

3.1       Second  Restated  Certificate  of  Incorporation  of NCT  Group,  Inc.
          (incorporated  herein by reference to Exhibit 3(a) to the registrant's
          Pre-Effective  Amendment No. 1 to  Registration  Statement on Form S-1
          (Registration No. 333-60574), filed on September 5, 2001).

3.2       By-laws  of NCT  Group,  Inc.  (incorporated  herein by  reference  to
          Exhibit  3(b) to the  registrant's  Pre-Effective  Amendment  No. 1 to
          Registration Statement on Form S-1 (Registration No. 333-60574), filed
          on September 5, 2001).

3.3(a)    Certificate  of  Designation,  Preferences  and  Rights  of  Series  H
          Convertible Preferred Stock of NCT Group, Inc. (incorporated herein by
          reference to Exhibit 3(c) of the registrant's  Pre-effective Amendment
          No.  5  to  Registration  Statement  on  Form  S-1  (Registration  No.
          333-60574) filed on August 9, 2002).

3.3(b)    Certificate of Amendment of Certificate  of  Designation,  Preferences
          and Rights of Series H Convertible  Preferred Stock of NCT Group, Inc.
          (incorporated  herein by reference to Exhibit 3(a) of the registrant's
          Quarterly  Report on Form 10-Q for the  quarter  ended  March 31, 2003
          (File No. 0-18267)).

10.1*     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 of the  registrant's  Registration
          Statement on Form S-8 (Registration No. 333-11213).

10.2*     NCT Group, Inc. 2001 Stock and Incentive Plan (as amended and restated
          as of September 17, 2004).

                                       46
<PAGE>

10.3      Consulting Agreement,  dated July 2, 2003, between NCT Group, Inc. and
          SpringerRun,  Inc. (incorporated herein by reference to Exhibit 10(az)
          to the  registrant's  Quarterly  Report on Form  10-Q for the  quarter
          ended September 30, 2003 (File No. 0-18267)).

10.4(a)   Reseller  Agreement,  dated  September 1, 2003,  between Artera Group,
          Inc.  and  Spyder  Technologies  Group,  LLC  (incorporated  herein by
          reference to Exhibit 10(ao) of the  registrant's  Quarterly  Report on
          Form  10-Q  for  the  quarter  ended  September  30,  2003  (File  No.
          0-18267)).

10.4(b)   Amendment  No. 1 to the September 1, 2003  Reseller  Agreement,  dated
          August 1, 2004,  between  Artera Group,  Inc. and Spyder  Technologies
          Group,  LLC  (incorporated  by  reference  to  Exhibit  10(fg)2 of the
          registrant's  Post-Effective Amendment No. 1 to Registration Statement
          on Form S-1 (Registration No. 333-60574), filed on October 7, 2004).

10.5(a)   Master Distributor Agreement,  dated September 1, 2003, between Artera
          Group, Inc. and Spyder Technologies Group, LLC (incorporated herein by
          reference to Exhibit 10(ap) of the  registrant's  Quarterly  Report on
          Form  10-Q  for  the  quarter  ended  September  30,  2003  (File  No.
          0-18267)).

10.5(b)   Amendment No. 1 to the September 1, 2003 Master Distributor Agreement,
          dated  August  1,  2004,   between  Artera  Group,   Inc.  and  Spyder
          Technologies  Group, LLC (incorporated  herein by reference to Exhibit
          10(fg)1  of  the  registrant's   Post-Effective  Amendment  No.  1  to
          Registration Statement on Form S-1 (Registration No. 333-60574), filed
          on October 7, 2004).

10.6(a)   Master  Distributor  Agreement,  dated October 1, 2003, between Artera
          Group, Inc. and Spyder Technologies Group, LLC (incorporated herein by
          reference  to  Exhibit  10(dl)  of  the   registrant's   Pre-Effective
          Amendment No. 9 to  Registration  Statement on Form S-1  (Registration
          No. 333-60574), filed on February 4, 2004).

10.6(b)   Amendment and Waiver to Master Distributor  Agreement (for Puerto Rico
          and The Caribbean),  dated August 1, 2004,  between Artera Group, Inc.
          and Spyder Technologies  Group, LLC (incorporated  herein by reference
          to Exhibit 10(fg)3 of the registrant's  Post-Effective Amendment No. 1
          to Registration  Statement on Form S-1 (Registration  No.  333-60574),
          filed on October 7, 2004).

10.7      Finder  Agreement dated August 1, 2004 between Artera Group,  Inc. and
          Spyder  Technologies  Group, LLC (incorporated  herein by reference to
          Exhibit 10(fg) of the registrant's  Post-Effective  Amendment No. 1 to
          Registration Statement on Form S-1 (Registration No. 333-60574), filed
          on October 7, 2004).

10.8(a)   Form of Secured Convertible Note (new financings) issued by NCT Group,
          Inc. to Carole Salkind.

10.8(b)   Schedule of Secured  Convertible Notes (new financings)  issued by NCT
          Group, Inc. to Carole Salkind and outstanding as of February 28, 2005.

10.9(a)   Form of Secured Convertible Note  (refinancings)  issued by NCT Group,
          Inc. to Carole Salkind.

 10.9(b)  Schedule of Secured  Convertible  Notes  (refinancings)  issued by NCT
          Group, Inc. to Carole Salkind and outstanding as of February 28, 2005.

10.10(a)  Form of Warrant (new financings)  issued by NCT Group,  Inc. to Carole
          Salkind.

10.10(b)  Schedule of Warrants  (new  financings)  issued by NCT Group,  Inc. to
          Carole Salkind and outstanding as of February 28, 2005.

10.11(a)  Form of Warrant  (refinancings)  issued by NCT Group,  Inc.  to Carole
          Salkind

10.11(b)  Schedule of Warrants  (new  financings)  issued by NCT Group,  Inc. to
          Carole Salkind and outstanding as of February 28, 2005.

10.12     Secured  Convertible Note dated December 22, 2004 issued by NCT Group,
          Inc. to Carole  Salkind  (incorporated  herein by reference to Exhibit
          10.01  of the  registrant's  Current  Report  on Form  8-K  (File  No.
          0-18267), filed on December 22, 2004).

                                       47
<PAGE>

10.13(a)  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.;
          dated  January 9, 2001  (incorporated  herein by  reference to Exhibit
          10(ap)  of  the   registrant's   Pre-effective   Amendment  No.  3  to
          Registration Statement on Form S-1 (Registration No. 333-47084), filed
          on January 26, 2001).

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

10.13(c)  Exchange Rights Agreement among NCT Group, Inc. and Subscribers, dated
          January 9, 2001 (incorporated herein by reference to Exhibit 10(ar) of
          the  registrant's   Pre-effective  Amendment  No.  3  to  Registration
          Statement on Form S-1 (Registration No.  333-47084),  filed on January
          26, 2001).

10.14(a)  Subscription Agreement, dated April 4, 2001, among Artera Group, Inc.,
          Alpha  Capital   Aktiengesellschaft   and  Amro  International,   S.A.
          (incorporated   herein  by   reference   to  Exhibit   10(bj)  of  the
          registrant's  Registration  Statement  on Form S-1  (Registration  No.
          333-60574), filed on May 9, 2001).

10.14(b)  Form of Note dated April 4, 2001 (incorporated  herein by reference to
          Exhibit 10(bk) of the registrant's  Registration Statement on Form S-1
          (Registration No. 333-60574), filed on May 9, 2001).

10.14(c)  Exchange  Rights  Agreement  by and among NCT Group,  Inc. and the
          Holders  identified  on Schedule A thereto,  dated as of April 4, 2001
          (incorporated   herein  by  reference  to  Exhibit  10(ab)(2)  of  the
          registrant's  Pre-effective  Amendment No. 1 to Registration Statement
          on Form S-1 (Registration No. 333-60574), filed on September 5, 2001).

10.15(a)  Subscription Agreement among Artera Group, Inc. and Subscribers: Alpha
          Capital  Aktiengesellschaft and Amro International,  S.A., dated as of
          May 25, 2001  (incorporated  herein by reference to Exhibit  10(aj) of
          the  registrant's  Quarterly Report on Form 10-Q for the quarter ended
          June 30, 2001 (File No. 0-18267)).

10.15(b)  Form of Convertible  Note dated May 25, 2001  (incorporated  herein by
          reference to Exhibit 10(aj)(1) of the registrant's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 2001 (File No. 0-18267)).

10.15(c)  Exchange Rights Agreement by and among NCT Group, Inc. and the Holders
          identified   on  Schedule  A  thereto,   dated  as  of  May  25,  2001
          (incorporated   herein  by  reference  to  Exhibit  10(aj)(2)  of  the
          registrant's  Quarterly Report on Form 10-Q for the quarter ended June
          30, 2001 (File No. 0-18267)).

10.16(a)  Subscription Agreement among Artera Group, Inc. and Subscribers: Alpha
          Capital  Aktiengesellschaft;   Amro  International,  S.A.;  The  Gross
          Foundation,  Inc.;  Leval Trading,  Inc.;  Nesher Ltd.; and Talbiya B.
          Investments  Ltd., dated as of June 29, 2001  (incorporated  herein by
          reference to Exhibit 10(ak) of the  registrant's  Quarterly  Report on
          Form 10-Q for the quarter ended June 30, 2001 (File No. 0-18267)).

10.16(b)  Form of Convertible Note dated June 29, 2001  (incorporated  herein by
          reference to Exhibit 10(ak)(1) of the registrant's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 2001 (File No. 0-18267)).

10.16(c)  Exchange  Rights  Agreement  by and among NCT Group,  Inc. and Holders
          identified  on  Schedule  A  thereto,   dated  as  of  June  29,  2001
          (incorporated   herein  by  reference  to  Exhibit  10(ak)(2)  of  the
          registrant's  Quarterly Report on Form 10-Q for the quarter ended June
          30, 2001 (File No. 0-18267)).

                                       48
<PAGE>

10.17     Letter, dated November 9, 2001, to each of the Subscribers  identified
          on Schedule A thereto  (being the  subscribers  in Artera Group,  Inc.
          convertible  notes dated January 9, 2001, April 4, 2001, May 25, 2001,
          and June 29, 2001) amending  terms of conversion of these  convertible
          notes  (incorporated  herein by  reference  to  Exhibit  10(ar) of the
          registrant's  Pre-effective  Amendment No. 3 to Registration Statement
          on Form S-1 (Registration No. 333-60574), filed on December 21, 2001).

10.18(a)  Subscription Agreement,  dated January 10, 2002, between Artera Group,
          Inc.  and Alpha  Capital  Aktiengesellschaft  (incorporated  herein by
          reference to Exhibit  10(a) of the  registrant's  Quarterly  Report on
          Form 10-Q for the quarter ended March 31, 2002 (File No. 0-18267)).

10.18(b)  Security Agreement, dated January 10, 2002, between Artera Group, Inc.
          and Alpha Capital Aktiengesellschaft (incorporated herein by reference
          to Exhibit 10(b) of the registrant's Quarterly Report on Form 10-Q for
          the quarter ended March 31, 2002 (File No. 0-18267)).

10.18(c)  Convertible  Note in the principal  amount of $550,000,  dated January
          10,   2002,   issued  by  Artera   Group,   Inc.   to  Alpha   Capital
          Aktiengesellschaft  (incorporated herein by reference to Exhibit 10(c)
          of the  registrant's  Quarterly  Report on Form  10-Q for the  quarter
          ended March 31, 2002 (File No. 0-18267)).

10.19(a)  Subscription Agreement,  dated March 11, 2002, between NCT Group, Inc.
          and Alpha Capital Aktiengesellschaft (incorporated herein by reference
          to Exhibit 10(f) of the registrant's Quarterly Report on Form 10-Q for
          the quarter ended March 31, 2002 (File No. 0-18267)).

10.19(b)  Convertible Note in the principal amount of $400,000,  dated March 11,
          2002,  issued by NCT Group,  Inc. to Alpha Capital  Aktiengesellschaft
          (incorporated herein by reference to Exhibit 10(h) of the registrant's
          Quarterly  Report on Form 10-Q for the  quarter  ended  March 31, 2002
          (File No. 0-18267)).

10.20(a)  Subscription Agreement,  dated April 22, 2003, between NCT Group, Inc.
          and Alpha Capital Aktiengesellschaft (incorporated herein by reference
          to Exhibit 10(u) of the registrant's Quarterly Report on Form 10-Q for
          the quarter ended June 30, 2003 (File No. 0-18267)).

10.20(b)  Convertible Note in the principal amount of $235,000,  dated April 22,
          2003,  issued by NCT Group,  Inc. to Alpha Capital  Aktiengesellschaft
          (incorporated herein by reference to Exhibit 10(t) of the registrant's
          Quarterly  Report on Form 10-Q for the  quarter  ended  June 30,  2003
          (File No. 0-18267)).

10.21     Consulting Agreement,  dated May 20, 2004, between NCT Group, Inc. and
          Kambrium AB (incorporated herein by reference to Exhibit 10(em) of the
          Registrant's  Pre-Effective Amendment No. 11 to Registration Statement
          on Form S-1 (Registration No. 333-60574), filed on June 10, 2004).

10.22     Consulting Agreement,  dated July 1, 2004, between NCT Group, Inc. and
          Manatt Jones Global Strategies,  LLC (incorporated herein by reference
          to Exhibit 10(fe) of the registrant's  Post-Effective  Amendment No. 1
          to Registration  Statement on Form S-1 (Registration  No.  333-60574),
          filed on October 7, 2004).

10.23(a)  Subscription  Agreement,  dated July 23, 2004, between NCT Group, Inc.
          and   Alpha   Capital   Aktiengesellschaft   and   Longview   Fund  LP
          (incorporated   herein  by   reference   to  Exhibit   10(ey)  of  the
          registrant's  Pre-Effective Amendment No. 12 to Registration Statement
          on Form S-1 (Registration No. 333-60574), filed on July 28, 2004).

10.23(b)  Security  Agreement,  dated July 23, 2004, between NCT Group, Inc. and
          Alpha Capital  Aktiengesellschaft  and Longview Fund LP  (incorporated
          herein  by   reference   to   Exhibit   10(ez)  of  the   registrant's
          Pre-Effective  Amendment No. 12 to Registration  Statement on Form S-1
          (Registration No. 333-60574), filed on July 28, 2004).

                                       49
<PAGE>

10.23(c)  Secured  Convertible Note in principal amount of $400,000,  dated July
          23,   2004,   issued   by   NCT   Group,   Inc.   to   Alpha   Capital
          Aktiengesellschaft (incorporated herein by reference to Exhibit 10(fa)
          of the  registrant's  Pre-Effective  Amendment No. 12 to  Registration
          Statement on Form S-1 (Registration No. 333-60574),  filed on July 28,
          2004).

10.23(d)  Secured  Convertible Note in principal amount of $500,000,  dated July
          23, 2004,  issued by NCT Group, Inc. to Longview Fund LP (incorporated
          herein  by   reference   to   Exhibit   10(fb)  of  the   registrant's
          Pre-Effective  Amendment No. 12 to Registration  Statement on Form S-1
          (Registration No. 333-60574), filed on July 28, 2004).

10.23(e)  Convertible Note in principal amount of $40,000,  dated July 23, 2004,
          issued by NCT Group, Inc. to Libra Finance S.A (incorporated herein by
          reference  to  Exhibit  10(fc)  of  the   registrant's   Pre-Effective
          Amendment No. 12 to Registration  Statement on Form S-1  (Registration
          No. 333-60574), filed on July 28, 2004).

10.23(e)  Convertible Note in principal amount of $50,000,  dated July 23, 2004,
          issued by NCT Group, Inc. to Bi-Coastal Consulting Corp. (incorporated
          by  reference  to  Exhibit  10(fd) of the  registrant's  Pre-Effective
          Amendment No. 12 to Registration  Statement on Form S-1  (Registration
          No. 333-60574), filed on July 28, 2004).

10.24     Consulting Agreement, dated July 30, 2004, between NCT Group, Inc. and
          LightSpeed Networks,  Inc.(incorporated herein by reference to Exhibit
          10(ff)  of  the  registrant's   Post-Effective   Amendment  No.  1  to
          Registration Statement on Form S-1 (Registration No. 333-60574), filed
          on October 7, 2004).

10.25     Amended and Restated  Private  Equity  Credit  Agreement,  dated as of
          September  30, 2004,  by and between NCT Group,  Inc. and Crammer Road
          LLC  (incorporated  herein  by  reference  to  Exhibit  10(fn)  of the
          registrant's  Post-Effective Amendment No. 1 to Registration Statement
          on Form S-1 (Registration No. 333-60574), filed on October 7, 2004).

14        NCT  Group,  Inc.  Code of Ethics  for the CEO,  CFO and Other  Senior
          Financial Officers  (incorporated herein by reference to Exhibit 14 of
          the  registrant's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 2003 (File No. 0-18267)).

21        Subsidiaries of NCT Group, Inc.

23.1      Consent of Eisner LLP.

31.1      Certification  of Chief Executive  Officer  pursuant to Rule 13a-14(a)
          under the Securities Exchange Act of 1934.

31.2      Certification of Chief Financial Officer pursuant Rule 13a-14(a) under
          the Securities Exchange Act of 1934.

32.1      Certification  of Chief Executive  Officer  pursuant to Rule 13a-14(b)
          under the Securities Exchange Act of 1934 and 18 U.S.C.  Section 1350,
          as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensation plan or arrangement.

                                       50
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED FINANCIAL STATEMENT INDEX

<TABLE>
<CAPTION>

                                                                                         Page
                                                                                         ----
<S>                                                                                        <C>
Report of Independent Registered Public Accounting Firm                                  F-1

Consolidated Balance Sheets as of December 31, 2003 and 2004                             F-2

Consolidated Statements of Operations and Consolidated Statements of
   Comprehensive Loss for the F-3 years ended December 31, 2002, 2003 and 2004

Consolidated Statements of Capital Deficit for the years
   ended December 31, 2002, 2003 and 2004                                                F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2002,
   2003 and 2004                                                                         F-5

Notes to the Consolidated Financial Statements                                           F-6

Report of Independent Registered Public Accounting Firm on Schedule II                   F-54

Schedule II - Valuation and Qualifying Accounts                                          F-55

</TABLE>

                                       51
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
NCT Group, Inc.


We have audited the accompanying  consolidated balance sheets of NCT Group, Inc.
and  subsidiaries  (the  "Company")  as of December  31, 2003 and 2004,  and the
related  consolidated  statements of  operations,  comprehensive  loss,  capital
deficit and cash flows for each of the years ended  December 31, 2002,  2003 and
2004.  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 audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits 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 provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all
material  respects,  the consolidated  financial position of NCT Group, Inc. and
subsidiaries  as of December 31, 2003 and 2004 and the  consolidated  results of
their operations and their  consolidated  cash flows for each of the years ended
December 31, 2002,  2003 and 2004 in  conformity  with U.S.  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  negative  cash flows  from  operating
activities and it has recurring net losses,  has a working  capital  deficiency,
and is in default on certain  convertible  notes  payable.  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.

As  discussed  in Note 2 to the  consolidated  financial  statements,  effective
January 1, 2002, the Company adopted a new method of accounting for its goodwill
and during 2003 the Company  adopted a new  accounting  standard  for its equity
instruments with characteristics of both liabilities and equity.


/s/ Eisner LLP
--------------------------
Eisner LLP


New York, New York
February 25, 2005

With respect to Note 27
--------------------------
March 31, 2005

                                      F-1
<PAGE>

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Notes 2, 10 and 11)

<TABLE>
<CAPTION>

                                                                                        (In thousands of dollars, except share data)
                                                                                               December 31,            December 31,
                                                                                                  2003                    2004
                                                                                            -----------------      -----------------
ASSETS
Current assets:
<S>                                                                                         <C>                    <C>
  Cash and cash equivalents                                                                 $            988       $          1,359
  Investment in available-for-sale marketable securities (Note 4)                                         49                     24
  Accounts receivable, net (Note 5)                                                                      255                    528
  Inventories, net  (Note 6)                                                                             509                    364
  Other current assets (includes $138 and $135, respectively, due from officers) (Note 8)                310                    248
                                                                                            -----------------      -----------------
      Total current assets                                                                             2,111                  2,523

Property and equipment, net (Note 7)                                                                     641                    470
Goodwill (Note 2)                                                                                      7,184                  1,252
Patent rights and other intangibles, net (Note 2)                                                      1,223                  1,089
Other assets  (Note 8)                                                                                 1,616                    120
                                                                                            -----------------      -----------------
                                                                                            $         12,775       $          5,454
                                                                                            =================      =================
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
  Accounts payable                                                                          $          2,905       $          1,909
  Accrued expenses-related parties (Note 9)                                                            2,055                  8,745
  Accrues expenses-other (Note 9)                                                                     11,744                  9,862
  Notes payable (Note 10)                                                                              3,403                    603
  Related party convertible notes (due to a stockholder) (Notes 11 and 20)                            28,650                 40,565
  Current maturities of convertible notes (Note 11)                                                    3,438                  4,513
  Deferred revenue (Note 12)                                                                           2,763                    885
  Shares of subsidiary subject to exchange into a variable number of shares (Note 13)                    742                    709
  Other current liabilities (Note 14)                                                                  7,227                  6,990
                                                                                            -----------------      -----------------
      Total current liabilities                                                                       62,927                 74,781
                                                                                            -----------------      -----------------

Long-term liabilities:
  Deferred revenue (Note 12)                                                                             535                      -
  Convertible notes (includes zero and $5,000, respectively, related parties) (Note 11)                  675                  5,000
  Other liabilities (Note 14)                                                                          1,536                     63
                                                                                            -----------------      -----------------
      Total long-term liabilities                                                                      2,746                  5,063
                                                                                            -----------------      -----------------

Commitments and contingencies (Note 23)

Minority interest in consolidated subsidiaries                                                         8,313                  8,645
                                                                                            -----------------      -----------------

Capital deficit (Note 15):
Shares payable, 3,029,608 shares                                                                           -                      -
Preferred stock, $.10 par value, 10,000,000 shares authorized:
  Convertible  series H preferred stock, issued and outstanding, 1,725 and 1,752
   shares, respectively (redemption amount $20,700,000 and $20,992,210, respectively)
   (liquidation amount $18,300,822 and $19,267,746, respectively)                                     18,301                 19,203
Common stock, $.01 par value, authorized 645,000,000 shares:
   issued and outstanding, 641,970,392 shares                                                          6,420                  6,420
Additional paid-in capital                                                                           205,102                245,746
Accumulated other comprehensive (loss) income                                                         (1,170)                    86
Accumulated deficit                                                                                 (289,864)              (354,490)
                                                                                            -----------------      -----------------
      Total capital deficit                                                                          (61,211)               (83,035)
                                                                                            -----------------      -----------------
                                                                                            $         12,775       $          5,454
                                                                                            =================      =================
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                      F-2
<PAGE>

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 2)

<TABLE>
<CAPTION>

                                                                                 (In thousands of dollars,except per share amounts)
                                                                                           For the Years Ended December 31,
                                                                                ----------------------------------------------------
                                                                                      2002              2003               2004
                                                                                ---------------    --------------     --------------
<S>                                                                             <C>                <C>                <C>
REVENUE:
Technology licensing fees and royalties                                         $        4,493     $       3,013      $       3,422
  Product sales, net                                                                     2,697             1,708              1,902
  Advertising                                                                              105                88                147
  Engineering and development services                                                      24                49                  4
                                                                                ---------------    --------------     --------------
      Total revenue                                                                      7,319             4,858              5,475
                                                                                ---------------    --------------     --------------

COSTS, EXPENSES AND OTHER INCOME:
  Cost of product sales                                                                  1,279               787              1,089
  Cost of advertising                                                                       15                14                 15
  Cost of engineering and development services                                               8                53                  3
  Selling, general and administrative (includes $4,226, $8,514 and $173
    related party consulting expenses, respectively) (Note 20)                          14,773            17,511              9,569
  Research and development                                                               4,711             3,684              4,104
  Provision for doubtful accounts                                                           77                 8                147
  Impairment of goodwill, net (Notes 2 and 10)                                             300                 -              5,932
  Impairment of other intangibles (Note 2)                                               2,116                 -                  -
  Write downs of investment and repurchased licenses, net (includes $9,199,
    zero and zero of related party expenses, respectively) (Notes 3 and 10)              9,199                 -                  -
  Costs of exiting activities (Note 18)                                                    145                 -                  -
  Other (income) expense, net (Note 17)                                                   (321)             (244)                 -
                                                                                ---------------    --------------     --------------
     Total operating costs, expenses and other income                                   32,302            21,813             20,859
Non-operating items:
  Other (income) expense, net (includes related party expenses of $3,863
    $2,103 and $6,752, respectively) (Notes 17 and 20)                                   7,411              (943)             6,575
  Interest expense (includes related party expenses of $6,284,
    $12,397 and $41,377, respectively)                                                   7,725            14,324             42,684
  Interest income                                                                          (14)              (36)               (17)
                                                                                ---------------    --------------     --------------
      Total costs and expenses                                                          47,424            35,158             70,101
                                                                                ---------------    --------------     --------------

NET LOSS                                                                        $      (40,105)    $     (30,300)     $     (64,626)

Less:  Preferred stock dividends (Note 15)                                               2,817             2,948              6,984
          Beneficial conversion features (Notes 11 and 15)                                  46                 -                104
                                                                                ---------------    --------------     --------------

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                        $      (42,968)    $     (33,248)     $     (71,714)
                                                                                ===============    ==============     ==============
Loss per share attributable to common stockholders:
  Basic and diluted                                                             $        (0.10)    $       (0.06)     $      (0.11)
                                                                                ===============    ==============     ==============

Weighted average common shares outstanding -
  Basic and diluted                                                                    446,423           563,543            645,000
                                                                                ===============    ==============     ==============

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Note 2)
                                                                                            (In thousands of dollars)
                                                                                        For the Years Ended December 31,
                                                                                ----------------------------------------------------
                                                                                      2002              2003               2004
                                                                                ---------------    --------------     --------------
NET LOSS                                                                        $      (40,105)    $     (30,300)     $     (64,626)
Other comprehensive income (loss):
  Currency translation adjustment                                                         (566)             (601)             1,218
  Adjustment of unrealized gain or loss / (unrealized loss) on
    available-for-sale marketable securities                                                 -               (53)                38
                                                                                ---------------    --------------     --------------
COMPREHENSIVE LOSS                                                              $      (40,671)    $     (30,954)     $     (63,370)
                                                                                ===============    ==============     ==============

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

                                      F-3
<PAGE>

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT (Note 2)
(In thousands of dollars and shares)

<TABLE>
<CAPTION>

                                                                          Convertible
                                                                        Preferred Stock
                                                                      --------------------
                                                                           Series H              Common Stock            Additional
                                                                      --------------------       ------------             Paid-in
                                                                       Shares      Amount      Shares    Amount           Capital
                                                                      --------    --------     -------   -------        -----------
<S>                 <C> <C>                                                       <C>          <C>       <C>            <C>
Balance at December 31, 2001                                                -     $      -     428,831   $ 4,288        $  164,621
Sale of preferred stock, net                                                2       18,000           -         -             5,309
Dividend to preferred shareholders                                          -          377           -         -              (377)
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                    -            -           -         -            (2,086)
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                               -            -           -         -              (400)
Exchange of subsidiary common stock for common stock                        -            -       6,073        61               409
Conversion of convertible debt                                              -            -       5,611        56               348
Exchange of subsidiary convertible debt for common stock                    -            -       2,599        26               193
Shares issued for settlement obligations/prepayments                        -            -      46,438       465             3,260
Shares payable for settlement obligations                                   -            -           -         -                 -
Retirement of treasury stock                                                -            -      (6,078)      (61)           (2,902)
Warrants issued in conjunction with convertible debt
   and related rights                                                       -            -           -         -             4,492
Beneficial conversion feature on convertible debt                           -            -           -         -             3,422
Net loss                                                                    -            -           -         -                 -
Currency translation adjustment                                             -            -           -         -                 -
Compensatory stock options and warrants                                     -            -           -         -             4,747
Expenses related to prior sale of stock                                     -            -           -         -              (137)
                                                                      --------    --------     -------   -------        -----------
Balance at December 31, 2002                                                2     $ 18,377     483,474   $ 4,835        $  180,899
Conversion of preferred stock                                               -         (785)     23,058       231               554
Dividend to preferred shareholders                                          -          709           -         -              (709)
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                    -            -           -         -            (1,896)
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                               -            -           -         -              (343)
Reversal of redemption adjustment on subsidiary preferred                   -            -           -         -               125
Exchange of subsidiary convertible debt for common stock                    -            -      42,093       421             1,333
Shares issued for settlement obligations/prepayments                        -            -      93,345       933             5,488
Warrants issued in conjunction with convertible debt
   and related rights                                                       -            -           -         -             5,415
Beneficial conversion feature on convertible debt                           -            -           -         -             5,959
Net loss                                                                    -            -           -         -                 -
Currency translation adjustment                                             -            -           -         -                 -
Valuation of available-for-sale marketable securities                       -            -           -         -                 -
Compensatory stock options and warrants                                     -            -           -         -             8,429
Adjustment of monetary value on subsidiary shares upon
   adoption of SFAS 150                                                     -            -           -         -              (138)
Expenses related to prior sale of stock                                     -            -           -         -               (14)
                                                                      --------    --------     -------   -------        -----------
Balance at December 31, 2003                                                2     $ 18,301     641,970   $ 6,420        $  205,102
Sale of preferred stock, net                                                -           205          -         -                25
Beneficial conversion feature on preferred stock                            -         (104)          -         -               104
Dividend and amortization of beneficial conversion feature to
    preferred shareholders                                                  -          801           -         -              (801)
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                    -            -           -         -            (2,023)
Charges for the non-conversion/exchange
    for common stock of NCT to NCT and
    subsidiary preferred shareholders                                       -            -           -         -            (3,931)
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                               -            -           -         -              (333)
Warrants issued in conjunction with convertible debt
   and related rights                                                       -            -           -         -            22,149
Beneficial conversion feature on convertible debt                           -            -           -         -            25,083
Net loss                                                                    -            -           -         -                 -
Currency translation adjustment                                             -            -           -         -                 -
Compensatory stock options and warrants                                     -            -           -         -               170
Valuation of available-for-sale marketable securities                       -            -           -         -                 -
Other                                                                       -            -           -         -               201
                                                                      --------    --------     -------   -------        -----------
Balance at December 31, 2004                                                2     $ 19,203     641,970   $ 6,420        $  245,746
                                                                      ========    ========     =======   =======        ===========

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

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

<PAGE>

                                                                                                    Accumulated            Shares
                                                                                  Accumu-              Other               Payable
                                                                                   lated           Comprehensive          ---------
                                                                                  Deficit          Income/(Loss)           Amount
                                                                                -----------        -------------          ---------
Balance at December 31, 2001                                                    $ (219,459)          $       50           $      -
Sale of preferred stock, net                                                             -                    -                  -
Dividend to preferred shareholders                                                       -                    -                  -
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                                 -                    -                  -
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                                            -                    -                  -
Exchange of subsidiary common stock for common stock                                     -                    -                  -
Conversion of convertible debt                                                           -                    -                  -
Exchange of subsidiary convertible debt for common stock                                 -                    -                  -
Shares issued for settlement obligations/prepayments                                     -                    -                  -
Shares payable for settlement obligations                                                -                    -              2,296
Retirement of treasury stock                                                             -                    -                  -
Warrants issued in conjunction with convertible debt
   and related rights                                                                    -                    -                  -
Beneficial conversion feature on convertible debt                                        -                    -                  -
Net loss                                                                           (40,105)                   -                  -
Currency translation adjustment                                                          -                 (566)                 -
Compensatory stock options and warrants                                                  -                    -                  -
Expenses related to prior sale of stock                                                  -                    -                  -
                                                                                -----------        -------------          ----------
Balance at December 31, 2002                                                    $ (259,564)          $     (516)          $  2,296
Conversion of preferred stock                                                            -                    -                  -
Dividend to preferred shareholders                                                       -                    -                  -
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                                 -                    -                  -
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                                            -                    -                  -
Reversal of redemption adjustment on subsidiary preferred                                -                    -                  -
Exchange of subsidiary convertible debt for common stock                                 -                    -                  -
Shares issued for settlement obligations/prepayments                                     -                    -             (2,296)
Warrants issued in conjunction with convertible debt
   and related rights                                                                    -                    -                  -
Beneficial conversion feature on convertible debt                                        -                    -                  -
Net loss                                                                           (30,300)                   -                  -
Currency translation adjustment                                                          -                 (601)                 -
Valuation of available-for-sale marketable securities                                    -                  (53)                 -
Compensatory stock options and warrants                                                  -                    -                  -
Adjustment of monetary value on subsidiary shares upon
   adoption of SFAS 150                                                                  -                    -                  -
Expenses related to prior sale of stock                                                  -                    -                  -
                                                                                -----------        -------------          ----------
Balance at December 31, 2003                                                    $ (289,864)          $   (1,170)          $      -
Sale of preferred stock, net                                                             -                    -                  -
Beneficial conversion feature on preferred stock                                         -                    -                  -
Dividend and amortization of beneficial conversion feature to
    preferred shareholders                                                               -                    -                  -
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                                 -                    -                  -
Charges for the non-conversion/exchange
    for common stock of NCT to NCT and
    subsidiary preferred shareholders                                                    -                    -                  -
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                                            -                    -                  -
Warrants issued in conjunction with convertible debt
   and related rights                                                                    -                    -                  -
Beneficial conversion feature on convertible debt                                        -                    -                  -
Net loss                                                                           (64,626)                   -                  -
Currency translation adjustment                                                          -                1,218                  -
Compensatory stock options and warrants                                                  -                    -                  -
Valuation of available-for-sale marketable securities                                    -                   38                  -
Other                                                                                    -                    -                  -
                                                                                -----------        -------------          ----------
Balance at December 31, 2004                                                    $ (354,490)          $       86           $      -
                                                                                ===========        =============          ==========

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

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

<PAGE>

                                                                                     Treasury Stock
                                                                                    -----------------
                                                                                    Shares    Amount               Total
                                                                                    ------   --------           -------------
Balance at December 31, 2001                                                         6,078   $ (2,963)             (53,463)
Sale of preferred stock, net                                                             -          -               23,309
Dividend to preferred shareholders                                                       -          -                    -
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                                 -          -               (2,086)
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                                            -          -                 (400)
Exchange of subsidiary common stock for common stock                                     -          -                  470
Conversion of convertible debt                                                           -          -                  404
Exchange of subsidiary convertible debt for common stock                                 -          -                  219
Shares issued for settlement obligations/prepayments                                     -          -                3,725
Shares payable for settlement obligations                                                -          -                2,296
Retirement of treasury stock                                                        (6,078)     2,963                    -
Warrants issued in conjunction with convertible debt
   and related rights                                                                    -          -                4,492
Beneficial conversion feature on convertible debt                                        -          -                3,422
Net loss                                                                                 -          -              (40,105)
Currency translation adjustment                                                          -          -                 (566)
Compensatory stock options and warrants                                                  -          -                4,747
Expenses related to prior sale of stock                                                  -          -                 (137)
                                                                                    ------   --------           -------------
Balance at December 31, 2002                                                             -   $      -          $   (53,673)
Conversion of preferred stock                                                            -          -                    -
Dividend to preferred shareholders                                                       -          -                    -
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                                 -          -               (1,896)
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                                            -          -                 (343)
Reversal of redemption adjustment on subsidiary preferred                                -          -                  125
Exchange of subsidiary convertible debt for common stock                                 -          -                1,754
Shares issued for settlement obligations/prepayments                                     -          -                4,125
Warrants issued in conjunction with convertible debt
   and related rights                                                                    -          -                5,415
Beneficial conversion feature on convertible debt                                        -          -                5,959
Net loss                                                                                 -          -              (30,300)
Currency translation adjustment                                                          -          -                 (601)
Valuation of available-for-sale marketable securities                                    -          -                  (53)
Compensatory stock options and warrants                                                  -          -                8,429
Adjustment of monetary value on subsidiary shares upon
   adoption of SFAS 150                                                                  -          -                 (138)
Expenses related to prior sale of stock                                                  -          -                  (14)
                                                                                    ------   --------           -------------
Balance at December 31, 2003                                                             -   $      -          $   (61,211)
Sale of preferred stock, net                                                             -          -                  230
Beneficial conversion feature on preferred stock                                         -          -                    -
Dividend and amortization of beneficial conversion feature to
    preferred shareholders                                                               -          -                    -
Charges for the non-registration of the underlying shares of NCT
    to subsidiary preferred shareholders                                                 -          -               (2,023)
Charges for the non-conversion/exchange
    for common stock of NCT to NCT and
    subsidiary preferred shareholders                                                    -          -               (3,931)
Dividend and amortization of discounts on beneficial conversion
   price to subsidiary preferred shareholders                                            -          -                 (333)
Warrants issued in conjunction with convertible debt
   and related rights                                                                    -          -               22,149
Beneficial conversion feature on convertible debt                                        -          -               25,083
Net loss                                                                                 -          -              (64,626)
Currency translation adjustment                                                          -          -                1,218
Compensatory stock options and warrants                                                  -          -                  170
Valuation of available-for-sale marketable securities                                    -          -                   38
Other                                                                                    -          -                  201
                                                                                    ------   --------           -------------
Balance at December 31, 2004                                                             -   $      -          $   (83,035)
                                                                                    ======   ========           =============

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

                                       F-4

<PAGE>

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Notes 2 and 19)

<TABLE>
<CAPTION>

                                                                                                 (In thousands of dollars)
                                                                                              For the Years Ended December 31,
                                                                                        --------------------------------------------
                                                                                            2002            2003            2004
                                                                                        -------------   -------------   ------------
<S>                                                                                     <C>             <C>             <C>
Cash flows from operating activities:
 Net loss                                                                               $  (40,105)     $  (30,300)     $  (64,626)
 Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization                                                             1,305             724             383
   Common stock, warrants and options issued as consideration for:
    Compensation and Operating expenses (includes $4,081, $8,349
    and zero, respectively, related party consulting)                                        4,961           8,429             216
   Provision for inventory                                                                      76            (122)             59
   Provision for doubtful accounts and uncollectible amounts                                   239              21             118
   Loss(gain) on disposition of fixed assets                                                     5              33              (1)
   (Gain) loss on settlement of lawsuit                                                          -          (4,888)          3,625
   Gain on dissolution of Artera International                                                   -               -          (4,567)
   Finance costs associated with non-registration of common shares                           5,529           2,207             752
   Preferred stock dividends as interest                                                         -              11              21
   Default penalty on notes (related party)                                                    441           2,104           6,712
   Amortization of discounts on notes (includes $2,700 , $5,715 and $18,420
     respectively, with related parties)                                                     2,888           6,348          18,471
   Amortization of beneficial conversion feature on convertible notes (includes
     $2,156, $4,740 and $19,405, respectively, with related parties) (Note 11)               2,305           4,900          19,536
   Write downs of investment and repurchased licenses, net (includes $9,199,
     zero and zero of related party expenses, respectively) (Notes 10 and 17)                9,199               -               -
   Impairment of goodwill, net (Note 2)                                                        300               -           5,932
   Impairment of other intangibles (Note 2)                                                  2,116               -               -
   Issuance of convertible note of subsidiary for placement fees                                 -              40               -
   Costs of exiting activities (Note 18)                                                       145               -               -
   Realized loss on available-for-sale securities (Note 4)                                     765               -              77
   Realized loss on fair value of warrant (Note 4)                                             151               1               -
   Settlement of debt                                                                            -            (231)              -
   Minority interest loss                                                                     (458)              -               -
   Changes in operating assets and liabilities, net of acquisitions:
      Decrease (increase) in accounts receivable                                               132             (31)           (286)
      Decrease in inventories                                                                  331             235              85
      Decrease in other assets                                                                 971             210              66
      Increase in accounts payable and accrued expenses                                      3,164           2,131           5,989
      Decrease in other liabilities and deferred revenue                                    (4,140)         (2,154)         (2,123)
                                                                                        -------------   -------------   ------------
   Net cash used in operating activities                                                $   (9,680)     $  (10,332)     $   (9,561)
                                                                                        -------------   -------------   ------------
Cash flows from investing activities:
   Capital expenditures                                                                 $       (3)     $     (150)     $     (79)
   Proceeds from sale of equipment                                                              11               -               -
                                                                                        -------------   -------------   ------------
     Net cash provided by (used in) investing activities                                $        8      $     (150)     $      (79)
                                                                                        -------------   -------------   ------------
Cash flows from financing activities:
   Proceeds from:
     Issuance of related party convertible notes, net (Notes 11 and 20)                 $    9,590      $   10,440      $    9,110
     Issuance of convertible notes and notes payable, net (Notes 10 and 11)                  1,019             590             873
     Sale of subsidiary preferred stock, net                                                   110               -               -
     Repayment of notes                                                                       (497)           (322)           (107)
                                                                                        -------------   -------------   ------------
     Net cash provided by financing activities                                          $   10,222      $   10,708      $    9,876
                                                                                        -------------   -------------   ------------
Effect of exchange rate changes on cash                                                 $     (311)     $      (44)     $      135
                                                                                        -------------   -------------   ------------
Net increase in cash and cash equivalents                                                      239             182             371
Cash and cash equivalents - beginning of period                                                567             806             988
                                                                                        -------------   -------------   ------------
Cash and cash equivalents - end of period                                               $      806      $      988      $    1,359
                                                                                        =============   =============   ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                      F-5
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

1.   Background:

     Throughout this document, "NCT" (which may be referred to as "we," "our" or
"us") means NCT Group, Inc. or NCT Group, Inc. and subsidiaries,  as the context
requires. NCT designs products and develops and licenses technologies based upon
its  portfolio  of  patents  and  related  rights  and  extensive  know-how  and
non-patented technologies. We operate in three segments:  communications,  media
and  technology.  Our  major  focus  is the  development  of our  communications
businesses, particularly our Artera Turbo Internet acceleration services and our
Pro Tech communications headset products and systems. Our communications segment
also develops and markets our ClearSpeech noise and echo cancellation algorithms
and related microphones and speakers. Our media segment develops and distributes
Sight & Sound, a micro broadcasting system that delivers  place-based  broadcast
and billboard  advertising.  Our technology segment provides Java-language based
microprocessor cores.

     We have has experienced  substantial net losses since our inception,  which
cumulatively amounted to $354.5 million through December 31, 2004. Cash and cash
equivalents  amounted to $1.4 million at December  31,  2004. A working  capital
deficit of $72.3  million  existed at December 31,  2004.  We were in default of
$0.5 million of our notes payable and $5.1 million of our  convertible  notes at
December 31, 2004. Our management  believes that internally  generated funds are
currently  insufficient  to meet our  short-term  and  long-term  operating  and
capital  requirements.  These funds include  available cash and cash equivalents
and revenue  derived from  technology  licensing  fees and royalties and product
sales. We have  insufficient  authorized common shares to meet obligations under
which we are  required  to issue  such  shares,  as well as any shares we may be
required to issue in connection with convertible notes,  warrants and options if
they are exercised in the future.  Our ability to continue as a going concern is
substantially  dependent upon our revenue  sources and future levels of funding,
which are currently  uncertain.  If we are unable to generate sufficient revenue
to sustain our current level of operations  and to execute our business plan, we
will need to obtain  additional  financing  to  maintain  our  current  level of
operations.  We are attempting to obtain additional working capital through debt
and equity  financings  (see Note 27).  However,  we can give no assurance  that
additional  financing will be available to us on acceptable terms or at all. The
failure  to obtain  any  necessary  additional  financing  would have a material
adverse effect on us, including causing a substantial  reduction in the level of
our operations.  These reductions, in turn, could have a material adverse effect
on our relationships with our licensees, customers and suppliers.

     In the event that funding from internal sources is  insufficient,  we would
have to  substantially  cut back our level of  spending  which  would  result in
substantially  curtailed  operations.  These  reductions  would  have an adverse
effect  on our  relations  with  our  existing  and  prospective  customers  and
suppliers. Uncertainty exists about the adequacy of current funds to support our
activities  or to pay awards or judgments  against us until  positive  cash flow
from operations can be achieved,  and uncertainty  exists about the availability
of external financing sources to fund any cash deficiencies (see Note 15).

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that we will continue as a going concern, which contemplates continuity
of  operations,  realization  of assets and  satisfaction  of liabilities in the
ordinary  course of  business.  Our ability to  continue  as a going  concern is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  equity
and/or debt  financing and other funding  sources to meet our  obligations.  The
uncertainties  described in the preceding  paragraph raise  substantial doubt at
December  31,  2004  about our  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 we be unable to continue as a going concern.

2.   Summary of Significant Accounting Policies:

Basis of Presentation:

     The consolidated  financial  statements include the accounts of NCT and its
majority-owned  subsidiaries  after elimination of all significant  intercompany
transactions   and  accounts.   We  include   losses  from  our   majority-owned
subsidiaries in our consolidated  statements of operations  exclusive of amounts
attributable to minority  shareholders'  common equity  interests only up to the
basis of such minority shareholders' interests.  Losses in excess of that amount
are borne by NCT. Such amounts from Pro Tech Communications,  Inc. ("Pro Tech"),
our

                                      F-6
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

86% owned  subsidiary,  borne by NCT for the years ended December 31, 2002, 2003
and 2004 amounted to $2.0 million, $0.2 million and $0.2 million,  respectively.
Future  earnings of our  majority-owned  subsidiaries  which would  otherwise be
attributable to minority  shareholders'  interests will be allocated to minority
shareholders only after future earnings are sufficient to recover the cumulative
losses absorbed by NCT in excess of NCT's allocable  percentage ($2.4 million at
December 31, 2004).  Investments  in less than  majority-owned  affiliates  over
which we  exercise  significant  influence  are  accounted  for under the equity
method. All other investments in affiliates are carried at cost.

Estimates:

     The  preparation  of  financial   statements  and  related  disclosures  in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make estimates and assumptions  that affect the
reported amounts of assets and liabilities,  the disclosure of contingent assets
and  liabilities  at the  date of the  financial  statements,  and  revenue  and
expenses  during the period  reported.  These  estimates  include  assessing the
collectibility of accounts receivable, the use and realizability of inventories,
useful lives for depreciation,  amortization  periods of tangible and intangible
assets  and the  assumptions  underlying  projections  of cash  flows  regarding
testing for  impairment of long-lived  assets.  The markets for our products and
services  are  characterized  by  intense   competition,   rapid   technological
development  and  evolving  standards,  all of which  could  impact  the  future
realizability of our assets. Estimates and assumptions are reviewed periodically
and the  effects  of  revisions  are  reflected  in the  period  that  they  are
determined to be necessary. Actual results could differ from those estimates.

Reclassifications:

     Some amounts in prior years' 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 at date of acquisition.

Revenue Recognition:

     Revenue is recognized when earned. Revenue from product sales is recognized
when the product is shipped and title has passed. Revenue from advertising sales
is recognized when the advertisements are aired or displayed.  Artera recognizes
revenue  ratably over the period service is provided  known as the  subscription
period.  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.  Revenue from  engineering  and  development  services is
generally recognized and billed as the services are performed. However, for some
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,  revenue 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.  No revenue was recognized  under the percentage of completion
method for the years ended December 31, 2002, 2003 and 2004.

     For  technology  licensing  fees  paid by  joint  venturers,  co-venturers,
strategic partners or other licensees which are fixed and determinable, accepted
by the customer and  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.

                                      F-7
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

We also maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments.  If the financial
condition of our  customers  were to  deteriorate  resulting in an impairment of
their ability to make payments, additional allowances might be required.

Marketable Securities:

     Marketable  securities that are bought and held principally for the purpose
of selling them in the near-term are classified as trading  securities.  Trading
securities  are  recorded at fair value,  with the change in market value during
the period included in the statement of operations.

     Marketable  debt securities that we have the positive intent and ability to
hold to maturity are classified as  held-to-maturity  securities and recorded at
amortized cost. Securities not classified as either  held-to-maturity or trading
securities are classified as available-for-sale  securities.  Available-for-sale
securities   are  recorded  at  market  value   (except  if  another  value  was
contractually  provided)  with the  change in market  value  during  the  period
excluded  from the  statements  of  operations  unless  it is  occasioned  by an
other-than-temporary  decline  in value and  recorded  net of income  taxes as a
separate  component  of capital  deficit.  We review  declines  in value of ours
portfolio  when  general  market  conditions  change  or  specific   information
pertaining to an industry or individual company becomes  available.  The factors
we consider in assessing whether a decline is other than temporary include:  our
evaluation of the length of the time and the extent to which the market value of
the  industry  has been  depressed  or the market value of the security has been
less than cost; evaluation of financial condition and near-term prospects of the
business, including cash sufficiency and new product developments; assessment of
observable  marketplace-determined values and trends; and our intent and ability
to retain our  investment  in the business  for a  sufficient  period of time to
allow for any  anticipated  recovery in market  value.  At December 31, 2003 and
2004,  all of our  marketable  securities  have been  deemed  available-for-sale
securities.

Derivative Instruments:

     Derivatives  are reported at their fair values at each  reporting date with
any gains or  losses  reported  in our  statements  of  operations.  We  adopted
Statement of Financial  Accounting  Standards (`SFAS") No. 138,  "Accounting for
Certain  Derivative  Instruments  - an  Amendment  of SFAS No.  133,"  effective
January 1, 2001.  For the years ended  December  31, 2002,  2003 and 2004,  fair
value  charges  of $0.2  million,  less  than  $0.1  million  and less than $0.1
million,  respectively,  are  included  in other  (income)  expense,  net. As of
December 31, 2004, we do not own any derivative instruments.

Inventories:

     Inventories  are stated at the lower of cost or market.  Cost is determined
using the first-in, first-out (FIFO) method for Pro Tech and is determined using
the average cost method for all other  inventories.  We assess the realizability
of inventories by periodically conducting a physical inventory and reviewing the
movement of inventory  to determine  the value of items that 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, 2003 and 2004,
our inventory reserves were $0.3 million and $0.3 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.

Deferred Charges:

     Deferred  charges,  included on the  consolidated  balance  sheets in other
assets,  primarily  represent  costs  related  to the  installation  of  digital
broadcast station systems at customer locations. Such installation costs consist
of labor costs  attributable to contractor  installation and outside  management
fees. We amortize such deferred  charges over the lesser of the estimated useful
life or the life of the site  agreement.  In the  event a site is  removed,  the

                                      F-8
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

unamortized deferred charges relating to that site are then expensed in full. In
each of the  years  ended  December  31,  2002,  2003  and  2004,  we  amortized
approximately $0.1 million of deferred charges and wrote off unamortized charges
relating to removals of approximately  $0.1 million,  less than $0.1 million and
less than $0.1 million,  respectively.  At December 31, 2003 and 2004,  deferred
charges were $0.2 million and $0.1 million, respectively.

Software Costs:

     Our  policy  is  to  capitalize  costs  in  connection  with  the  internal
development  or  purchase of computer  software  products to be sold,  leased or
otherwise marketed after  technological  feasibility has been established.  When
software costs are capitalized,  they are included in property and equipment and
amortized  over the  products'  estimated  useful  life.  During the years ended
December 31, 2003 and 2004, no software costs were capitalized.

Goodwill and Intangible Assets with Indefinite Useful Lives:

     The  excess of the  consideration  paid over the fair  value of net  assets
(including  identifiable  intangibles)  acquired  in  business  combinations  is
recorded as goodwill.  Goodwill is also recorded by us upon the  acquisition  of
some or all of the stock held by minority  shareholders of a subsidiary,  except
where such accounting is, in substance, the purchase of licenses previously sold
to such minority shareholders or their affiliates.

     We adopted SFAS No. 142, "Goodwill and Other Intangible  Assets," effective
January  1,  2002.  Under  SFAS No.  142,  we  ceased  amortizing  goodwill  and
intangible  assets  with  indefinite  useful  lives and began  testing  them for
impairment at least annually and whenever there is an impairment indicator.  All
acquired  goodwill  and  intangible  assets with  indefinite  useful  lives were
assigned to reporting units (an operating segment or a component of an operating
segment that constitutes a business for which discrete financial  information is
available)  for  purposes  of  impairment  testing and  segment  reporting.  Our
reporting  units with  goodwill  consist of NCT Hearing  and  Midcore  Software,
Inc./Artera Group,  Inc., both of which are within the communications  operating
segments,  and  Advancel  Logic  Corporation  within  the  technology  operating
segment. We have no intangible assets with indefinite useful lives. The carrying
value of our goodwill by operating segment follows:

<TABLE>
<CAPTION>

                                           (In thousands of dollars)
                       Communications        Media        Technology
                          Segment           Segment         Segment         Total
                       ---------------   -------------   -------------  --------------
<S>       <C>          <C>               <C>             <C>            <C>
Balance as of
  January 1, 2004      $     6,845       $          -    $       339    $      7,184
Goodwill acquired                -                  -              -               -
Impairment losses           (5,932)                 -              -          (5,932)
                       ---------------   -------------   -------------  --------------
Balance as of
  December 31, 2004    $       913       $          -    $       339    $      1,252
                       ===============   =============   =============  ==============
</TABLE>

     We evaluate the carrying value and period of  amortization  of our goodwill
at each balance sheet date. The factors used in the evaluation included: current
operating results,  projected future operating  results,  and any other material
factors that affect the  continuity  of the  business.  Goodwill  impairment  is
evaluated at the  reporting  unit level,  comparing  the  carrying  value of the
reporting  unit with its  estimated  fair value.  If the fair value  exceeds its
carrying  value,  no  impairment  is  recognized.  If the carrying  value of the
reporting  unit exceeds its fair value,  then the carrying value of the goodwill
is compared to the implied fair value of the goodwill. If the implied fair value
of the goodwill exceeds its carrying value, no impairment is recognized.  If the
carrying value of the goodwill exceeds its implied fair value then impairment is
recognized  to the  extent of the  excess.  We  recognized  no  impairment  upon
adoption  of SFAS  No.  142 with  respect  to our  goodwill.  We  recognized  an
impairment  charge from goodwill of $0.3 million  during the year ended December
31, 2002 in  connection  with the step  acquisition  of shares of NCT Audio (see
Note 15).

     In  our  annual  assessment  of  the  goodwill  of  and  the  value  of the
Midcore/Artera  reporting  unit  (included in the  communications  segment),  we
considered  the results of  operations  in relation  to  previous  estimates  of
activity, as well as estimates of anticipated operations. Based on our inability
to  develop  the  anticipated  lines of  businesses  and to  realize  results as
budgeted,  in  part  because  of  charges  at our  enterprise  systems  business
co-developer  during  the last  quarter  of 2004,  we have  determined,  for the
purposes  of  our  current  assessment  of  goodwill,   not  to  anticipate  the
development of additional

                                      F-9
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     lines of business.  Although we are  currently in  negotiations  with other
parties for further  development  and  utilization  of our system,  we cannot be
reasonably  assured  such  negotiations  will be  successful.  As a result,  our
assessment of the value of the reporting unit, based on existing operations,  is
not  sufficient  to  carry  the  goodwill  without  impairment.   Based  on  our
assessment,  as of December  31,  2004,  we  concluded  that the goodwill of the
Midcore/Artera reporting unit is fully impaired and we recorded an impairment of
$5.9 million.

Patent Rights and Other Intangible Assets with Finite Useful Lives:

     Under the guidelines in SFAS No. 142 and SFAS No. 144,  "Accounting for the
Impairment  or Disposal of  Long-Lived  Assets,"  intangible  assets with finite
lives are  tested for  impairment  whenever  events or changes in  circumstances
indicate that the carrying amount may not be recoverable. We test our intangible
assets with finite useful lives for  impairment  by using the  estimated  future
cash flows directly  associated with, and that are expected to arise as a direct
result of, the use of the  intangible  asset.  We do so by projecting the future
estimated revenue and costs and comparing the resultant  undiscounted cash flows
to the carrying  amount of the intangible  asset. If the carrying amount exceeds
the undiscounted cash flows, an impairment may be indicated. The carrying amount
is then  compared to the  discounted  cash flows,  and if there is excess,  such
amount is recorded as an impairment.

     We also evaluate the useful lives each reporting period. The factors we use
in evaluating the period of amortization  include:  current  operating  results,
anticipated  future operating results and any other material factors that affect
the continuity of the business. Based on our evaluation as of December 31, 2002,
we determined an impairment  was present with respect to the license  granted to
Pro  Tech.  The  resulting  impairment  charge to Pro  Tech,  on its  accounting
records,  was  $11.5  million.  Upon  consolidation  of Pro  Tech's  results  of
operations  in our  financial  statements,  we  recorded  an  impairment  in the
carrying  value of other  intangible  assets with finite  lives of $2.1  million
representing  the  minority  shareholders'  portion  of this  impairment  in our
consolidated statement of operations for the year ended December 31, 2002. Based
on our evaluation as of December 31, 2003 and December 31 2004, we determined no
impairment existed.

     Patent  rights and other  intangible  assets,  which  includes  the cost to
acquire  rights to patents and other rights under  licenses,  are stated at cost
and are amortized using the  straight-line  method over the remaining  estimated
useful lives, ranging from one to seventeen years. Amortization expense was $0.5
million,  $0.3 million and $0.1  million for the years ended  December 31, 2002,
2003 and 2004, respectively. Accumulated amortization of patent rights and other
intangible  assets was $4.3  million and $4.4  million at December  31, 2003 and
2004,   respectively.   The  other  intangibles   subject  to  amortization  are
categorized below with an estimate of the amortization expense for the next five
years.

                                            (In thousands of dollars)
                                               December 31, 2004
                                    --------------------------------------------
                                    Gross Carrying   Accumulated      Carrying
                                        Amount       Amortization      Value
                                    --------------   -------------   -----------

Amortized intangible assets
 Patents                            $       4,147    $     (3,934)   $      213
 Licensed technology                        1,330            (454)          876
                                    --------------   -------------   -----------
Total                               $       5,477    $     (4,388)   $    1,089
                                    ==============   =============   ===========


Estimated amortization expense for the years ending:
------------------------------------------------------
December 31, 2005                                         $ 140
December 31, 2006                                         $ 140
December 31, 2007                                         $ 140
December 31, 2008                                         $ 140
December 31, 2009                                         $ 140

                                      F-10
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Other Assets:

     Other  long-lived  assets are reviewed for  impairment  whenever  events or
changes in circumstances  indicate that the carrying amount of the asset may not
be  recoverable.  Recoverability  of assets to be held and used is measured by a
comparison of the carrying amount of the asset to  undiscounted  future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets  exceeded the fair value of the assets.  Assets to
be disposed of are  reported at the lower of the  carrying  amount or fair value
less the costs to sell the assets.  There were no such impairments for the years
ended December 31, 2002, 2003 and 2004.

Advertising:

     Advertising    expenses    include    commissions   paid   to   advertising
representatives and agencies and are expensed as incurred.  Advertising expenses
for the years ended  December 31, 2002,  2003 and 2004 were $0.1  million,  $0.1
million and $0.1 million, respectively, and are included in selling, general and
administrative expenses.

Comprehensive Loss:

     We report  comprehensive  loss in accordance with SFAS No. 130,  "Reporting
Comprehensive  Income." The  provisions of SFAS No. 130 require us to report the
changes in capital  deficit from all sources  during the period other than those
resulting from investments by and  distributions  to stockholders.  Accordingly,
the  consolidated  statements of  comprehensive  loss are  presented,  while the
caption  "accumulated  other  comprehensive  income  (loss)" is  included on the
consolidated   balance  sheets  as  a  component  of  capital  deficit.  Due  to
availability  of net  operating  losses and the deferred  tax benefit  resulting
therefrom  being  fully  reserved,  there is no tax effect  associated  with any
component of other  comprehensive  loss.  Comprehensive loss is comprised of net
loss and other comprehensive  income (loss).  Other comprehensive  income (loss)
includes  certain  changes in capital deficit that are excluded from net income,
including unrealized gains and losses on our  available-for-sale  securities and
foreign currency translation adjustments.

Foreign Currency Translation:

     Local currencies are generally  considered the functional  currency for our
foreign  subsidiaries.  We translate our foreign  assets and  liabilities at the
exchange  rates in effect at each balance  sheet date.  Revenue and expenses are
translated  using average rates for the year.  The  resulting  foreign  currency
translation  adjustments are included in accumulated other comprehensive  income
(loss) as a component of capital deficit. The foreign currency transaction gains
and losses are included in the  consolidated  statements of operations  and were
not material for the years ended  December 31, 2002,  2003 and 2004. The foreign
currency  translation  adjustment of $0.6 million and $1.2 million for the years
ended December 31, 2003 and 2004,  respectively,  is  attributable to our United
Kingdom operations.

Loss per Common Share:

     We report loss per common share in accordance with SFAS No. 128,  "Earnings
Per Share." The per share  effects of potential  common shares such as warrants,
options,   convertible  debt  and  convertible   preferred  stock,   aggregating
approximately 7.5 billion shares,  have not been included as the effect would be
antidilutive  (see Notes 13, 15 and 16). A number of our commitments  require us
to reserve and/or  register for resale a number of shares of our common stock in
excess of the number of shares actually issuable (see Note 15). We have received
requests for shares (162.8  million)  that we have not been able to satisfy.  As
such, we have included 3,029,608 shares (the remaining number authorized) in our
weighted  average  common shares  outstanding on the  accompanying  consolidated
statement  of  operations  for the year ended  December  31,  2004 and in shares
payable on our consolidated balance sheets at December 31, 2003 and 2004.

     When  preferred  stock is  convertible  into common  stock at an  effective
conversion rate that represents 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  stockholders and is
accounted for as an embedded  dividend to preferred  stockholders.  In addition,
when warrants are issued in conjunction  with such convertible  securities,  the
fair value of  warrants  is  determined  by applying  the  Black-Scholes  option
pricing model.

                                      F-11
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

In  accordance  with Emerging  Issues Task Force  ("EITF")  Issue No. 96-13,  as
codified  in  EITF  00-19,  these  warrants  are  considered   permanent  equity
instruments  since they may only be actually  settled  with the  issuance of our
common  stock.  The proceeds  received  from the  transaction  are  allocated in
accordance with EITF 98-05 and EITF 00-27. The allocated fair value is deemed to
be a "preferred stock beneficial  conversion  feature" and is accounted for as a
component of additional  paid-in  capital.  We have  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 us to concentration of
credit risk,  consist of cash and cash  equivalents  and trade  receivables.  We
maintain  cash  and  cash   equivalents  in  accounts  with  various   financial
institutions in amounts which, at times,  may be in excess of the FDIC insurance
limit. We have not experienced any losses on such accounts and do not believe we
are exposed to any significant risk with respect to cash and cash equivalents.

     We sell our products and services to distributors  and end users in various
industries  worldwide.   We  regularly  assess  the  realizability  of  accounts
receivable  and also take  into  consideration  the  value of past due  accounts
receivable and the collectibility of such receivables based on credit worthiness
and historic collections from past due accounts. We do not require collateral or
other security to support customer receivables. Our preference is to collect our
receivables in cash. However,  from time to time,  receivables may be settled by
securities transferred to us by the customer in lieu of cash payment.

Significant Customers:

     In each of the years  ended  December  31,  2002,  2003 and  2004,  revenue
derived  from  certain  customers  comprised  more than 10% of our  consolidated
revenue ("significant  customers").  One customer, New Transducers Ltd. ("NXT"),
was a significant  customer in the years ended December 31, 2002,  2003 and 2004
and accounted for $2.1 million in each year. In 2002, we had another significant
customer that  accounted for $1.9 million of our  consolidated  revenue for that
year.

Fair Value of Financial Instruments:

     Our 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, 2003 and 2004,
the fair value of these instruments  approximated  their carrying value (carried
at cost) because of the short maturity of the instruments.  Fair values of other
investments  classified as  available-for-sale  were  estimated  based on market
prices. The fair value of notes payable approximates the carrying value based on
interest  rates that are  currently  available  to us for  issuance of debt with
similar  terms and remaining  maturities.  The fair value of  convertible  notes
payable to Carole  Salkind is not  objectively  determinable  due to the related
party nature of these  instruments.  The face value of convertible notes held by
Carole  Salkind  at  December  31,  2003 and 2004 was  $33.8  million  and $58.1
million,  respectively.  At December 31, 2003 and 2004, these  outstanding notes
were convertible into 857.5 million and 2,823.5 million shares, respectively, of
NCT  common  stock  with a fair  value  of  $34.3  million  and  $55.1  million,
respectively.

Stock-Based Compensation:

     We have adopted the disclosure only provisions of SFAS No. 123, "Accounting
for  Stock-Based  Compensation,"  as amended by SFAS No.  148,  "Accounting  for
Stock-Based  Compensation  - Transition and  Disclosure,"  and continue to apply
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees,"  and related  interpretations  in accounting for our  stock-based
compensation  plans.  Under APB No. 25, no compensation  costs are recognized if
the option  exercise  price is equal to or greater than the fair market price of
the common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at the date of grant using the  Black-Scholes  option  pricing  model and
compensation   costs  are  recognized   ratably  over  the  vesting  period.  No
stock-based employee compensation cost is reflected in our net loss attributable
to common  stockholders,  as options  granted  under our plans have an  exercise
price equal to or greater than the market value of the  underlying  common stock
on the date of grant.  Had  compensation  costs been determined as prescribed by
SFAS

                                      F-12
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

No. 123, our net loss attributable to common stockholders and net loss per share
would have been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                              (In thousands of dollars, except per share amounts)
                                                                       For the Years Ended December 31,
                                                            ---------------------------------------------------------
                                                                  2002                2003                 2004
                                                            -----------------   -----------------   -----------------
<S>                                                          <C>                <C>                 <C>
Net loss attributable to common stockholders                 $       (42,968)   $        (33,248)   $        (71,714)
Total stock-based employee compensation
  expense determined under fair value based
  method for all awards, net of related tax effects                   (1,696)             (1,077)             (1,285)
                                                            -----------------   -----------------   -----------------
Pro forma net loss attributable to common stockholders      $        (44,664)   $        (34,325)   $        (72,999)
                                                            =================   =================   =================
Net loss per common share (basic and diluted):
   As reported                                              $          (0.10)   $          (0.06)   $          (0.11)
                                                            =================   =================   =================
   Pro forma                                                $          (0.10)   $          (0.06)   $          (0.11)
                                                            =================   =================   =================
</TABLE>

     The  weighted-average  fair  values  at date of grant for  options  granted
during the years ended  December 31, 2002,  2003 and 2004 were $0.06,  $0.04 and
$0.03,  respectively,  and were estimated using the Black-Scholes option pricing
model with the following weighted-average assumptions:

                                           Years ended December 31,
                             --------------------------------------------------
                                  2002             2003               2004
                                  ----             ----               ----
Expected life in years              3.5              3.5                3.5
Interest rate                2.50%-3.61%            2.25%         1.94% - 3.16%
Volatility                          100%             100%             100%
Dividend yield                        0%               0%               0%

Recent Accounting Pronouncements:

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43," which is the result
of its  efforts to converge  U.S.  accounting  standards  for  inventories  with
International  Accounting  Standards.   SFAS  No.  151  requires  idle  facility
expenses,  freight,  handling cost and wasted  material  (spoilage)  costs to be
recognized as current-period  charges. It also requires that allocation of fixed
production  overhead to the costs of conversion be based on the normal  capacity
of the production facilities. SFAS No. 151 will be effective for inventory costs
incurred  during fiscal years  beginning  after June 15, 2005. We are evaluating
the impact of this standard on our consolidated financial statements.

     In December 2004,  the FASB issued SFAS No. 153,  "Exchanges of Nonmonetary
Assets--an amendment of Accounting Principles Board Opinion No. 29." that amends
Opinion No. 29 to eliminate the exception for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial  substance if the future cash flows of the entity are expected to
change  significantly  as a  result  of the  exchange.  The  provisions  of this
statement are  effective for  non-monetary  asset  exchanges for fiscal  periods
beginning after June 15, 2005. We believe the adoption of SFAS 153 will not have
an impact on our results of operations.

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standard No. 123 (Revised 2004) "Share-Based
Payment"  ("SFAS No.  123R") that  prescribes  the  accounting  for  share-based
payment  transactions in which a company receives  employee services in exchange
for (a) equity  instruments of the company or (b) liabilities  that are based on
the fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments.

     SFAS No. 123R addresses all forms of share-based payment awards,  including
shares issued under  employee stock purchase  plans,  stock options,  restricted
stock and stock  appreciation  rights.  SFAS No. 123R  eliminates the ability to
account  for  share-based  compensation  transactions  using APB Opinion No. 25,
"Accounting

                                      F-13
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

for Stock Issued to Employees,"  that was previously  allowed under SFAS No. 123
as  originally  issued.  Under SFAS No. 123R,  companies  are required to record
compensation expense for all share based payment award transactions  measured at
fair value. This statement is effective for quarters ending after June 15, 2005.
We have not yet determined the impact of applying the various provisions of SFAS
No. 123R.

3.   Acquisitions:

     We acquired a 25% interest  (4,000 shares) in DMC New York, Inc. ("DMC NY")
on April  12,  2001 for $4.0  million.  The  consideration  consisted  of a $1.0
million  convertible note issued to Crammer Road LLC, $1.0 million cash and $2.0
million of our common stock (13.3 million shares). In June 2002, we acquired the
remaining  12,000  shares (75%) of the  outstanding  capital  stock of DMC NY in
exchange for 1,800  shares of our series H preferred  stock and $0.1 million net
proceeds  from  Crammer  Road (see Note 16). DMC NY was the owner of 16 licenses
previously purchased from our subsidiary,  Distributed Media Corporation ("DMC")
in 1999. The purchase of the remaining 75% of DMC NY was valued at the estimated
fair value of the NCT common stock  underlying  our series H preferred  stock of
$23.2  million  ($18  million  stated  value  and  approximately   $5.2  million
representing the additional fair value resulting from the conversion rate of 75%
of the fair market value, as defined,  of NCT common stock into which the series
H preferred stock is convertible).  Because DMC NY had not commenced operations,
we recorded an  aggregate  charge of $9.2 million for this  acquisition  for the
year ended  December  31,  2002  classified  on our  consolidated  statement  of
operations as write downs of investment and  repurchased  licenses,  net. DMC NY
has not  recorded  any  revenue  and apart from its New York  metropolitan  area
license  rights,  has no other assets or operations.  The aggregate cost for our
acquisition  of these 16,000 shares was $27.2  million.  The purchase  price was
arrived at in various  negotiations  between  NCT and Crammer  Road.  We did not
obtain an  independent  valuation.  There were no  operations  conducted for the
years ended December 31, 2003 and 2004.

     Our acquisition of DMC NY is summarized as follows:

<TABLE>
<CAPTION>

                                                  DMC New York
 Date              Consideration                 Shares Acquired      % Interest     Acquisition Price
 ----              -------------                 ---------------      ----------     -----------------
<S> <C>     <C>                                          <C>                <C>           <C>
4/12/01   $1.0 million cash                            1,000              6.25%         $1.0 million
4/12/01   $1.0 million note                            1,000              6.25%         $1.0 million
4/12/01   13.3 million shares common stock             2,000             12.50%         $2.0 million
6/24/02   1,800 shares series H preferred stock       12,000             75.00%        $23.2 million
</TABLE>

4.   Marketable Securities:

     Investment in marketable securities comprises available-for-sale securities
at fair market value. The following table sets forth the market value,  carrying
value,  and  realized  and  unrealized  gain  (loss)  of our  available-for-sale
securities:

                              (In thousands of dollars)
               Cost                       Market                    Market
               Basis      Unrealized      Value      Unrealized     Value
             01/01/03    Gain (Loss)     12/31/03    Gain (Loss)   12/31/04
             ----------  ------------  ------------  ------------  ----------

ITC          $      94   $       (56)  $        38   $       (28)  $      10
Teltran              8             3            11             3          14
             ----------  ------------  ------------  ------------  ----------
Totals       $     102   $       (53)  $        49   $       (25)  $      24
             ==========  ============  ============  ============  ==========

     We review  declines in the value of our  investment  portfolio when general
market conditions change or specific information pertaining to an industry or an
individual company becomes  available.  For the year ended December 31, 2002, we
recorded   impairment  charges  of  approximately   $0.8  million   representing
other-than-temporary declines in the value of marketable securities. At December
31, 2004, a net unrealized loss of $0.1 million was included on the consolidated
balance sheet as part of accumulated other comprehensive income (loss).

                                      F-14
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

5.   Accounts Receivable:

                                                    (In thousands of dollars)
                                                          December 31,
                                                  ------------------------------
                                                      2003             2004
                                                  -------------    -------------
Technology license fees and royalties             $       278      $       472
Joint ventures and affiliates                              34               34
Other receivables                                         284              375
                                                  -------------    -------------
                                                  $       596      $       881
Allowance for doubtful accounts                          (341)            (353)
                                                  -------------    -------------
   Accounts receivable, net                       $       255      $       528
                                                  =============    =============

6.   Inventories:

                                                    (In thousands of dollars)
                                                          December 31,
                                                  ------------------------------
                                                      2003             2004
                                                  -------------    -------------
Finished goods                                    $       588      $       491
Components                                                203              215
                                                  -------------    -------------
                                                  $       791      $       706
Reserve for obsolete and slow moving inventory           (282)            (342)
                                                  -------------    -------------
   Inventories, net                               $       509      $       364
                                                  =============    =============

     At  December  31, 2003 and 2004,  net  inventories  determined  by the FIFO
method were $494,000 and $344,000,  respectively, and net inventories determined
by the average cost method were $15,000 and $20,000,  respectively.  The reserve
is primarily for finished goods at December 31, 2003 and 2004.

7.   Property and Equipment:

                                                    (In thousands of dollars)
                                                          December 31,
                                                  ------------------------------
                                                      2003             2004
                                                  -------------    -------------
Machinery and equipment                           $     1,210      $     1,284
Furniture and fixtures                                    622              585
Tooling                                                   632              494
Leasehold improvements                                    392              394
Other                                                     429              433
                                                  -------------    -------------
                                                  $     3,285      $     3,190
Accumulated depreciation                               (2,644)          (2,720)
                                                  -------------    -------------
   Property and equipment, net                    $       641      $       470
                                                  =============    =============

     Depreciation  expense for the years ended December 31, 2002,  2003 and 2004
was $0.9 million, $0.4 million and $0.1 million, respectively.

                                      F-15
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

8.   Other Assets:

                                                    (In thousands of dollars)
                                                          December 31,
                                                  ------------------------------
                                                      2003             2004
                                                  -------------    -------------
Notes receivable                                  $     1,000      $     1,000
Due from officers (Note 20)                               138              127
Other                                                     172              223
                                                  -------------    -------------
                                                  $     1,310      $     1,350
Reserve for uncollectible amounts (a)                  (1,000)          (1,102)
                                                  -------------    -------------
   Other current assets                           $       310      $       248
                                                  =============    =============


Marketable ITC securities (b)                     $     1,320      $         -
Advances and deposits                                      73               70
Deferred charges                                          223               50
                                                  -------------    -------------
   Other assets (classified as long term)         $     1,616      $       120
                                                  =============    =============

Footnotes:
---------
(a)  On January 9, 2001,  Artera  Group,  Inc.  accepted  an  aggregate  of $1.0
     million of non-recourse,  non-interest bearing notes receivable due January
     2, 2002, as partial consideration for its January 9, 2001 convertible notes
     payable  to six  accredited  investors.  The notes are fully  reserved  and
     remain  unpaid at December  31,  2004 (see Note 11).  In 2004,  the reserve
     increased  anticipating  non-collection  of amounts due from  officer.  The
     portion of the reserve related to the note receivable from the (now former)
     officer (plus accrued interest) is in excess of the amount owed to him (see
     Note 20).
(b)  Valued  at  agreed  amount  of  $5.00  per  share  returnable  to  Infinite
     Technology  Corporation ("ITC") in settlement of obligation at December 31,
     2003. In March 2004,  the parties  entered into a  cross-release  agreement
     resulting  in  the  elimination  of the  obligation  and  reduction  of the
     carrying value of the marketable securities (see Note 14).

9.   Accrued Expenses:

                                                    (In thousands of dollars)
                                                          December 31,
                                                  ------------------------------
                                                      2003             2004
                                                  -------------    -------------
Non-conversion fees due to a related party        $         -      $     3,972
Non-registration fees due to a related party                -            1,446
Interest due to a related party                           818            1,012
Consulting fees due to a related party                    310              483
Incentive compensation due to officers                    927            1,832
                                                  -------------    -------------
   Accrued expenses-related party                 $     2,055      $     8,745
                                                  =============    =============

Non-registration fees                             $     3,147      $     4,436
Interest                                                1,484            1,458
Judgments                                               2,072                -
Commissions payable                                        75              372
Other                                                   4,966            3,596
                                                  -------------    -------------
   Accrued expenses-other                         $    11,744      $     9,862
                                                  =============    =============

                                      F-16
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

10.  Notes Payable:

<TABLE>
<CAPTION>

                                                                                    (In thousands of dollars)
                                                                                           December 31,
                                                                                   ----------------------------
                                                                                       2003            2004
                                                                                   -------------   ------------
<S>                                                                                <C>             <C>
Logical eBusiness Solutions Limited (f/k/a DataTec) (a)                            $    2,679      $        -
   Obligation of subsidiary to a prior owner of Web Factory;
   past due; payable in 1,500,000 British Pounds Sterling;
   interest accrues at 4% per annum above the base rate
   of National Westminister Bank plc. The debt extinguished upon
   dissolution of Artera International (see Note 18).
Note due investor                                                                         385             385
   Interest at 8% per annum payable at maturity;  effective interest rate
   of 80.3% per annum resulting from the issuance of warrants and finders
   fees; matured April 7, 2003 (a); default interest accrues at 18% per annum.
Note due stockholder of subsidiary                                                        142              40
   Interest at 8.5% per annum; monthly payments (including interest)
   of $3.5 through May 2005, as revised, remainder matures June 27, 2005.
Note  due former employee                                                                 100             100
   $100 bears interest at 8.25% per annum, compounded annually;
   past due (a).
Other financings                                                                           97              78
   Interest ranging from 7% to 9% per annum;
    $35 due July 15, 2003 (a); $62 and $16 all other.

                                                                                   -------------   -------------
                                                                                   $    3,403      $      603
                                                                                   =============   =============
</TABLE>

Footnote:
--------
(a) Notes payable in default due to non-payment.

                                      F-17
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

11.  Convertible Notes Payable:

<TABLE>
<CAPTION>

                                                                                        (In thousands of dollars)
                                                                                              December 31,
                                                                                      -----------------------------
Related Party Convertible Notes:                                                           2003           2004
                                                                                      -------------   -------------
<S>                                      <C>                                          <C>             <C>
Issued to Carole Salkind - (a) (see Note 20)                                          $    33,824     $   58,120
Weighted average effective interest rate of 89.7% per annum; accrues
interest 8% per annum except $5,000 at 12%; collateralized by substantially all
of the assets of NCT; convertible into NCT common stock at prices ranging
from $0.0166 - $0.0296 or exchangeable for common stock of NCT
subsidiaries except for Pro Tech; maturing by quarter as follows:
                                  2003          2004
                               ------------------------
     On demand                  $  3,050      $      -
     March 31, 2004               11,163             -
     June 30, 2004                19,611
     June 30, 2005                              26,408
     September 30, 2005                         26,712
     December 31, 2009                           5,000
Less: unamortized debt discounts                                                           (5,174)       (12,555)
                                                                                      -------------   -------------
                                                                                      $    28,650     $   45,565
Less: amounts classified as long-term                                                           -         (5,000)
                                                                                      -------------   -------------
                                                                                      $    28,650     $   40,565
                                                                                      =============   =============


                                                                                        (In thousands of dollars)
                                                                                               December 31,
                                                                                      -----------------------------
Convertible Notes:                                                                        2003           2004
                                                                                      -------------   -------------
8% Convertible Notes (b)                                                              $     1,651     $    2,641
Weighted average effective interest rate of 30.8% per annum;
generally convertible into NCT common stock at 80% of the five-day
average closing bid price preceding conversion; past due: matures:
                              2003           2004
                          ------------   ------------
     March 14, 2002       $       17     $       17
     April 12, 2002                9              9
     January 10, 2004            550            550
     March 11, 2004              400            400
     April 22, 2005              235            235
     September 4, 2005           440            440
     July 23, 2006                 -            990

6% Convertible Notes (c)                                                                    2,474          2,474
Weighted average effective interest rate of 85.8% per annum;
convertible into NCT common stock at 100% of the five-day average
closing bid price preceding conversion; past due:
                              2003           2004
                          ------------   ------------
     January 9, 2002      $      818     $      818
     April 4, 2002               325            325
     May 25, 2002                 81             81
     June 29, 2002             1,250          1,250
                                                                                      -------------   -------------
                                                                                      $     4,125     $    5,115
Less: unamortized debt discounts                                                              (12)          (602)
Less: amounts classified as long-term                                                        (675)             -
                                                                                      -------------   -------------
                                                                                      $     3,438     $    4,513
                                                                                      =============   =============
</TABLE>

                                      F-18
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Footnotes:
---------
(a)  Since  1999,   we  have  issued   convertible   notes   collateralized   by
     substantially all of our assets to Carole Salkind, a stockholder and spouse
     of a former  director of NCT. In 2002 we recorded  original issue discounts
     of $2.8  million to the notes  issued to her based upon the  relative  fair
     values  of the  debt and  warrants  granted  to Ms.  Salkind  and  recorded
     discounts  of  $1.6  million  for  warrants  issued  as  consideration  for
     irrevocable  waivers relating to Pro Tech common stock whereby the original
     instrument was a convertible  note or warrant issued in conjunction  with a
     convertible note. In addition, beneficial conversion features totaling $3.1
     million  were  recorded as a discount to the notes.  These  discounts  were
     amortized  over the term of the related  notes.  During 2003,  we issued an
     aggregate of $41.7 million of convertible  notes as consideration for $10.4
     million  of cash,  rollover  of $23.9  million  in  principal  for  matured
     convertible  notes  (includes all of the notes  outstanding at December 31,
     2002) and $3.1 million for  convertible  notes  consolidated  in advance of
     maturity,  $1.9 million of interest, and $2.4 million of default penalties.
     We recorded  original  issue  discounts  of $4.8 million to the notes based
     upon the  relative  fair  values of the debt and  warrants  granted  to Ms.
     Salkind and recorded discounts of $1.0 million for consideration related to
     the consolidation of convertible notes. In addition,  beneficial conversion
     features  totaling  $6.0 million were  recorded as a discount to the notes.
     These  discounts were amortized over the term of the related notes.  During
     2004,  we issued an  aggregate  of $91.8  million of  convertible  notes as
     consideration  for $9.1  million  of cash,  rollover  of $67.5  million  in
     principal  for matured  convertible  notes or demand notes for which demand
     had been made, $3.4 million of interest,  $6.8 million of default penalties
     and $5.0 million as  consideration  for  settlement of PRG claims (see Note
     22). We recorded  original  issue  discounts of $21.9  million to the notes
     based upon the relative fair values of the debt and warrants granted to Ms.
     Salkind. In addition, beneficial conversion features totaling $23.3 million
     have been  recorded as a discount to the notes.  These  discounts are being
     amortized over the term of the related notes.  For the years ended December
     31, 2002,  2003 and 2004,  $4.9 million,  $10.5 million and $37.8  million,
     respectively,  of amortization  related to these discounts is classified as
     interest expense in our consolidated statements of operations.  Unamortized
     discounts of $5.2 million and million have been reflected as a reduction to
     the face value of convertible notes in our consolidated balance sheet as of
     December 31, 2003 and 2004,  respectively.  The default provisions in these
     notes  impose a penalty of 10% of the  principal  payments  in default  and
     default  interest  from the date of default on the  principal in default at
     the stated interest rate plus 5%. As of December 31, 2003 and 2004, none of
     the notes outstanding is in default.  Because we had defaulted on repayment
     of all of the  notes  as they  matured  during  2002,  2003  and  2004,  an
     aggregate  default penalty  expense of $0.4 million,  $2.1 million and $6.8
     million,  respectively,  has been reflected in our statements of operations
     in other income (expense).

(b)  Notes  totaling  $26,000 are  convertible  at 80% of the lowest closing bid
     price of our common stock for the five days  preceding  conversion;  a note
     totaling $0.6 million is convertible at the lower of $0.07 per share or 80%
     of the lowest closing bid price for the five days preceding  conversion;  a
     note  totaling  $0.4 million is  convertible  at $0.0647 per share;  a note
     totaling $0.2 million is  convertible at $0.04 per share and notes totaling
     approximately  $0.4  million are  convertible  at 80% of the average of the
     closing bid price for the five days preceding conversion.

     On July 23, 2004, we issued subordinated  collateralized  convertible notes
     for an  aggregate  principal  amount  of  $0.9  million.  These  notes  are
     collateralized by substantially  all of our assets. In addition,  we issued
     unsecured convertible notes to finders in the aggregate principal amount of
     $0.1 million.  The net proceeds of approximately $0.9 million were used for
     working  capital  requirements.  The notes mature on July 23, 2006 and bear
     interest at 8% per annum, payable at maturity.  Until the notes are paid in
     full,  the holders have the right to convert any  outstanding  principal of
     the notes and, at their  election,  the interest  accrued on the notes into
     shares of our common stock at a conversion price per share of the lesser of
     $0.0232 or 80% of the  average of the  closing  bid price for the five days
     immediately  preceding  conversion.  Discount features were recorded to the
     notes  representing  the fair value of warrants issued in conjunction  with
     the  issuance of debt and are being  amortized  over the term of the notes.
     For the year ended December 31, 2004, $0.1 of amortization related to these
     discounts is classified as interest expense in our consolidated  statements
     of operations.

     The convertible  note for $0.6 million is  collateralized  by substantially
     all  of the  assets  of  our  subsidiary,  Artera  Group,  Inc.  Beneficial
     conversion  features were recorded as a discount to the notes and are being

                                      F-19
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     amortized over the term of the notes. For the year ended December 31, 2004,
     approximately  $11,000  of  amortization  related  to  these  discounts  is
     classified  as  interest   expense  in  our   consolidated   statements  of
     operations. We did not fulfill registration obligations and settled finance
     costs  associated  with   non-registration   of  common  shares  underlying
     convertible notes during 2003 and 2004.

     We are in default on convertible  notes  aggregating  $1.0 million due to a
     cross-default provision and non-payment.  In addition, we are in default on
     convertible   notes  aggregating  $0.6  million  due  to  a  cross  default
     provision.  We are also  default  on  convertible  notes  aggregating  $1.0
     million effective August 31, 2004 due to our inability to reserve shares of
     our common stock issuable upon conversion of these notes.

(c)  The cash  consideration  for the 6%  convertible  notes  issued to multiple
     investors  by Artera  Group,  Inc.  aggregated  $2.9  million,  net of $0.1
     million in  expenses,  of which $0.6  million was  received in 2000.  Other
     consideration consisted of Pro Tech common stock valued at $0.5 million and
     non-recourse  notes receivable of $1.0 million (see Note 8). Original issue
     discounts  aggregating $3.0 million due to the difference  between the face
     amount  of the  notes  and the  consideration  received  were  recorded  as
     discounts to the notes.  These discounts were amortized to interest expense
     over the term of the  respective  notes.  For the years ended  December 31,
     2002,  2003  and  2004,  respectively,  $0.2  million,  zero  and  zero  of
     amortization  related to these discounts is classified as interest  expense
     in our consolidated statements of operations. No unamortized discounts have
     been reflected as a reduction to the convertible  notes in our consolidated
     balance  sheets as of  December  31, 2003 and 2004.  On January  10,  2002,
     substantially all of the assets of our subsidiary, Artera Group, Inc., were
     made collateral for three holders of notes with principal  aggregating $3.1
     million.  As a result of exchanges for $1.8 million,  at December 31, 2003,
     the  principal  for these three holders  aggregated  $1.3 million.  We have
     recorded finance costs associated with non-registration of common shares of
     approximately $2.6 million, $2.0 million and $0.8 million in finance  costs
     included in other  (income)  expense,  net for the years ended December 31,
     2002, 2003 and 2004, respectively,  (see Note 17). The company settled $0.8
     million of accrued  interest  payable  and  approximately  $4.6  million of
     accrued  non-registration  fees  payable  on  convertible  notes  with four
     holders  through  April 7, 2003 by issuance  of shares of its common  stock
     (see Note 15). The notes included in the  settlement are accruing  interest
     from April 7, 2003 at the  stated  rate of 6%.  The  aggregate  outstanding
     principal  amount  of   approximately   $2.5  million  is  in  default  for
     non-payment.  These notes are senior debt of our subsidiary,  Artera Group,
     Inc.

12.  Deferred Revenue:

     New  Transducers  Ltd.  ("NXT"),  a wholly-owned  subsidiary of NXT plc. On
March 30, 2001, NXT plc, NXT, NCT Audio and NCT entered into several  agreements
terminating previous agreements from 1997 to 1999. Under the new agreements, NCT
received  2.0  million  ordinary  NXT  plc  shares  in  consideration   for  the
cancellation of the 6% royalty  payable by NXT to NCT Audio.  The NXT plc shares
issued had a value of  approximately  $9.2 million.  Additionally,  ownership of
certain intellectual  property,  the rights to which had been previously granted
to NXT,  was  transferred  to NXT.  NXT has  licensed to NCT certain NXT and all
NCT-developed  intellectual property. A side letter with NXT was entered into on
or about  March  30,  2001,  whereby  NCT  agreed to pay NXT $0.6  million  as a
non-refundable  design fee related to Gekko  loudspeakers.  The design fee was a
prepayment  of royalties due under the  four-year  term of this side letter.  We
offset the $9.2  million  license fee due NCT with the $0.6  million  design fee
owed to NXT resulting in $8.6 million of deferred revenue.  The deferred revenue
balance  is  being  recognized  on  a  straight-line  basis  over  the  specific
performance  period of four years,  $2.1  million of revenue was  recognized  in
2002,  2003 and 2004.  As of December 31, 2004,  we do not expect to realize any
additional cash from revenue that has been deferred.

13.  Shares of Subsidiary Subject to Exchange into a Variable Number of Shares:

     Upon  adoption of SFAS No. 150 on July 1, 2003,  an aggregate of 550 shares
of Pro Tech series A and B convertible  preferred  stock were  outstanding  with
exchange  rights into NCT common  stock then valued at $0.6  million,  which was
reclassified  from minority  interest in  consolidated  subsidiaries  to current
liabilities  on our  consolidated  balance  sheet  at a  monetary  value of $0.7
million.  An adjustment of monetary value on subsidiary  shares of approximately
$0.1 million was charged to additional paid-in capital to reflect the fair value
of the shares required to be issued upon exchange.

                                      F-20
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     For the years  ended  December  31,  2003 and 2004,  we  calculated  the 4%
dividends  earned by holders of the Pro Tech series A and B  preferred  stock at
approximately $11,000 and $21,000, respectively.  Following adoption of SFAS No.
150 on July 1, 2003, this amount is included in interest expense.

     The  monetary  value of Pro Tech  series A and B  preferred  stock was $0.7
million  in our  consolidated  balance  sheet at  December  31,  2004,  which is
comprised of approximately  $0.6 million of shares plus the accrued dividends of
approximately  $89,000. We would have to issue approximately 37.3 million shares
of our common stock if settlement of the stated value plus accrued dividends had
occurred at December 31, 2004. There is no limit on the number of shares that we
could  be  required  to  issue  upon  exchange  of the Pro  Tech  series A and B
preferred stock.

14.  Other Liabilities:

<TABLE>
<CAPTION>

                                                              (In thousands of dollars)
                                                                    December 31,
                                                           --------------------------------
                                                                2003             2004
                                                           --------------   ---------------
<S>                                                        <C>              <C>
License reacquisition payable                              $       4,000    $        4,000
Royalty payable                                                    1,679             1,679
Development fee payable                                              650               650
Due to selling shareholders of Theater Radio Network                 557               557
Due to Lernout & Hauspie                                             100               100
Loan advance by investor                                             230                 -
Other                                                                 11                 4
                                                           --------------   ---------------
  Other current liabilities                                $       7,227    $        6,990
                                                           ==============   ===============


Due to ITC (Note 8)                                        $       1,422    $            -
Other                                                                114                63
                                                           --------------   ---------------
  Other liabilities (classified as long term)              $       1,536    $           63
                                                           ==============   ===============

</TABLE>

     License  reacquisition  payable at each of  December  31,  2003 and 2004 is
comprised of $4.0 million for the cost of  reacquiring  DMC licenses  from three
licensees.

     On August 29, 2000,  we acquired 100% of the  outstanding  capital stock of
Midcore Software, Inc. In connection therewith, we initially issued to Midcore's
selling stockholders 13,913,355 restricted shares of our common stock based upon
a ten-day  volume-weighted  average closing bid price of $0.34626 per share, for
an aggregate  value of $4.8  million.  In addition,  the purchase  consideration
included  $1.8 million to be paid by us in cash,  over 36 months,  the timing of
which was based upon  earned  royalties.  If after  August 29,  2003,  the total
royalty  had not  been  earned,  or if  earned  but not  fully  paid,  then  the
recipients could elect at their discretion either to continue to receive payment
of the royalties in accordance with the merger agreement,  or receive the unpaid
balance in the form of our common  stock.  On August 29,  2000,  we recorded the
entire $1.7 million  obligation  as a  liability.  On  September  23, 2003,  the
founding  stockholders  of Midcore  made an  election  to accept  payment of the
remaining  royalty  due  them  in our  common  stock.  Prior  to  the  election,
approximately  $46,000  of  the  liability  had  been  paid.  The  election  and
calculation  of the number of shares  was  provided  for in the August 29,  2000
agreement under which we acquired Midcore and is based upon the  volume-weighted
average  closing  bid price for the ten days  immediately  preceding  August 29,
2003, or $0.04914 per share.  We are  obligated to issue 34.2 million  shares of
our common stock to fulfill its remaining  royalty  obligation which is included
in other current liabilities as royalty payable at December 31, 2003 and 2004 on
our consolidated balance sheets.

     The merger  agreement  provided  that we had an obligation to register with
the Securities and Exchange  Commission ("SEC") a specified amount of $2,467,639
in shares of our common  stock  issued to the Midcore  selling  stockholders  at
closing. In the event that our volume-weighted, average trailing ten-day closing
bid  price  declined  before  we  requested  effectiveness  of our  registration
statement,   we  were  required  to  issue  additional  shares  to  the  selling
stockholders  to  provide  them the  specified  amount.  We refer to this  price
guaranty  provision as the fill-up

                                      F-21
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

provision. Of the shares initially issued,  7,126,548 shares of our common stock
were to be registered  based upon a  volume-weighted,  average  trailing ten-day
closing  bid price of  $0.34626.  Due to the fill-up  provision,  on February 9,
2001, we issued 2,863,894  additional  shares of our common stock to the selling
stockholders  based  upon the  closing  bid price of  $0.2470 to make up for the
diminished value of their shares.  The issuance of the additional shares did not
affect the cost of the acquired company. In addition,  we are obligated to issue
26.2  million  shares (the look back shares) of NCT common stock to the founding
stockholders  of Midcore because the value of shares issued upon the acquisition
of  Midcore,  related to a price  guarantee,  was less than $1.5  million on the
third  anniversary of the acquisition.  This issuance of additional common stock
based on a reduction in security  prices did not affect the cost of the acquired
company in accordance  with SFAS No. 141as we will record the current fair value
of the additional shares issued and simultaneously  reduce the amount previously
recorded for shares issued at the date of acquisition.

     Midcore's founding stockholders have taken legal action against us relating
to the royalty  and look back  obligations  (see Note 22).  We remain  unable to
issue the shares  until an  increase in the number of  authorized  shares of our
common stock is approved by our stockholders.

     On  September  28,  2000,  NCT  Video  Displays,   Inc.,  our  wholly-owned
subsidiary,  entered  into a product  development  and  license  agreement  with
Advanced Display Technologies,  LLC ("ADT"). Under the agreement,  NCT Video was
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,  including certain  electronic outdoor
billboard displays that utilize a laser or light beam scanning  methodology.  On
May 4, 2001,  NCT Video and ADT (by then known as ViewBeam  Technology,  L.L.C.)
entered into a product and development agreement that modified the September 28,
2000  agreement.  Some of the  provisions  of the original  agreement  remain in
effect.  The agreement does not materially  modify or change the development fee
to be paid by NCT Video but does modify the specifications of the product design
and the field of use to which the  September  28,  2000  exclusive  license  was
granted.  Such license had a carrying amount of $0.7 million and $0.7 million at
December 31, 2003 and 2004,  respectively.  The amount  represents  our cost for
ADT's  completion of this product  development and resultant  license rights and
subsequent modification and is being amortized over the estimated useful life of
nine years. In addition,  as part of this  agreement,  NCT Video and ADT 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 $1.0 million for performing
such  development  work. At each of December 31, 2003 and 2004, $0.7 million was
included in other current liabilities.

     On August 18, 2000, we acquired from the five sole  stockholders of Theater
Radio  Network,  Inc.  100% of the  outstanding  capital  stock of Theater Radio
Network,  a provider of  in-theater  audio  advertising  in  multiplex  cinemas,
through DMC Cinema, then a newly formed subsidiary of NCT's subsidiary, DMC. The
acquisition included our issuance of restricted shares of NCT common stock and a
7.5% equity  interest in DMC Cinema.  The  purchase  agreement  provided  that a
specified  amount of $2,395,000 in shares of NCT common stock would be issued to
the  selling  stockholders.   We  had  an  obligation  to  register  the  shares
represented by this specified amount. In the event that our trailing  twenty-day
closing bid price declined before we requested effectiveness of the registration
statement  from the SEC,  we were  required  to issue  additional  shares to the
selling  stockholders  to provide them the  specified  amount.  We refer to this
provision as the fill-up provision.  We initially issued 7,405,214 shares of our
common stock based upon a trailing  twenty-day closing bid price of $0.3376.  Of
such  shares,  311,019  shares  were  issued  to the  placement  agent  for  the
transaction for services rendered,  aggregating $105,000.  The placement agent's
shares were not subject to the fill-up provision.  Due to the fill-up provision,
in February 2001, we issued 2,455,248  additional  shares of NCT common stock to
the five selling stockholders based upon a trailing twenty-day closing bid price
of $0.2508 to make up for the diminished  value.  The issuance of the additional
shares did not affect the cost of the acquired company.

     We may be required  to issue  additional  shares of our common  stock as an
earnout based upon cumulative revenue of Theater Radio Network (DMC Cinema). The
selling stockholders have demand registration rights for these earnout shares.

     On May 8,  2000,  as  amended  effective  June  30,  2000,  Advancel  Logic
Corporation   ("Advancel")  entered  into  a  license  agreement  with  Infinite
Technology  Corporation  ("ITC").  Under the  agreement,  Advancel  granted  ITC
exclusive  rights  to  create,  make,  market,  sell and  license  products  and
intellectual  property based upon Advancel's

                                      F-22
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Java  Turbo-J  technology.  Advancel  also granted ITC  non-exclusive  rights to
Advancel's Java smartcard core. In consideration  for this license,  we received
1.2 million  shares of ITC's common  stock,  valued at $6.0  million  determined
using the quoted  price of the stock on the date the shares were  received,  and
on-going  unit  royalties.  With the  exception  of specific  rights  granted to
STMicroelectronics  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.

     Effective June 30, 2000, in conjunction with this license  agreement,  NCT,
Advancel and ITC entered into a strategic  alliance and  technology  development
amendment pursuant to which NCT would fund research and engineering  development
related to microprocessor  and  semiconductor  chips for which NCT would pay ITC
$2.5 million.  NCT 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 did not  receive  $2.5  million in  proceeds  from the sale of the NCT
shares,  NCT was  required to make up any  shortfall  in cash or return to ITC a
sufficient  number of ITC shares of common  stock  received  by NCT as  outlined
above.  The value NCT would  receive  upon return of the ITC shares would be the
agreed  value of $5.00 per share,  the market  value of the ITC shares  when NCT
received  them.  Conversely,  if ITC received  $2.5 million in proceeds from the
sale of NCT shares and there were NCT shares remaining, ITC would have to return
the unsold  share  excess to NCT.  At each of December  31,  2003 and 2004,  the
shortfall  based  upon  the  sales of NCT  common  stock  reported  to us by ITC
amounted to $1.4 million,  included in other  liabilities.  Although the license
agreement and the strategic alliance and technology development amendment,  both
with ITC,  are  separate  and  unrelated,  we  determined  that  they  should be
accounted for as a single  transaction,  thus,  both agreements are combined for
financial reporting  purposes.  Prepaid research and engineering costs have been
recognized in expense as these  services are performed by ITC.  These costs were
billed by ITC based on the  number of hours  spent by ITC  personnel  developing
this chip during each period. In addition,  we recognized license fee revenue in
amounts to match the research and engineering expense recognized.  The strategic
alliance  and  technology  development  amendment  does  not  have a  definitive
expiration  date. For each of the years ended December 31, 2002,  2003 and 2004,
we did not recognize  license fee revenue or research and  engineering  expenses
related to ITC.

     On March 31,  2004,  ITC,  Advancel  and NCT entered  into a  cross-release
agreement that released the parties from any and all claims, through the date of
the cross-release under prior agreements and affirms the ownership of ITC common
stock (see Notes 4 and 8). The  agreement  resulted in the  elimination  of $1.4
million as an obligation of Advancel and the reduction in the carrying amount of
the ITC common stock to its fair value.

15.  Capital Stock:

Authorized Capital Stock:

     We have authorized 645 million shares of common stock,  $0.01 par value per
share, and 10 million shares of preferred stock, $0.10 par value per share.

Common shares available for future issuance

     At  December   31,  2004,   we  were   required  to  reserve  for  issuance
approximately  8.5 billion  shares of our common stock based on the market price
of $0.0195 per share on that date (or the discount  therefrom as provided  under
applicable  exchange or conversion  agreements).  The number of shares  issuable
upon  conversion  or  exchange  of  many  of  our  outstanding  convertible  and
exchangeable  securities  varies as a function of the market price of our common
stock.  At December  31,  2004,  the number of shares we are required to reserve
exceeded the number of authorized  but unissued  shares of our common stock.  At
December  31, 2004,  we were unable to satisfy  valid  conversion,  exchange and
share  issuance  requests to issue  approximately  162.8  million  shares of our
common  stock  because of an  insufficient  number of  authorized  but  unissued
shares.  The table below  outlines the greater of the shares of our common stock
that we are  required  to reserve  for  issuance  or  register  for resale as of
December 31, 2004 based on balances at December  31, 2004 and accrued  dividends
and interest through December 31, 2004.

                                      F-23
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

<TABLE>
<CAPTION>

<S>                                                                               <C>
     NCT Convertible Notes issued to Carole Salkind                               2,862,729,398
     Stock options and warrants                                                   2,346,420,973
     NCT Preferred Stock (a)                                                      1,976,204,341
     8% Convertible Notes                                                           218,985,619
     ConnectClearly Common Stock exchange                                             4,644,231
     Pro Tech Preferred Stock exchange                                               44,545,434
     6% Convertible Notes exchange                                                  221,380,592
     Artera Preferred Stock exchange                                                328,896,643
     Earnout for Theater Radio Network acquisition                                    7,091,200
     Look back and royalty payable for Midcore Software acquisition                  60,359,577
     Private Equity Credit Agreement                                                422,654,269
                                                                                -----------------
                                                                                  8,493,912,277
                                                                                =================
</TABLE>

Footnote:
--------
(a)  We are required to reserve  100,000,000  shares of our common stock for the
     conversion of our series H preferred stock until our  stockholders  approve
     an  increase  in the  number  of  authorized  shares of our  common  stock.
     Thereafter,  we are  required  to  reserve  150% of the  number  of  shares
     necessary to fully  convert the then issued and  outstanding  shares of our
     series H preferred  stock plus accrued  accretion.  The table  includes the
     entire reserve requirement for our outstanding series H preferred stock.

(b)  A number of our  commitments  require us to  reserve  and/or  register  for
     resale a number of shares of our  common  stock in excess of the  number of
     shares actually issuable (approximately 7.5 billion).

Transactions with Crammer Road LLC:

2002 Exchange Agreement

     On June 21, 2002, we entered into an exchange  agreement  with Crammer Road
to acquire the remaining 12,000 shares of DMC NY in exchange for 1,800 shares of
our series H  convertible  preferred  stock and $120,000 in cash.  We issued the
1,800 shares of series H preferred stock in June 2002.

DMC New York, Inc.

     NCT acquired 75% of DMC NY in 2002 and 25% in 2001.  Our aggregate  cost of
the DMC NY shares was approximately $27.2 million (see Note 3).

Private Equity Credit Agreements

     On  September  30, 2004,  we entered  into an amended and restated  private
equity credit agreement with Crammer Road. The September 30, 2004 private equity
credit agreement superseded and replaced a private equity credit agreement dated
July 25, 2002 between us and Crammer Road. The new agreement  permits us to sell
to Crammer Road shares of our common  stock  having an aggregate  value of up to
$50 million (the maximum commitment  amount),  in exchange for cash, pursuant to
puts made by us. The  agreement  requires us to sell to Crammer Road at least an
aggregate of $5 million of our common stock (the minimum commitment  amount), in
exchange for cash. All sales of our common stock to Crammer Road pursuant to the
agreement  will be at a 9% discount  from the market  price of our common  stock
(defined  as the average of the lowest  closing bid price for any three  trading
days during the ten trading days  immediately  following  the put date).  We are
obligated to register for resale shares of our common stock sold pursuant to the
agreement  in an  amount no less than the  number of shares  for which  puts are
made, but in no event less than 150% of the minimum  commitment amount. In order
for us to be able to sell shares to Crammer Road pursuant to the  agreement,  we
must  obtain  stockholder  approval  of an  amendment  to  our  Second  Restated
Certificate of Incorporation  to sufficiently  increase the number of authorized
shares  of our  common  stock  and must  establish  and  maintain  an  effective
registration  statement  with the SEC to permit  the  resale  of shares  sold to
Crammer Road pursuant to the agreement.

     On July 25, 2002, we entered into a private  equity credit  agreement  with
Crammer Road. The July 2002 credit  agreement  provided that shares of up to $50
million  (the  maximum  commitment  amount) of our  common

                                      F-24
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

stock may be sold to Crammer  Road  pursuant to put notices  delivered  by us to
Crammer Road. The terms of the agreement  required us to put at least $5 million
(the minimum  commitment amount) of our common stock, in exchange for cash, at a
discount to market of 10%. In  connection  with the  execution  of this  private
equity  credit  agreement,  we issued a  five-year  warrant to  Crammer  Road to
purchase  1,000,000  shares of our common stock at an exercise price of $0.07375
per share.  We were  obligated to register for resale shares of our common stock
for the warrant and the credit  agreement  in an amount no less than 112% of the
maximum  commitment  amount.  If we  failed  to  issue  shares  for the  minimum
commitment amount during the commitment period (which terminated 24 months after
effectiveness  of a resale  registration  statement  relating  to the  shares or
earlier as described in the agreement), we were required to pay Crammer Road, in
immediately  available  funds, an amount equal to the product of (i) the minimum
commitment  amount,  less the  aggregate  shares of our  common  stock  actually
delivered  to  Crammer  Road  under  the  equity  credit  line  and (ii) the 10%
discount.

     On April 12,  2001,  we executed a private  equity  credit  agreement  that
provided  that  shares of up to $50  million of our common  stock may be sold to
Crammer Road pursuant to put notices  delivered by us to Crammer Road. The April
2001 private  equity credit  agreement  replaced a September 2000 private equity
credit agreement. In conjunction with this transaction, we issued Crammer Road a
warrant to purchase  250,000 shares of our common stock.  The terms of the April
2001 credit  agreement  obligated us to put $17 million of our common stock (the
minimum commitment amount) to Crammer Road. The agreement provided for a penalty
for late effectiveness of a registration statement covering the resale of shares
in the minimum commitment amount. In addition, if we failed to issue and deliver
shares for the minimum  commitment  amount of $17 million  during the commitment
period,  which would  terminate 18 months after the commitment  period began, we
were  obligated to pay Crammer  Road in  immediately  available  funds an amount
equal to the product of (i) the minimum  commitment  amount,  less the aggregate
value of shares of our common stock actually delivered to Crammer Road under the
credit line and (ii) the then  applicable  discount.  NCT and Crammer Road had a
dispute  about the  amount  due under the  penalty  provision  of the April 2001
private equity credit agreement (see Settlement with Crammer Road below).

     We delivered a put notice to Crammer  Road in November  2000 under the then
existing  private equity credit  agreement for $0.5 million and issued 2,810,304
shares of our common stock to Crammer Road, of which 343,604  shares were issued
in 2001.

Settlement with Crammer Road

     In September 2002, Crammer Road brought a legal action against NCT alleging
that NCT breached a series of agreements entered into by Crammer Road and NCT on
April 12, 2001, namely, a Private Equity Credit Agreement, a Registration Rights
Agreement  relating  thereto,  an  Exchange  Agreement,  a  Registration  Rights
Agreement  relating thereto,  two promissory notes and an additional side letter
agreement.  On October 30,  2002,  a  settlement  agreement  was executed by the
parties and  approved by the court on December 11,  2002.  Under the  settlement
agreement,   all  claims  in  the  suit  by  Crammer  Road  were   dismissed  in
consideration of the issuance by NCT to Crammer Road of 68 million shares of NCT
common stock ($5.44 million priced at $.08 per share).  On December 17, 2002, we
issued  Crammer  Road 40 million  of the 68 million  shares.  The  remaining  28
million  shares were issuable 65 days after demand  therefor by Crammer Road. On
or about May 8, 2003, we issued the remaining 28 million shares to Crammer Road.

Shares Issued for Acquisitions:

     We have an  obligation  to issue  additional  shares of our common stock to
satisfy an earnout provision for the Theater Radio Network acquisition. Further,
we are obligated to issue additional shares to satisfy a look back provision for
the Midcore Software acquisition and royalty payable.

Private Placement and Issuance of NCT Common Stock:

     In 2002,  we  issued  328,717  shares  of our  common  stock to the  former
president of Theater  Radio  Network (who had become an employee of DMC Cinema).
This issuance was in settlement  of amounts owed him  aggregating  approximately
$25,000 that he had advanced to the company.

                                      F-25
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Shares Issued upon Conversion or Exchange of Indebtedness:

     During the years ended December 31, 2002, 2003 and 2004, $0.2 million, $1.8
million and zero,  respectively,  of the 6% convertible notes plus interest were
exchanged for 2,598,956 shares,  42,092,786 shares and zero shares of our common
stock. At December 31, 2004,  $2.5 million of the 6% convertible  note principal
remained that could be exchanged for shares of our common stock.

     During the year ended December 31, 2002, $0.4 million of our 8% convertible
notes plus interest were converted into 5,611,682 shares of our common stock.

Shares Issued for Settlement of Legal Claims:

     We issued  Crammer Road shares of our common stock in December 2002 and May
2003  pursuant to a  settlement  agreement  (see  Settlement  with  Crammer Road
above).

     On or about January 31, 2002, West Nursery Land Holding Limited Partnership
brought an action against NCT in the District Court of Maryland for Anne Arundel
County.  On  December  31,  2002,  NCT and West  Nursery  executed a  settlement
agreement  under which all claims of West Nursery against NCT were discharged in
consideration  of the issuance by NCT of 1,248,170  shares of its common  stock.
Pursuant  to the  settlement  agreement  between  NCT and West  Nursery  Holding
Limited  Partnership,  on or about April 1, 2003, we issued  1,248,170 shares of
our common stock ($56,000 in stock priced at $0.0448 per share) to West Nursery.

     On February 21, 2002, an action was brought by Mesa Partners,  Inc. against
NCT and DMC.  On  December  3, 2002,  NCT,  DMC and Mesa  executed a  settlement
agreement  that  was  approved  by the  court  in April  2003.  Pursuant  to the
settlement agreement, on or about April 11, 2003, NCT issued 2,321,263 shares of
its common stock ($125,000 in stock priced at $0.05385 per share) to Mesa.

     On or about  December  17,  2002,  an action was  brought by Alpha  Capital
Aktiengesellschaft,  Austost Anstalt Schaan, Balmore S.A. and Libra Finance S.A.
against NCT and Artera Group,  Inc. On or about April 7, 2003,  NCT,  Artera and
the plaintiffs  executed a settlement  agreement.  In September 2003, upon court
approval of the settlement agreement, NCT issued 61,776,067 shares of its common
stock ($4.0  million in stock priced at $0.06475  per share) to the  plaintiffs,
reduced  previously  accrued  interest  payable of $0.9  million and  liquidated
damages  for  non-registration  of  common  shares  underlying  convertible  and
exchangeable notes and preferred stock of $8.0 million (consists of $4.7 million
related  to  convertible  notes and $3.3  million  related  to  Artera  series A
preferred  stock).  We recorded a $4.9  million gain on  litigation  settlements
included  in  non-operating  other  (income)  expense,  net for the  year  ended
December 31, 2003.

     During the year ended December 31, 2002, we recorded  charges totaling $0.5
million  for the  issuance of  6,138,081  shares of our common  stock.  Of these
shares,  5,938,081 were valued at approximately  $0.5 million and were issued to
settle a legal matter with Linford Group  Limited  related to a leasehold of our
indirect subsidiary Artera Group International Limited. In addition,  200,000 of
the total  number of shares were issued to settle a legal matter and were valued
at less than $0.1  million  (based upon the closing bid price on the date of the
settlement).

Shares Issued to Vendors and Others:

     During the year ended  December 31, 2002, we recorded a charge of less than
$0.1  million  for the  issuance  of 300,000  shares of our  common  stock for a
partial payment of consulting  services (based upon the closing bid price on the
date of the agreement).

ConnectClearly.com, Inc. Initial Financing:

     On August 10,  2000,  we entered into an  agreement  with three  accredited
investors    for   the    financing    of   our    majority-owned    subsidiary,
ConnectClearly.com,   Inc.   In   connection   with  the   initial   funding  of
ConnectClearly,  we issued 1,000 shares of ConnectClearly  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.  During the
years ended December 31, 2002, 2003 and 2004, no shares of  ConnectClearly  were
exchanged  for shares of our common  stock.

                                      F-26
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

At December  31,  2003 and 2004,  63  ConnectClearly  common  shares  subject to
exchange are outstanding.  These  ConnectClearly  common shares are exchangeable
for shares of our common stock at 80% of the five-day closing bid average of our
common stock for the five-day period immediately preceding the exchange.

Distributed Media Corporation:

     On February 28,  2002,  we issued  2,142,073  shares of our common stock in
exchange  for  6,435  shares  of DMC  common  stock  pursuant  to an  employment
termination  agreement.  We  recorded  a charge  based on the fair  value of our
common stock at that date of $0.2 million included in our consolidated statement
of  operations  for the year ended  December  31, 2002,  classified  as selling,
general and administrative expense.

NCT Audio Products, Inc.:

     NCT Audio sold 2,145 common shares in 1997 for  approximately  $4.0 million
in a private  placement  under  Regulation D of the  Securities Act of 1933 (the
"Securities  Act").  The terms of the sale  allowed  purchasers  of NCT  Audio's
common  stock  to  exchange  their  shares  for NCT  common  stock at 80% of the
five-day  average  closing  bid  price of NCT  common  stock  for the five  days
immediately  preceding the exchange.  The NCT share exchanges were accounted for
as step acquisitions of NCT Audio.  Based upon a change in strategy and the then
current  valuation of NCT Audio, we began impairing  goodwill that resulted from
step  acquisitions.  In 2002,  $0.3  million of goodwill  resulting  from a step
acquisition was impaired because of NCT Audio's continuing inability to generate
positive cash flows from operations.  Included in our consolidated statements of
operations are impairment  charges  aggregating $0.3 million year ended December
31, 2002.

     Through  December 31, 2004, we issued an aggregate of 31,239,483  shares of
our common stock in exchange for 2,145 shares of NCT Audio common stock.  During
the year ended  December 31, 2002,  160 shares of NCT Audio common  stock,  were
exchanged  for 3,930,818  shares of NCT common  stock.  At December 31, 2003 and
2004, no shares of NCT Audio common stock subject to exchange are outstanding.

Transactions Affecting Common Stock of Pro Tech Communications, Inc.:

     At December 31, 2004, NCT Hearing Products,  Inc. held  approximately  62.8
million  shares of Pro Tech common stock,  comprising  approximately  86% of the
issued and outstanding  shares of Pro Tech common stock. There were no issuances
of Pro Tech common stock during 2002 and 2003.  During 2004, Pro Tech issued 2.5
million shares of its common stock upon  conversion of 40 shares of its series B
preferred  stock and issued an aggregate  of 37.7  million  shares of its common
stock to NCT  Hearing  from  which  NCT  Hearing  paid 2  million  shares to two
investor  communications and public relations consultants.  The shares issued to
NCT Hearing  were to settle  $640,466 of  outstanding  notes owed to NCT Hearing
(27.8  million  shares) and in  consideration  for an  expansion of an existing,
exclusive worldwide  technology license conveyed by NCT Hearing to Pro Tech (9.8
million shares).

NCT Group, Inc. Preferred Stock:

     Our  Board  of  Directors  is  authorized  to issue 10  million  shares  of
preferred  stock,  par value $0.10 per share.  Through 2004, we designated eight
series of preferred stock,  including series A, B, C, D, E, F, G and H preferred
stock.  Series A and B were  eliminated in 1992 without ever having been issued.
We have issued preferred stock under our series C, D, E, F, G and H designations
and have eliminated our series C, D, E and F. Our series G convertible preferred
stock is designated but not outstanding at December 31, 2004. As of December 31,
2004, there are 1,752 shares of series H preferred stock issued and outstanding.

     Our  designated  series H  convertible  preferred  stock  consists of 2,100
designated  shares,  with a par value $0.10 per share, a stated value of $10,000
per share and a cumulative  dividend of 4% per annum on the stated value payable
upon  conversion in either cash or common stock,  at our election.  The series H
preferred  stock is senior  in rank to our  common  stock and has a  liquidation
value equal to the dividends  plus the stated value in the case of  liquidation,
dissolution or winding up of NCT. The holder of our series H preferred stock has
no voting  rights  (except as may be  required  by law).  Each share of series H
preferred  stock is  convertible  into shares of our common  stock at 75% of the
average  closing bid price of our common stock for the five-day  trading  period
immediately

                                      F-27
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

preceding conversion. The holder of the series H preferred stock is subject to a
limitation  on the  percentage  ownership of  outstanding  common  shares of the
company, as defined. The series H preferred stock is redeemable by us in cash at
any time at a  redemption  price that is a function of the time between the date
the series H was originally issued and the redemption date. The redemption price
ranges from 85% of stated  value  (within  three  months of issuance) to 120% of
stated value  (after nine months from  issuance).  On June 24,  2002,  we issued
1,800  shares ($18  million  stated  value) of our series H  preferred  stock to
Crammer Road for $120,000 cash and 12,000 shares of DMC New York, Inc. (see Note
3). On May 11,  2004,  we issued 27 shares of our  Series H  preferred  stock to
Crammer  Road.  For the years ended  December 31, 2002,  2003 and 2004,  we have
included $0.4 million, $0.7 million and $0.7 million, respectively, representing
preferred  stock  dividends  and for the  year ended  December  31,  2004,  $0.1
representing  amortization of beneficial conversion features on the consolidated
statements of  operations.  During 2003,  75 shares of series H preferred  stock
along with accrued dividends totaling  approximately $0.8 million were converted
into 23,057,761 shares of our common stock.

     During the year ended  December 31,  2004,  we accrued  approximately  $5.4
million related to our inability to satisfy valid  conversion and share issuance
requests.  These  amounts  are  included in  preferred  stock  dividends  on the
consolidated statements of operations for the year then ended.

Artera Group, Inc. Preferred Stock:

     On  February  21,  2001,  the  Board of  Directors  of Artera  Group,  Inc.
designated  a series A  convertible  preferred  stock  which  consists of 30,000
designated  shares,  par value of $0.10 per share,  and stated  value $1,000 per
share with a  cumulative  dividend of 4% per annum on the stated  value  payable
upon conversion in either cash or common stock of Artera. We issued 8,299 shares
of  Series A  preferred  stock  in 2001.  Each  share  of  series A  convertible
preferred  stock is convertible  into shares of Artera common stock on and after
the  earlier  of two years  after  issuance  or ten days  after  Artera  becomes
publicly  traded,  at a conversion  price equal to the average closing price for
the five trading  days prior to the  conversion  date.  At December 31, 2003 and
2004, we have included $8.3 million and $8.6 million, respectively, representing
the carrying value of the preferred  stock included in minority  interest on the
consolidated  balance sheets.  We amended these rights as to $4.3 million stated
value of the  preferred  stock as described  below.  For each of the years ended
December 31, 2002, 2003 and 2004, the dividends were approximately $0.3 million.
These  amounts are included in  preferred  stock  dividends on the  consolidated
statements of operations for the years then ended.

     We entered into an exchange  rights  agreement in 2001 with ten  accredited
investors  who hold $4.3  million in aggregate  stated value of Artera  series A
preferred  stock.  Each of the ten holders of Artera series A preferred stock is
entitled  to  exchange  the Artera  series A  preferred  stock for shares of NCT
common stock 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  date
and may not convert  into Artera  common  stock.  NCT is  obligated  to register
shares of its common stock for the exchange of Artera series A preferred  stock.
For the years ended  December 31, 2002,  2003 and 2004,  we incurred  charges of
$2.1 million, $1.9 million and $0.6 million,  respectively, for non-registration
of the  underlying  shares of NCT common  stock.  These  amounts are included in
preferred stock dividends on the  consolidated  statements of operations for the
years then ended. Pursuant to the exchange rights agreement,  NCT has the option
at any time to redeem any outstanding  Artera series A preferred stock by paying
the holders  cash equal to the  aggregate  stated  value of the Artera  series A
preferred stock being redeemed (together with accrued and unpaid dividends).  As
a result of a  settlement  of a legal  action,  which  included  $3.3 million of
accrued  non-registration fees payable relating to our inability to register the
shares,  we recorded a gain of $2.0  million in 2003  included in  non-operating
other  (income)  expense,  and we are no longer  accruing  these  fees for three
holders of Artera series A preferred  stock.  Pursuant to an exchange rights and
release  agreement dated April 10, 2003,  three holders of an aggregate of 3,154
shares of Artera  series A  preferred  stock  received  an  additional  right to
exchange their shares into a to be designated series of NCT preferred stock upon
thirty days prior  written  notice.  As of December  31,  2004,  8,299 shares of
Artera series A preferred stock are issued and  outstanding,  and no shares have
been converted or exchanged.

Pro Tech Communications, Inc. Preferred Stock:
(see Note 13)

     Pro Tech has designated two series of preferred stock,  series A and B. Its
series A convertible  preferred stock consists of 1,500 designated  shares,  par
value $0.01 per share,  and a stated value of $1,000 per share with a cumulative
dividend  rate of 4% per  annum  on the  stated  value.  The Pro  Tech  series B
convertible preferred stock

                                      F-28
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

consists of 500 designated shares, par value $0.01 per share, and a stated value
of  $1,000  per share  with a  cumulative  dividend  rate of 4% per annum on the
stated value.  For the years ended  December 31, 2002,  2003 and 2004,  $46,000,
zero and zero,  respectively,  of a beneficial  conversion was recognized on the
consolidated  statements of  operations.  The series A and B preferred  stock is
convertible into shares of Pro Tech's common stock at a discount from the quoted
market value.  In addition each share of Pro Tech series A and B preferred stock
is  exchangeable  for shares of NCT common stock at 80% of the lowest average of
the  average  closing  bid  price  for a  share  of NCT  common  stock  for  any
consecutive  five-day  period  out of 15  trading  days  preceding  the  date of
exchange.

     Prior to the  adoption of SFAS No. 150,  for the years ended  December  31,
2002 and 2003, we calculated the 4% dividends  earned by holders of the Pro Tech
series A and series B convertible  preferred stock at approximately  $22,000 and
$11,000,  respectively.  These amounts are included in preferred stock dividends
and in the  calculation  of loss  attributable  to  common  stockholders  on the
consolidated statement of operations for the years then ended.

     During  the  years  ended  December  31,  2002  and  2003,  there  were  no
conversions or exchanges.  During the year ended December 31, 2004, 40 shares of
Pro Tech series B preferred  stock were converted  into 2,522,042  shares of Pro
Tech common stock. At December 31, 2004, there were 50 shares of Pro Tech series
A  preferred  stock  outstanding  and 460 shares of Pro Tech  series B preferred
stock outstanding.

Treasury Stock:

     On March 1, 2002, we retired and cancelled all 6,078,065 shares of treasury
     stock.

16.  Common Stock Options and Warrants:

     We value options and warrants using the Black-Scholes  option pricing model
and account for options and warrants  issued to those that are not our employees
or members  of our Board of  Directors  as  outlined  herein.  The fair value of
options  and  warrants  issued to  general  consultants  or as  settlements  are
recorded as consulting expense or settlement expenses over the vesting period of
the  related  options  or  warrants  and  classified  as  selling,  general  and
administrative  expenses. The relative fair value of options and warrants issued
in connection with  indebtedness are amortized as interest expense over the term
of the related  indebtedness.  The allocated  fair value of options and warrants
issued in conjunction  with preferred  stock are accreted as an increase in loss
attributable to common  stockholders in the net loss per share  computation over
the vesting period of the related options or warrants. The fair value of options
and warrants issued in connection with  acquisitions  are recorded as additional
purchase price.

Stock Options:

     We have stock option plans under which directors,  officers,  employees and
consultants   may  be  granted   options  to  purchase  common  stock  or  other
equity-based  awards.  Our stock  option  plans that have been  approved  by our
stockholders are as follows:  1987 Stock Option Plan (the "1987 Plan");  the NCT
Group,  Inc. 1992 Stock  Incentive Plan (as amended,  the "1992 Plan");  the NCT
Group,  Inc.  Option Plan for Certain  Directors  (as  amended,  the  "Directors
Plan");  and the NCT Group, Inc. 2001 Stock and Incentive Plan (as amended,  the
"2001 Plan").  In addition,  options outside the option plans have been granted.
Due to plan expirations,  no future grants of options for the purchase of shares
of NCT common  stock are  available  under the 1987  Plan,  the 1992 Plan or the
Directors Plan.

     As of December 31, 2004, there were no options  outstanding  under the 1987
Plan or the Directors Plan. The following summarizes information about our stock
options outstanding and exercisable at December 31, 2004:

                                      F-29
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

<TABLE>
<CAPTION>

                                                  Options Outstanding                       Options Exercisable
                                     -------------------------------------------    -----------------------------------
                                                          Weighted
                                                          Average
                                                         Remaining     Weighted                              Weighted
                                                        Contractual     Average                               Average
                     Range of             Number           Life        Exercise             Number           Exercise
      Plan        Exercise Prices      Outstanding      (In Years)       Price           Exercisable (a)       Price
 --------------   ---------------    ----------------   -----------   ----------        ----------------    -----------
<S>  <C>            <C>        <C>       <C>                  <C>       <C>                 <C>                 <C>
   1992 Plan      $ 0.103 to $1.00     38,921,799           3.17      $  0.3897           38,921,799          $ 0.3897
                                     ================                                   ================

   2001 Plan      $ 0.031 to $0.13     95,766,753 (b)       5.33      $  0.0687           95,766,753 (b)      $ 0.0687
                                     ================                                   ================

 Non-plan         $ 0.029 to $0.13     368,275,000          3.44      $  0.0454           368,275,000         $ 0.0454
                                     ================                                   ================
</TABLE>

Footnotes:
---------
(a)  Exercisable  on a  plan  by  plan  basis  subject  to the  approval  by our
stockholders  of a  sufficient  increase in the number of  authorized  shares of
common  stock.  (b)  Approximately   77.8  million  of  the  number  of  options
outstanding and  exercisable  under the 2001 Plan are subject to the approval by
our stockholders of sufficient  increases in the number of authorized  shares of
common stock and shares  available for issuance under the 2001 Plan. At the time
of such  stockholder  approval,  if the market value of our common stock exceeds
the exercise  price of the subject  options,  we will incur a charge to earnings
equal to the difference  between the exercise price of the option and the market
price,  multiplied by the number of options involved. If stockholder approval of
the  increase is not  obtained,  options  granted will be reduced for the excess
unauthorized shares.

1987 Plan

     Our 1987 Plan  provided  for the grant of up to 4.0  million  shares of our
common stock as either  incentive stock options or  nonstatutory  stock options.
Options to purchase  shares could be granted under the 1987 Plan to persons who,
in the case of incentive stock options,  were our full-time employees (including
officers and directors;  or, in the case of nonstatutory stock options, were our
employees or non-employee  directors.  The exercise price of all incentive stock
options  was  required  to be at least  equal to the fair  market  value of such
shares on the date of grant and could be exercisable  over a ten-year  period as
determined  by the Board of  Directors.  The exercise  price and duration of the
nonstatutory  stock options were determined by the Board of Directors.  In 2000,
the Board of  Directors  determined  that no future  grants of  options  for the
purchase of shares would be made under the 1987 Plan.  Thus,  no options for the
purchase  of shares are  available  for  future  grant  under the 1987 Plan.  At
December 31, 2002 and 2003 there were outstanding, exercisable options under the
1987 Plan to acquire  1,350,000  shares of common  stock at a  weighted  average
exercise price of $0.5093 per share. All of these options expired in 2004.

1992 Plan

     On October 6,  1992,  we adopted  the 1992 Plan for the grant of shares and
options to purchase up to 10.0 million  shares of common stock to our  officers,
employees,  consultants  and directors.  The exercise  price of options  granted
under the 1992 Plan was  required to be at least equal to the fair market  value
of such  shares  on the date of the  grant,  and  such  options  were  generally
exercisable over a five to ten-year period with vesting  schedules 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 available there under to 30.0 million.  On July 13, 2000, the stockholders
approved an  amendment  to the 1992 Plan to  increase  the  aggregate  number of
shares of our common stock under the 1992 Plan from 30.0 million to 50.0 million
shares.

     From time to time, the Board of Directors accelerates the vesting schedules
of previously  granted stock options so that the right to acquire the underlying
shares becomes 100% vested.  On September 20, 2001, the vesting  schedule on the
December 6, 2000 grant to acquire  6,000,000  shares made to our Chairman of the
Board of Directors and Chief  Executive  Officer was  accelerated in 2001 due to
his formation of Artera Group, Inc. and conceptualization of its strategy.

                                      F-30
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     1992 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                           Years Ended December 31,
                                           -----------------------------------------------------------------------------------------
                                                      2002                         2003                          2004
                                           --------------------------  ----------------------------   ------------------------------
                                                            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            46,408,663     $  0.420     44,022,537     $   0.420       42,459,337      $  0.404
Options granted                                      -     $      -              -     $       -                -      $      -
Options exercised                                    -     $      -              -     $       -                -      $      -
Options canceled, expired or forfeited      (2,386,126)    $  0.440     (1,563,200)    $   0.672       (3,537,538)     $  0.557
                                           -------------               -------------                  -------------
Outstanding at end of year                  44,022,537     $  0.420     42,459,337     $   0.404       38,921,799      $  0.390
                                           =============               =============                  =============

Options exercisable at year-end             44,022,537     $  0.420     42,459,337     $   0.404       38,921,799      $  0.390
                                           =============               =============                  =============
Options available for grant at year-end              -     $      -              -     $       -                -      $      -
                                           =============               =============                  =============
</TABLE>

Directors Plan

     On November 15, 1994,  the Board of Directors  adopted the  Directors  Plan
which was approved by our  stockholders  in July 1996.  As of December 31, 2004,
the Directors  Plan has no shares  available due to the  expiration of the plan.
During the three years ended  December 31, 2004,  the activity in the  Directors
Plan consisted of the forfeiture in 2002 of all outstanding  options  (538,500).
The 538,500 options had a weighted average exercise price of $0.73 per share.

2001 Plan

     On April 25,  2001,  our Board of  Directors  adopted the 2001 Plan for the
grant of shares and options to purchase up to 18,000,000  shares of common stock
to directors, officers, employees and consultants. The 2001 Plan was approved by
our  stockholders in July 2001. The exercise price of all 2001 Plan options must
be at least  equal to the fair market  value of our common  stock on the date of
grant, and the term and vesting schedules of 2001 Plan options are determined by
the Board of Directors. On June 3, 2002, June 13, 2002 and October 25, 2002, the
Board of Directors granted  seven-year  options to purchase shares of our common
stock to directors,  officers and employees in the aggregate  amount of 430,000,
10,575,000 and 20,675,000  shares,  respectively,  at exercise prices of $0.081,
$0.081 and $0.083,  respectively,  the fair market value of shares of our common
stock on the  respective  dates of grant.  On September  10, 2003,  the Board of
Directors granted  seven-year  options to purchase shares of our common stock to
directors,  officers and employees in the aggregate amount of 26,290,000 shares,
at an exercise price of $0.054 per share, the fair market value of shares of our
common stock on the date of grant. On March 17, 2004 and July 2, 2004, the Board
of Directors  granted seven year options to purchase  shares of our common stock
to directors,  officers and employees in the aggregate  amount of 29,010,000 and
250,000  shares   respectively,   at  exercise  prices  of  $0.048  and  $0.031,
respectively,  the fair market value of our common stock on the respective dates
of grant. On September 30, 2004, the Board of Directors granted a stock award of
120,000 shares.  The June 13, and October 25, 2002, the 2003 and the 2004 grants
and awards were made subject to the approval by our  stockholders  of sufficient
increases in the number of shares of  authorized  common stock and available for
issuance under the 2001 Plan.

     During 2004, our Board of Directors  granted options and stock awards under
the 2001 Plan for an  aggregate  of  29,380,000  shares of our  common  stock at
exercise  prices  reflecting  market  prices  on the dates of grant  subject  to
sufficient  increases in the number of authorized shares of common stock and the
number  under  the 2001 Plan  subject  to  stockholder  approval  of  sufficient
increases  in the number of shares of our common stock (i)  authorized  and (ii)
available  for  issuance  under the 2001 Plan.  At the time of such  stockholder
approval,  if the market value of our common stock exceeds the exercise price of
the subject options,  the company will incur a non-cash charge to earnings equal
to the spread  between the  exercise  price of the option and the market  price,
times the number of options involved. If stockholder approval of the increase is
not  obtained at an annual  meeting of  shareholders,  options  granted  will be
reduced pro rata for the excess unauthorized shares. Of these grants, 27,380,000
were granted to officers,  directors and employees and 2,000,000 were granted as
partial  consideration for consulting  services.  We estimated the fair value of
these  consulting  options  using the  following  assumptions  in  applying  the
Black-Scholes  option pricing model:  dividend yield of 0%;  risk-free  interest
rate of 1.94%;  volatility

                                      F-31
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

of 100%; and an expected life of three and one-half  years and recorded  charges
for consulting  services of approximately  $0.2 million,  classified as selling,
general and administrative expense.

     On October 25, 2002, the Board of Directors  deemed all options  granted to
directors,  officers, consultants and employees before that date as fully vested
(pending the stockholder approvals discussed above) to acknowledge its gratitude
for the ongoing  dedication of these individuals  during the 2002  restructuring
and cost-saving measures,  including suspension of employee salary increases. On
September 10, 2003,  the Board of Directors  (pending the necessary  stockholder
approvals)  accelerated  the vesting  schedules of options granted to directors,
officers and employees  dated October 25, 2002 to 100% vested to acknowledge its
continued gratitude for the dedication of these individuals.  On March 17, 2004,
the Board of Directors (pending the necessary stockholder  approvals) deemed all
options  granted to  directors,  officers and employees on September 10, 2003 as
fully vested to acknowledge  its continued  gratitude to these  individuals.  On
December 31, 2004,  the Board of Directors  (pending the  necessary  stockholder
approvals)  accelerated  the vesting  schedules of options granted to directors,
officers  and  employees  in 2003 and 2004 to 100%  vested  to  acknowledge  its
gratitude  to  these  individuals  during  a  period  of  continued  cost-saving
measures,  including the suspension of employee salary  increases.  Although the
acceleration  of vesting  schedules was a modification  of the original  grants,
there was no accounting  consequence because the market price on the date of the
modification was lower than the original exercise price of the grants.

     2001 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                             Years Ended December 31,
                                           -----------------------------------------------------------------------------------------
                                                      2002                         2003                          2004
                                           --------------------------  ----------------------------   ------------------------------
                                                            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            10,387,503     $   0.13     41,485,358     $   0.100       67,054,945         $ 0.0780
Options granted                             31,680,000     $   0.08     26,290,000     $   0.054       29,260,000         $ 0.0477
Options exercised                                    -     $      -              -     $       -                -         $      -
Options canceled, expired or forfeited        (582,145)    $   0.13       (720,413)    $   0.096         (548,192)        $ 0.0915
                                           -------------               -------------                  -------------
Outstanding at end of year                  41,485,358     $   0.10     67,054,945     $   0.078       95,766,753 (a)     $ 0.0687
                                           =============               =============                  =============

Options exercisable at year-end             30,080,358     $   0.11     52,476,945     $   0.085       95,766,753         $ 0.0687
                                           =============                ============                  =============
Options available for grant at year-end              -     $      -              -     $       -                -         $       -
                                           =============                ============                  =============
Stock awards granted                                                                                      120,000
                                           =============                ============                  =============
</TABLE>

Footnotes:
---------
(a) As of December 31, 2004, 77,766,753 of the outstanding options and the stock
award of 120,000  shares  under the 2001 Plan are subject to the approval by our
stockholders  of  sufficient  increases  in the number of  authorized  shares of
common and shares available for issuance under the 2001 Plan.

Non-Plan

     In 2002 and 2003,  the  Board of  Directors  granted  non-plan  options  to
acquire  shares of our  common  stock to  consulting  entities  in which  Carole
Salkind or her son were the sole  shareholder  (see Note 20).  The fair value of
these consulting  options  (determined  using the  Black-Scholes  option pricing
model) resulted in aggregate  charges of $5.1 million and $8.3 million  included
in our selling, general and administrative expenses for the years ended December
31, 2002 and 2003, respectively.

                                      F-32
<PAGE>
                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     Non-plan stock option activity is summarized as follows:
<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                           -----------------------------------------------------------------------------------------
                                                      2002                         2003                          2004
                                           --------------------------  ----------------------------   ------------------------------
                                                            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               100,000     $   0.27       84,825,000   $  0.0700      368,375,000       $  0.0455
Options granted                            100,225,000     $   0.07      283,550,000   $  0.0393                -       $       -
Options exercised                                    -     $      -                -   $       -                -       $       -
Options canceled, expired or forfeited     (15,500,000)    $   0.08                -   $       -         (100,000)      $  0.2656
                                           -------------                -------------                 -------------
Outstanding at end of year                  84,825,000     $   0.07      368,375,000   $  0.0455      368,275,000       $  0.0454
                                           =============                =============                 =============

Options exercisable at year-end             84,825,000     $   0.07      368,375,000   $  0.0455      368,275,000       $  0.0454
                                           =============                =============                 =============
</TABLE>

Warrants:

     As noted previously,  we determine the fair value of our warrants using the
Black-Scholes  option  pricing  model.  If  issued  with  convertible  notes  or
preferred  stock, we allocate  proceeds  between the note or preferred stock and
the warrants based on relative fair market value.

     During 2002, in  conjunction  with the issuance of  convertible  notes,  we
granted Carole Salkind five-year  warrants to acquire an aggregate of 96,372,920
shares of our common stock  (including  30,000,000  warrants for her irrevocable
wavier to  rights to  exchange  her notes and a warrant  for  shares of Pro Tech
common  stock) at exercise  prices  ranging  from $0.041 to $0.097 per share,  a
weighted average exercise price of $0.069.  The fair value of these warrants was
$5.0  million.  Based  upon  allocation  of  the  relative  fair  values  of the
instruments,  we recorded a discount of $4.4  million to the  convertible  notes
issued to Carole Salkind. During 2002, we issued warrants to outside consultants
for the right to acquire an aggregate of  10,854,167  shares of our common stock
at exercise  prices ranging from $0.054 to $0.75 per share,  a weighted  average
exercise price of $0.099 and recorded a charge for  consulting  services of $0.6
million.  Included in these shares,  as consideration for advisory services by a
placement  agent,  was a five-year  warrant to acquire  5,000,000  shares of our
common stock at an amended  exercise price, of the lesser of $0.07 or the lowest
closing bid price  between  January 10,  2002 and June 28,  2003,  or $0.027 per
share. In conjunction  with the execution of a license  agreement with FairPoint
Broadband, Inc., on October 11, 2002 we issued a five-year warrant for 2,000,000
shares of our common  stock to FairPoint  Communications,  Inc.  exercisable  at
$0.15 per share. The fair value of this warrant was  approximately  $0.1 million
which was recorded as a reduction of license fee revenue. In connection with the
issuance  of a  promissory  note on December  6, 2002,  we issued two  five-year
warrants to the note holder,  one for 1,400,000 shares of our common stock at an
exercise  price per share of the lesser of $0.07 or the lowest closing bid price
of our  common  stock for the  period  from the  grant  date  through  the first
anniversary,  or $0.027 per share.  The fair value of the  warrant was less than
$0.1 million and was  recorded as a discount to the related  note payable  based
upon  allocation  of the  relative  fair  values of the  instruments.  The other
warrant  was for  15,000,000  shares at an  exercise  price of $0.01 per  share,
subject to certain  conditions and vested and became exercisable in its entirety
as of the date,  if any,  that both of the  following  events  occurred:  (a) we
failed to pay when due and  payable  (April 7, 2003) any amount owed to the note
holder under the  promissory  note,  dated  December 6, 2002,  in the  principal
amount of $385,000,  and (b) we failed,  as of the date that the note became due
and payable (April 7, 2003),  to pay any amount owed under certain  registration
penalty   provisions  and  such  payment   obligation  had  not  been  otherwise
discharged.  If the  event  described  in  clause  (b)  occurred  but the  event
described  in clause  (a) did not  occur,  then this  warrant  vested and became
exercisable  as to  2,000,000  shares only.  During  2003,  both of these events
occurred and we recorded the fair value of this  warrant  (calculated  as of May
30, 2003) as interest  expense of $0.6  million for the year ended  December 31,
2003 as a result of this vesting. Based upon additional negotiation in 2003, the
warrant  vested as to 12.5 million  shares and 2.5 million  warrant  shares were
cancelled resulting in no accounting effect.

     During 2003, in  conjunction  with the issuance of  convertible  notes,  we
issued Carole Salkind five-year  warrants to acquire an aggregate of 175,175,579
shares of our common stock at exercise  prices ranging from $0.029 to $0.055 per
share, a weighted  average  exercise price of $0.04078.  The fair value of these
warrants was $5.6 million.  Based upon allocation of the relative fair values of
the instruments, we recorded a discount of $4.8 million to the convertible notes
issued to Carole Salkind. During 2003, we issued warrants to outside consultants
for the

                                      F-33
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

right to  acquire  an  aggregate  of  3,000,000  shares of our  common  stock at
exercise  prices  ranging  from $0.0312 to $0.048 per share,  a weighed  average
exercise price of $0.0438 and recorded a charge for consulting  services of $0.1
million.

     During 2004, in  conjunction  with the issuance of  convertible  notes,  we
issued   Carole   Salkind   five-year   warrants  to  acquire  an  aggregate  of
1,513,000,000 shares of our common stock at exercise prices ranging from $0.0166
to $0.053 per share,  a weighted  average  exercise  price of $0.0267.  The fair
value of these warrants was $31.3 million. Based upon allocation of the relative
fair values of the  instruments,  we recorded a discount of $22.9 million to the
convertible  notes issued to Carole Salkind.  During 2004, we issued warrants to
outside consultants for the right to acquire an aggregate of 2,750,000 shares of
our common stock at exercise  prices  ranging from $0.020 to $0.048 per share, a
weighed  average  exercise price of $0.0429 and recorded a charge for consulting
services of  approximately  $0.1 million.  In  conjunction  with the issuance of
$990,000  debt to third parties in July 2004,  we issued  five-year  warrants to
acquire an  aggregate  of  12,500,001  shares of our common stock at an exercise
price of the lower of $0.0232 or 80% of the five day  closing bid price prior to
exercise. The fair value of these warrants was $0.3 million.

     Warrant activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                             Years Ended December 31,
                                            ----------------------------------------------------------------------------------------
                                                        2002                         2003                          2004
                                            -----------------------------  --------------------------  -----------------------------
                                                                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               43,725,585       $ 0.207      169,667,922   $ 0.0910      344,005,337      $ 0.0601
Warrants granted                              126,627,087       $ 0.066      178,175,579   $ 0.0408    1,528,250,001      $ 0.0267
Warrants exercised                                      -       $     -                -   $      -                -      $      -
Warrants canceled, expired or forfeited          (684,750)      $ 0.621       (3,838,164)  $ 0.2512      (28,917,917)     $ 0.1146
                                            ----------------               -------------               -------------
Outstanding at end of year                    169,667,922       $ 0.091      344,005,337   $ 0.0601    1,843,337,421      $ 0.0316
                                            ================               =============               =============

Warrants exercisable at year-end              168,788,705       $ 0.090      343,639,714   $ 0.0597    1,843,185,342      $ 0.0316
                                            ================               =============               =============
</TABLE>

     The following table summarizes  information  about warrants  outstanding at
December 31, 2004:

<TABLE>
<CAPTION>

                               Warrants Outstanding                Warrants Exercisable
                      ---------------------------------------   ---------------------------
                                                  Weighted
                                                   Average
                                       Weighted   Remaining                       Weighted
                                       Average    Contractual                     Average
       Range of           Number       Exercise      Life            Number       Exercise
   Exercise Prices      Outstanding     Price     (In Years)      Exercisable      Price
  ------------------   -----------     ------    ----------      -------------    --------
<S>          <C>        <C>           <C>              <C>        <C>             <C>
  $0.0100 to $0.0190    531,750,000   $0.01702         4.93       531,750,000     $0.01702
  $0.0200 to $0.0296    673,650,001   $0.02706         4.52       673,650,001     $0.02706
  $0.0310 to $0.0490    503,381,952   $0.04007         4.07       503,381,952     $0.04007
  $0.0500 to $0.0990    127,583,801   $0.06808         2.83       127,583,801     $0.06808
  $0.1000 to $0.7500      6,971,667   $0.29839         2.15         6,819,588     $0.29804
                      --------------                            --------------
                      1,843,337,421   $0.03158         4.39     1,843,185,342     $0.03156
                      ==============                            ==============
</TABLE>

Stock Options and Warrants of Pro Tech Communications, Inc.:

     Pro Tech's  1998 Stock  Option  Plan is for the  benefit of its  directors,
officers,  employees and  consultants  and  authorizes  the issuance of up to 30
million  options for shares of Pro Tech common  stock.  As of December 31, 2004,
Pro Tech's  outstanding stock options have exercise prices ranging from $0.03 to
$0.4375 and a weighted average  remaining  contractual life of approximately 4.3
years. The following table summarizes Pro Tech's stock option activity:

                                      F-34
<PAGE>
                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004
<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                    ---------------------------------------------------------------------------
                                             2002                       2003                    2004
                                    -------------------------- ----------------------- ------------------------
                                                   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      1,740,000    $  0.283      1,372,500    $ 0.253    1,285,000     $ 0.242
Options granted                         250,000    $  0.060              -    $     -      635,000     $ 0.030
Options exercised                             -    $      -              -    $     -            -     $     -
Options expired                        (617,500)   $  0.259        (87,500)   $ 0.402     (425,000)    $ 0.221
                                    ------------               ------------            ------------
Outstanding at end of year            1,372,500    $  0.253      1,285,000    $ 0.242    1,495,000     $ 0.158
                                    ============               ============            ============
Options exercisable at year-end       1,235,000    $  0.232      1,285,000    $ 0.242    1,495,000     $ 0.158
                                    ============               ============            ============
</TABLE>
     In  connection  with  issuance of Pro Tech's  series A preferred  stock and
series B preferred  stock,  Pro Tech issued  warrants to purchase  shares of its
common  stock.  At December 31, 2004, no Pro Tech  warrants are  outstanding  as
indicated in the following table:
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                    ------------------------------------------------------------------------------
                                            2002                        2003                      2004
                                    ------------------------  -------------------------- -------------------------
                                                   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     5,500,000     $  0.433      5,500,000     $ 0.433     1,000,000      $  0.130
Warrants granted                             -     $      -              -     $     -             -      $      -
Warrants canceled or expired                 -     $      -     (4,500,000)    $ 0.500    (1,000,000)     $  0.130
                                    ------------              -------------              ------------

Outstanding at end of year           5,500,000     $  0.433      1,000,000     $ 0.130             -      $      -
                                    ============              =============              ============
</TABLE>

17.  Other (Income) Expense:

     Other operating income consisted of the following:

<TABLE>
<CAPTION>
                                                          (In thousands of dollars)
                                                       For the Years Ended December 31,
                                                      ----------------------------------
                                                         2002       2003        2004
                                                      ----------  ----------  ----------
<S>                                                    <C>         <C>         <C>
Settlement of accounts payable                         $      -    $   (54)    $     -
Write-down of prepaid royalty                               563          -           -
Minority share of loss in subsidiary - Pro Tech            (458)         -           -
Other                                                      (426)      (190)          -
                                                      ----------  ----------  ----------
 Other operating income                                $   (321)   $  (244)    $     -
                                                      ==========  ==========  ==========

     Non-operating other (income)/expense, net consisted of the following:

                                                          (In thousands of dollars)
                                                       For the Years Ended December 31,
                                                      ----------------------------------
                                                         2002       2003        2004
                                                      ----------  ----------  ----------
Finance costs associated with non-registration
 of common shares                                      $  6,070    $  2,207    $    752
Litigation settlements (Notes 11 and 15)                      -      (5,317)      3,625
Default penalties on debt (Note 12)                         441       2,103       6,752
Dissolution of Artera International (Note 11)                 -           -      (4,567)
Other-than-temporary decline in value of available
-for-sale securities                                        765           -           -
Depreciation in fair value of warrant                       151           1           -
Other                                                       (16)         63          13
                                                      ---------- ----------   ----------
 Other (income) expense (classified as non-operating)  $  7,411    $   (943)   $  6,575
                                                      ==========  ==========  ==========
</TABLE>
                                      F-35
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     In   consideration  of  a  license   agreement  with  Infinite   Technology
Corporation, we received 1.2 million shares of ITC's common stock valued at $6.0
million  determined  using the quoted  price of the stock on the date the shares
were  received  ($5.00 per share).  For the year ended  December  31,  2002,  we
recorded an other-than-temporary realized loss of $0.7 million included in other
(income) expense, net in the consolidated  statement of operations.  At December
31, 2004,  an unrealized  loss of $0.1 million was included on the  consolidated
balance sheet as part of accumulated other comprehensive income (loss).

     Other  expense,  net includes a $4.6 million  gain on the  dissolution  and
liquidation  of Artera Group  International  Limited and the year ended December
31,  2003  included  gains on the  settlement  of lawsuits in the amount of $4.9
million.  During 2004, we recorded an expense of $3.6 million for  settlement of
PRG claims (see Note 22).

18.  Costs of Exiting Activities:

     On March 21, 2002,  the Board of  Directors  of Artera Group  International
Limited, a U.K.-based subsidiary,  decided that the corporation should cease all
operations and be liquidated.  On April 5, 2002 Artera  International ceased its
Internet service provider  operations and entered into liquidation  proceedings,
resulting  in a  charge  of $0.4  million.  On July  22,  2004,  the  liquidator
concluded the  liquidation  of Artera  International  and the  notification  was
registered  at Companies  House in the UK on July 27, 2004. On October 27, 2004,
the Registrar of Companies removed Artera International from its register.

     In  December  2001,  management  decided  to close  our  Maryland  research
facilities.  The abandonment of this facility was completed in the first quarter
of 2002. For the year ended December 31, 2002, we recorded employee  termination
costs of $0.3 million along with an adjustment relating to the lease termination
and settlement of litigation brought by the Maryland landlord of $(0.6) million.

     These costs have been included in the consolidated  statement of operations
as "costs of exiting activities."

     On February 28, 2002, DMC Cinema,  Inc. ceased business  operations and had
no material operations at date of discontinuance.

                                      F-36
<PAGE>
                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

19.  Supplemental Cash Flow Disclosures:
<TABLE>
<CAPTION>
                                                                                                  (In thousands of dollars)
                                                                                              For the Years Ended December 31,
                                                                                          ----------------------------------------
                                                                                               2002         2003           2004
                                                                                          ------------  ------------  ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
<S>                                                                                       <C>           <C>           <C>
  Interest                                                                                $       17    $       35    $       30
                                                                                          ============  ============  ============
Supplemental disclosures of non-cash investing and financing activities:
  Unrealized holding loss on available-for-sale securities                                $        -    $      (53)   $        -
                                                                                          ============  ============  ============
  Issuance of series H preferred stock in exchange for previously accrued
    acquisition of subsidiary                                                             $   14,000    $        -    $        -
                                                                                          ============  ============  ============
  Issuance of common stock upon conversion of principal portion of convertible
    notes                                                                                 $      375    $        -    $        -
                                                                                          ============  ============  ============
  Receipt of common stock of subsidiary for payment of note receivable                    $        -    $        -    $      640
                                                                                          ============  ============  ============
  Issuance of common stock for services                                                   $       19    $        -    $        -
                                                                                          ============  ============  ============
  Issuance of common stock upon exchange of principal portion of convertible
    notes of subsidiary                                                                   $      200    $    1,754    $        -
                                                                                          ============  ============  ============
  Property and equipment financed through capitalized leases and notes payable            $       15    $        -    $        -
                                                                                          ============  ============  ============
  Issuance of common stock to fulfill common stock payable obligation                     $        -    $    2,296    $        -
                                                                                          ============  ============  ============
  Issuance of common stock upon conversion of preferred stock and dividends               $        -    $      785    $        -
                                                                                          ============  ============  ============
  Issuance of common stock to settle litigation                                           $        -    $    4,125    $        -
                                                                                          ============  ============  ============
  Receipt of common stock of subsidiary as consideration for license amendment            $        -    $        -    $      275
                                                                                          ============  ============  ============
  Issuance of preferred stock for advance by investor in prior years                      $        -    $        -    $      230
                                                                                          ============  ============  ============
  Finance costs associated with non-registration of common shares
    on preferred stock of subsidiary                                                      $        -    $    1,896    $    2,023
                                                                                          ============  ============  ============
  Finance costs associated with non-conversion of preferred stock                         $        -    $        -    $    3,931
                                                                                          ============  ============  ============
  Principal on convertible notes and notes payable rolled into new notes                  $    8,499    $   25,932    $   67,517
                                                                                          ============  ============  ============
  Interest on convertible notes and notes payable rolled into new notes                   $      626    $    1,933    $    3,433
                                                                                          ============  ============  ============
  Default penalty on convertible notes rolled into new notes                              $      875    $    2,392    $    6,712
                                                                                          ============  ============  ============
</TABLE>

20.  Related Parties:

Convertible Notes and Warrants Issued to Carole Salkind:

     Beginning in 1999, we have issued  convertible  notes to Carole Salkind,  a
stockholder  and the spouse of a former  director of NCT.  During the year ended
December 31, 2004,  we issued $86.8 million of 8%  convertible  notes due in six
months  and a $5.0  million  12%  convertible  note due in five  years to Carole
Salkind (see Note 11) along with  five-year  warrants to acquire an aggregate of
1,513,000,000 shares of our common stock (see Note 16).  Consideration  paid for
these notes included  approximately  $9.1 million in cash and the refinancing of
notes aggregating  approximately $67.5 million, along with default penalties and
accrued interest.  In addition,  we issued her a $5.0 million note in settlement
of PRG litigation (see Note 22). Carole Salkind demanded, and we agreed, that to
the extent  required in connection with her  collateralized  interests under our
collateralized  notes to her, we would pay the legal fees she incurs as a result
of legal matters (see Note 11).

Consulting Agreements with Affiliates of Carole Salkind:

     From time to time,  we have entered  into  consulting  agreements  with the
following entities that are affiliates of Carole Salkind: Acme Associates, Inc.;
Leben Care, Inc.; Stop Noise, Inc.;  Motorworld,  Incorporated;  Inframe,  Inc.;
Avant Interactive,  Inc.; Turbo Networks,  Inc.; and Maple Industries,  Inc. Ms.
Salkind is the sole stockholder of Acme Associates,  Motorworld,  Inframe, Avant
Interactive,  Turbo Networks and Maple  Industries.  Ms.  Salkind's son,  Steven
Salkind,  is the sole  stockholder  of Leben Care and Stop  Noise.  All of these
agreements  expired  by their  terms  during  2004 or  early  2005,  except  our
agreement  with Turbo  Networks,  which expires in April 2005, and our agreement
with Maple Industries, which expires in June 2005.

                                      F-37
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     The consultants have provided on-going  consulting services and advice in a
number  of  areas  pertaining  to our  business  affairs  as we have  reasonably
requested  from time to time,  including  the  following:  (1)  advising  on our
strategic direction;  (2) assisting us in corporate development;  (3) evaluating
merger, acquisition and joint venture opportunities; (4) developing and refining
business plans; (5) developing  business and growth strategies;  (6) advising on
recruiting; (7) discussing product development issues and expansion; (8) serving
as a marketing liaison and facilitator; (9) evaluating marketing plans; and (10)
assisting  with various  contract  negotiations.  We believe that the consulting
agreements  with these companies are on terms no less favorable to us than those
that could be obtained from unaffiliated parties. The actual consulting services
under these agreements have been performed  primarily by Ms.  Salkind's  spouse,
Morton  Salkind,  acting on behalf of the  consultants.  Mr. Salkind served as a
member of our board of directors from July 1997 until January 1999.

     As compensation for these consulting services,  we have generally agreed to
pay cash fees and to grant  stock  options  to the  consulting  entities  and to
provide health insurance to Mr. Salkind.  Through December 31,2004,  we have not
paid any cash fees, but we have accrued $482,500 in fees as of December 31, 2004
and expect to accrue an additional  $27,500 through June 2005, which is when the
final consulting agreement will expire. In addition,  we have granted five-year,
fully vested stock options to the  consultants  that are exercisable at the then
market price of our common stock on the date of grant.  As of December 31, 2004,
we have granted  options to purchase an aggregate of  368,275,000  shares of our
common  stock  at a  weighted  exercise  price  per  share of  $0.0454  to these
consultants.  In  conjunction  with the issuance of these  options,  we recorded
charges  aggregating  $4.2  million,  8.3  million  and zero for the years ended
December 31, 2002,  2003 and 2004,  respectively.  Finally,  we have paid health
insurance premiums on behalf of Mr. Salkind of approximately  $1,600, $2,200 and
$4,100  in  2002,  2003  and  2004,  respectively.  We have not paid any cash or
non-cash consulting compensation directly to Carole Salkind or Morton Salkind or
to any members of their family.  The consulting  engagements and compensation of
entities  represented by Mr.  Salkind is not dependent upon the ongoing  funding
provided by Ms. Salkind.

     Accrued  consulting  fees (see Note 27) and stock  options  granted  are as
follows:

                               (In thousands of dollars, except share data)

                                Accrued Fees                   Options
                           ---------------------       -----------------------
                                                                       Weighted
                                December 31,                           Average
                           -------------------                         Exercise
                             2003        2004          Shares           Price
                           --------    -------        --------          ------
Consultant
----------
Leben Care                 $ 150.0     $ 150.0         8,350,000    $  0.0969
Acme Associates               37.5        60.0       240,500,000       0.0453
Inframe                       27.5        57.5        23,000,000       0.0420
Avant Interactive             27.5        57.5        24,500,000       0.0334
Maple Industries              17.5        47.5        23,000,000       0.0440
Turbo Networks                20.0        50.0        22,550,000       0.0414
Motorworld                    30.0        60.0        23,000,000       0.0420
Stop Noise                                             3,375,000       0.0926
                           --------    --------      -----------
Total                      $ 310.0     $ 482.5       368,275,000    $  0.0454
                           ========    ========      ===========

     On January 7, 2005, we entered into a three-year  consulting agreement with
Morton Salkind to provide us ongoing financial and consulting  advisory services
as we may  reasonably  request  from  time to time.  As  compensation  for these
consulting services,  we have agreed to pay to Mr. Salkind a monthly $5,000 cash
fee payable at the end of the term of the agreement  and to provide Mr.  Salkind
with  the use of an  automobile  owned  or  leased  by us,  together  with  auto
insurance  coverage,  through the term of the  agreement.  Our expected costs to
provide this automobile are $10,800 per year.

                                      F-38
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

SpringerRun, Inc.:

     In July 2003, we entered into a consulting agreement with SpringerRun, Inc.
John McCloy II, a director of NCT, is Chairman of the Board of Directors,  Chief
Executive  Officer and a 40% stockholder of  SpringerRun.  John McCloy II's son,
John  McCloy III,  is  President,  Treasurer,  Secretary,  a Director  and a 25%
stockholder  of  SpringerRun.  John  McCloy  II's  son,  Rush  McCloy,  is a 25%
stockholder  of  SpringerRun.  Under  this  consulting  agreement,   SpringerRun
provides consulting services to us, consisting  primarily of raising capital and
debt  financing,  identifying  potential  joint  ventures  and  other  strategic
transactions and finding distributors,  licensees and end users for our products
and  technologies.  The initial term of the SpringerRun  agreement was one year,
but was automatically  extended for additional  one-year terms unless terminated
prior to the start of any one-year term by either party. Under the agreement, we
have agreed to pay SpringerRun the following  compensation:  6% of the amount of
any equity  financing  arranged by SpringerRun plus 5% of this amount payable in
warrants to purchase  shares of our common  stock;  1% of the amount of any debt
financing  arranged by  SpringerRun;  and 7% of our net revenues  resulting from
joint  ventures  or  distribution,  license or end user  agreements  arranged by
SpringerRun for the first three years of these agreements and 5% of net revenues
resulting  from  these  agreements  thereafter.  In  lieu of  cash,  some of the
compensation  described above may, at SpringerRun's  request and if agreed to by
us, be paid in shares of our common stock or in the shares of any joint  venture
entity  entered  into by us. We have  paid  expenses  aggregating  approximately
$7,000 on behalf of  SpringerRun  through  December 31, 2004.  The  compensation
earned by SpringerRun  under the agreement  through December 31, 2004 was $1,033
and has been offset against the expenses paid by us on behalf of SpringerRun.

Spyder Technologies Group, LLC:

     In October 2003, Artera Group entered into a master  distributor  agreement
with Spyder  Technologies  Group, LLC under which Spyder  distributes the Artera
Turbo service in Puerto Rico, the U.S.  Virgin Islands and a number of countries
in the Caribbean  region.  This agreement  superseded a prior agreement  entered
into in October 2002.  Jonathan  Parrella,  the son of Michael J. Parrella,  our
Chairman and Chief Executive Officer,  is President of and holds a 25% ownership
interest in Spyder. Michael J. Parrella,  Jr., the son of Michael J Parrella and
an  officer  of  Artera  Group,  holds  a  17%  ownership  in  Spyder.   Bulldog
Communications,   Inc.  holds  a  20%  ownership  interest  in  Spyder.  Bulldog
Communications,  Inc. is owned 20% by each of Michael J.  Parrella  and his wife
and three children: Karen Parrella, Michael Parrella, Jr., Jonathan Parrella and
Daniel  Parrella.  Michael J.  Parrella is also the  Chairman of the Board,  and
Karen  Parrella is the  President,  of Bulldog  Communications.  The term of the
agreement  is through  February  2008.  The  agreement  includes a  compensation
structure  based on  royalties  payable  by Spyder  to Artera  Group on sales to
distributors  by Spyder.  The royalties  are  calculated on a per unit basis and
vary based upon the size and  category  of the end user of the  product  and the
support services  provided by Artera Group. On August 1, 2004,  Artera Group and
Spyder  entered  into an amendment  and waiver with  respect to this  agreement.
Among  other  things,   Spyder   granted  a  limited  waiver  of  its  exclusive
distribution  rights in exchange for the right to certain  finder's fees and the
royalty amounts  payable under the agreement were amended.  The finder's fee and
the new royalty amounts  payable are comparable with those currently  payable to
similarly situated, unrelated finders and master distributors, respectively.

     In September 2003, Artera Group entered into a master distributor agreement
with Spyder  under which  Spyder  distributes  the Artera  Turbo  service in the
United  States,  Canada,  South  America and  Central  America.  This  agreement
superseded  a prior  agreement  entered  into in October  2002.  The term of the
agreement is five years. The agreement  includes a compensation  structure based
on  royalties  payable  by Spyder to Artera  Group on sales to  distributors  by
Spyder. The royalties are calculated on a per unit basis and vary based upon the
size  and  category  of the end user of the  product  and the  support  services
provided by Artera  Group.  On August 1, 2004,  Artera and Spyder  amended  this
agreement to amend,  among other things,  the royalty  amounts payable under the
agreement.

     Also in September 2003, Artera Group entered into a reseller agreement with
Spyder under which Spyder resells the Artera Turbo service in the United States,
Canada,  South  America and Central  America.  Spyder is to pay Artera Group per
unit royalties that vary based upon the size and category of the end user of the
product.  The term of the  agreement is one year,  with  possible  renewals.  On
August 1, 2004,  Artera and Spyder amended this agreement to amend,  among other
things, the royalty amounts payable under the agreement.

                                      F-39
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     On August 1, 2004,  Artera and Spyder entered into a finder agreement under
which  Spyder  will  assist  Artera  Group in finding  master  distributors  and
resellers for Artera's  Artera Turbo  service.  Artera will pay Spyder a monthly
commission based upon agreements with master  distributors or resellers  reached
by Artera as a result of Spyder's performance.

     Under all of the Spyder agreements,  Spyder earned aggregate commissions of
$143,  $3,017,  and $2,614 for the years ended December 31, 2002, 2003 and 2004,
respectively.

     In addition,  from time to time on an "as needed"  basis,  Spyder  provides
technical  consulting services to Artera Group pertaining to Artera Turbo, for a
fee of $20 per hour per person.  Spyder earned  aggregate  technical  consulting
fees of $12,330,  $86,840 and $115,206 the years ended  December 31, 2002,  2003
and 2004.

Incentive Compensation of Management:

     Our Chairman of the Board of Directors and Chief Executive Officer, who, at
December  31,  2004,  held  options and  warrants to  purchase an  aggregate  of
56,729,634  shares of our  common  stock,  participated  in an  incentive  bonus
arrangement consisting of 1% of the value, in cash or otherwise, of transactions
consummated by us with third parties,  including  refinancings  of related party
convertible  notes (see Note 11). Under this bonus  arrangement,  we included in
selling,  general and administrative costs approximately $136,000,  $433,000 and
$902,000 for the years ended December 31, 2002, 2003 and 2004, respectively.  At
December 31, 2003 and 2004,  $631,000 and  $879,000,  respectively  was due this
officer under this arrangement (see Note 27).

     Our  President and  director,  who, at December 31, 2004,  held options and
warrants to purchase an  aggregate  of  14,092,073  shares of our common  stock,
participated in an incentive bonus arrangement  consisting of 1/3% of the value,
in cash or otherwise,  of  transactions  consummated  by us with third  parties,
including  refinancings  of related party  convertible  notes (see Note 11). Her
participation in this incentive bonus  arrangement  commenced  effective January
2001.  Under this  bonus  arrangement,  we  included  in  selling,  general  and
administrative costs approximately $45,000,  $144,000 and $300,000 for the years
ended December 31, 2002, 2003 and 2004,  respectively.  At December 31, 2003 and
2004,  $108,000  and  $372,000,  respectively  was due this  officer  under this
arrangement (see Note 27).

     Our Senior Vice President,  Chief Financial  Officer,  who, at December 31,
2004 held options and warrants to purchase an aggregate of 10,939,024  shares of
our common stock,  participated in an incentive bonus arrangement  consisting of
1/2% of the value, in cash or otherwise, of transactions  consummated by us with
third parties,  including  refinancings of related party  convertible notes (see
Note 11).  Under this bonus  arrangement,  we included  in selling,  general and
administrative costs approximately $68,000,  $217,000 and $451,000 for the years
ended December 31, 2002, 2003 and 2004,  respectively.  At December 31, 2003 and
2004,  $163,000  and  $558,000,  respectively  was due this  officer  under this
arrangement (see Note 27).

     Our Senior Vice President,  General Counsel and Secretary,  at December 31,
2004, held options to purchase 3,350,000 shares of our common stock.

     Our Chief Operating Officer, Artera Group, Inc., at December 31, 2004, held
120,000 shares of restricted  stock and options to purchase  2,280,000 shares of
our common stock.

     Our former Senior Vice President,  Corporate Development,  who, at December
31, 2004 held options to purchase an aggregate of 6,013,049 shares of our common
stock,  participated  in an  incentive  bonus  arrangement  under  which  he was
eligible to receive cash  compensation  for completion of specified events and a
cash  bonus  consisting  of 1% of the  value of  specific  subsidiary  financing
transactions  in  which  he was  directly  involved  and  1/2% of the  value  of
licensing  agreements  and  joint  venture  alliances  in which he was  directly
involved.  Under this bonus  arrangement,  we included  no selling,  general and
administrative  expenses for the years ended  December 31, 2002,  2003 and 2004,
respectively.  At December  31, 2003 and 2004,  $24,000 and $24,000 was due this
officer under this arrangement.

                                      F-40
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Indebtedness of Management:

     On  January  30,  2002,  Michael  Parrella,  our  Chairman  of the Board of
Directors and Chief  Executive  Officer,  entered into a promissory  note in the
principal  amount of $30,000 to borrow funds from us in anticipation of payments
due under his incentive compensation arrangement.  The note went into default on
January 31, 2004.  The note bore interest at 5.75% per annum payable at maturity
and default  interest  after  maturity at the stated rate plus 5%. The note plus
accrued interest was paid in February 2004.

     Effective April 30, 2004,  Jonathan Charry, an executive officer,  resigned
from his employment with us as our Senior Vice President, Corporate Development.
On various  dates in 2000 and 2001,  Dr.  Charry  had  entered  into  short-term
promissory  notes to borrow  funds from us in  anticipation  of payments due him
under his incentive  compensation  arrangement.  As of May 1, 2002, the borrowed
funds  had  not  been  repaid  but  were  consolidated  with  interest  into  an
outstanding  promissory  note due January  15,  2003 for a  principal  amount of
$108,000.  The note bore interest at an annual rate of 6.0% through its due date
of January 15,  2003,  and at prime plus 5%  thereafter.  This note has not been
paid.  We  continue  to seek  collection  on the May 1, 2002 note.  In 2004,  we
recorded an allowance of  approximately  $0.1 million for the portion of the May
1, 2002 note receivable from Dr. Charry (plus accrued interest) in excess of the
amount we owed to Dr. Charry (see above). At December 31, 2004, the total amount
outstanding  under this note,  including accrued but unpaid interest through the
date a reserve was recorded was $127,000.

Kambrium, AB:

     On May 20,  2004,  we entered  into a one-year  consulting  agreement  with
Kambrium,  AB, a Swedish  consulting  firm.  Under this  agreement,  Kambrium is
assisting us in establishing distribution  relationships,  large end user sales,
resellers,   capital  funding,   joint  venture  partners  and  private  network
opportunities  for our Artera Group business and our Artera Turbo product lines,
primarily in Scandinavia.  We paid Kambrium an up-front, one-time engagement fee
of  $30,000 to cover  Kambrium's  first-year  expenses  for their  provision  of
services to us. In addition,  our agreement  with  Kambrium  provides for future
pay-for-performance consideration that is generally based on a percentage of the
value  of the  revenue  or  funding  received  by us as a result  of  Kambrium's
efforts. Kambrium is currently developing several significant business prospects
for our Artera Group  business and our Artera Turbo  product  lines.  Our former
Senior Vice President,  Corporate Development was engaged by Kambrium to provide
Kambrium with product expertise to facilitate Kambrium's efforts on our behalf.

Manatt Jones Global Strategies, LLC:

     On July 1, 2004, we entered into a sixteen-month  consulting agreement with
Manatt Jones Global  Strategies,  LLC, a consulting  firm. Under this agreement,
Manatt Jones is assisting us in establishing distribution  relationships,  large
end user sales,  resellers,  capital funding, joint venture partners and private
network opportunities for our Artera Group business and our Artera Turbo product
lines,  primarily in Mexico, Latin America and Asia through the firm's extensive
contacts in those regions,  but also in the United States and elsewhere  through
the firm's extensive  contacts in the Washington,  D.C. area.  Manatt Jones also
provides us with use of their Washington,  D.C. and New York City offices. Under
this  agreement,  we pay a monthly  fee of  $16,000  to  Manatt  Jones for these
services.  Manatt Jones  recruited our former Senior Vice  President,  Corporate
Development  to serve as a Managing  Director  in which  capacity  he is able to
support Manatt Jones's efforts on our behalf as a result of his availability and
his experience with our Artera Group business. The total paid in 2004 under this
agreement was $98,000.

LightSpeed Networks, Inc.:

     On July 30, 2004,  we entered  into a two-year  consulting  agreement  with
LightSpeed Networks,  Inc., a consulting firm. Under this agreement,  LightSpeed
will  assist  us, in  particular  Artera  Group,  in  establishing  distribution
relationships  and securing capital,  funding and joint ventures.  Our agreement
with LightSpeed provides for future  pay-for-performance  consideration (after a
threshold  is met) that is generally  based on a percentage  of the value of the
revenue or  funding  received  by us as a result of  LightSpeed's  efforts.  Our
former Senior Vice  President,  Corporate  Development is the President and sole
stockholder of LightSpeed.  In addition, under the agreement with LightSpeed, we
agreed to waive the  expiration  of options  that  otherwise  would have expired
three months after his resignation from employment with us and to accelerate the
vesting of any  unvested  options then

                                      F-41
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

held by the former  officer,  in order to provide him  additional  incentive  to
further our business  objectives through his efforts with LightSpeed,  resulting
in a charge of $0.1 million. The amount paid under the arrangement was zero.

Alpha Capital Aktiengesellschaft and Libra Finance, S.A.:

     In April 2003,  we issued a  convertible  note in the  aggregate  principal
amount of $235,000 to Alpha Capital  Aktiengesellschaft,  a beneficial  owner of
more than 5% of our common  stock.  The note matures on April 22, 2005 and bears
interest  at 8% per annum.  The note is  convertible  into  shares of our common
stock at a  conversion  price per share of $0.04.  We would be  required to make
certain liquidating damages payments if we fail to effect a requested conversion
in a timely manner. We also have an obligation to register for resale the shares
of our common stock issuable upon conversion of the note.

     In September 2003, we issued a convertible note in the aggregate  principal
amount of $400,000 to Alpha  Capital and an additional  convertible  note in the
aggregate  principal  amount of $40,000 to Libra  Finance,  S.A.,  a third party
finder and a  beneficial  owner of more than 5% of our common  stock.  The notes
mature on  September  4, 2005 and bear  interest at 8% per annum.  The notes are
convertible  into shares of our common stock at a conversion  price per share of
80% of the average  closing bid price of our common  stock for the five  trading
days prior to  conversion.  We would be  required  to make  certain  liquidating
damages payments if we fail to effect a requested conversion in a timely manner.
We also have an obligation to register for resale the shares of our common stock
issuable upon conversion of the note.

     In July 2004, we issued a subordinated  collateralized  convertible note in
the  aggregate  principal  amount of $400,000 to Alpha  Capital and an unsecured
convertible note in the aggregate  principal amount of $40,000 to Libra Finance,
as third party finder. The notes mature on July 23, 2006 and bear interest at 8%
per  annum.  The notes are  convertible  into  shares of our  common  stock at a
conversion  price per share equal to the lesser of $0.0232 or 80% of the average
closing  bid  price of our  common  stock  for the five  trading  days  prior to
conversion. We would be required to make certain payments if we fail to effect a
requested  conversion in a timely manner. In connection with the issuance of the
note to Alpha  Capital,  we issued Alpha Capital a five-year  warrant to acquire
5,555,556 shares of our common stock at an exercise price per share equal to the
conversion  price of the note. We also have an obligation to register for resale
the  shares  of our  common  stock  issuable  upon  conversion  of the notes and
exercise of the warrants.

Crammer Road LLC:

     We have executed a number of transactions  with Crammer Road (see Note 15),
a  beneficial  owner of more than 5% of our common  stock,  and  settled a legal
action brought in 2002 by Crammer Road. Crammer Road was the sole stockholder of
DMC NY, the owner of 16 licenses  previously  purchased from  Distributed  Media
Corporation.  We acquired 25% of DMC NY in 2001 and 75% in 2002 (see Note 3). We
intended to put shares of our common  stock to Crammer  Road in  exchange  for a
combination  of cash and the  remaining  shares of DMC NY common stock under the
April 12, 2001 private equity credit agreement with Crammer Road, but reacquired
those  12,000 DMC NY shares in exchange  for our series H preferred  stock.  The
purchase  price paid for DMC NY aggregated  approximately  $27.2 million and was
arrived  at in various  negotiations  between us and  Crammer  Road.  We did not
obtain a  valuation  from an outside  firm.  Crammer  Road  obtained  the 16 DMC
licenses  from  other  investors  in private  transactions.  The  investors  who
initially owned the 16 DMC licenses had paid for them in 1999 with $4 million in
cash and by  surrendering  to NCT $9.6  million of NCT series E and F  preferred
stock (9,600 shares at the stated value of $1,000 per share). The holders of our
series E and F preferred stock were the original purchasers of the DMC licenses.
The purchasers of our series E and F preferred  stock (except one investor) were
the same investors who  contributed the 16 licenses to Crammer Road. The capital
contribution  of licenses  to Crammer  Road was for  purposes of  administrative
convenience to provide for such  contributors'  undertakings in respect of their
investment in Crammer Road. In turn, Crammer Road's purpose for contributing the
16 licenses to DMC NY was to provide it a perceived form of liquidity,  possibly
through an initial public  offering or through the  acquisition of DMC NY by DMC
or NCT.  Subsequently,  it  appeared  that the  licensees  lacked the ability to
initiate services under the license agreements.  Concurrently,  due to a lack of
capital (such capital  would have been  provided,  in part, by the licensees for
services  rendered on their behalf and at their request by DMC),  DMC was unable
to execute  its  business  plan to  provide,  install  and  operate  our digital
broadcast  system at  locations in the New York area.  DMC was  undercapitalized
despite  the license  fees  received  because it was unable to attract  adequate
private  financing  or  complete  an initial  public  offering  to  establish  a
sufficient installed base of Sight & Sound locations that would be

                                      F-42
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

attractive to prospective  advertisers.  As such,  Crammer Road did not perceive
that it had an opportunity to exploit the licenses in a viable business venture.
DMC did not receive any requests  from Crammer Road to install the  locations it
had  secured.  In  addition,  Crammer  Road did not seek to  obtain  advertising
contracts  as all of its efforts  would  require  additional  investment  in the
venture.  On September 27, 2000, DMC NY issued 16,000 shares of its common stock
in exchange for 16 licenses held by Crammer Road pursuant to a license  exchange
agreement.  Certain  officers and directors of NCT comprise 100% of the Board of
Directors of DMC NY.

     In May 2004,  we issued 27 shares  ($270,000  stated value) of our series H
preferred  stock to Crammer  Road for cash  advanced  in prior years of $230,000
less related fees of $24,500.  In  connection  with the  issuance,  a beneficial
conversion  feature  of  $0.1  million  was  recorded  as  a  reduction  to  the
outstanding balance of the preferred stock and an increase to additional paid-in
capital. The beneficial conversion feature was immediately amortized because the
series H preferred  is eligible to be  converted  on the date of  issuance.

21.  Income Taxes:

     We provide for income taxes in  accordance  with SFAS 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 we
determined that it is more likely than not that a deferred tax asset will not be
realized.  Our  temporary  differences  primarily  result  from  the  losses  on
available-for-sale   securities  and  stock  compensation  expenses  related  to
warrants and options.

     We file consolidated  federal and state tax returns.  At December 31, 2004,
we had available  estimated net operating loss  carryforwards  of  approximately
$208.0  million,  estimated  capital  loss  carryforwards  of $3.6  million  and
estimated  research and development  credit  carryforwards of approximately $2.6
million for federal income tax purposes,  of which  approximately  $42.3 million
will expire within the five years ending  December 31, 2009 ($3.9 million expire
in 2005) and  approximately  $165.7 million of net operating loss  carryforwards
and all capital loss  carryforwards and research and development  credits expire
at various dates from December 31, 2010 through  December 31, 2024. In addition,
the  net  operating  losses  of  acquired   companies  prior  to  their  related
acquisitions by us have not been included above.  Our ability to utilize our net
operating  loss and capital loss  carryforwards  and  research  and  development
credits  may be  severely  limited  and  subject to an annual  limitation  under
Section 382 of the Internal Revenue Code.

     The difference  between the statutory tax rate of 34% and our effective tax
rate of 0% is primarily due to the increase in the valuation  allowance of $17.7
million and $15.3 million in 2003 and 2004,  respectively.  The difference is as
follows:

<TABLE>
<CAPTION>

                                                             Years Ended December 31,
                                             ------------------------------------------------------
                                                    2002               2003               2004
                                             ----------------   -----------------  ----------------
<S>                                                <C>                <C>                <C>
Statutory rate                                     (34.0)%            (34.0)%            (34.0)%
State tax net of federal effect                     (5.6)              (5.6)              (5.6)
Permanent differences:
   Goodwill                                          9.4                -                    -
   Beneficial Conversion                             -                  -                 11.9
   Other                                             4.4                0.2               (3.6)
Effect of adjustments to prior year net
   operating loss carryforwards                      -                (19.0)               6.2
Increase in valuation allowance                     25.8               58.4               25.1
                                             ----------------   -----------------  ----------------
   Effective tax rate                                - %               - %                - %
                                             ================   =================  ================
</TABLE>

     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

                                      F-43
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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
our deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>

                                                                 (In thousands of dollars)
                                                                       December 31,
                                                            -------------------------------------
                                                                  2003               2004
                                                            -----------------  ------------------
<S>                                                                     <C>                <C>
Accounts receivable                                           $           44       $         140
Inventory                                                                112                 135
Investments                                                            6,108               4,525
Property, equipment and intangibles                                     (193)              2,105
Accrued expenses                                                       1,347                 437
Stock compensation                                                     9,337               9,422
                                                            -----------------  ------------------
     Total temporary differences                              $       16,755       $      16,764
Net operating and capital loss carryforwards                          63,784              78,949
Federal research and development credits                               2,408               2,597
                                                            -----------------  ------------------
                                                              $       82,947       $      98,310
Less:  Valuation allowance                                           (82,947)            (98,310)
                                                            -----------------  ------------------
     Deferred taxes                                           $            -       $           -
                                                            =================  ==================
</TABLE>

22.  Litigation:

Theater Radio Network - InsiderStreet (Neometrix) Litigation:

     On December 6, 2000, our subsidiary,  DMC Cinema (formerly known as Theater
Radio Network), filed suit against InsiderStreet.com,  Inc. in the Circuit Court
of the  Thirteenth  Judicial  Circuit  for  Hillsborough  County,  Florida.  The
complaint  alleged  that  InsiderStreet  breached  a  May  5,  2000  advertising
agreement  with  Theater  Radio  Network and sought a  declaratory  judgment and
specific performance of the agreement.  The agreement provided that, in exchange
for advertising services performed by Theater Radio Network, InsiderStreet would
deliver to Theater  Radio  Network $3 million in common stock of  InsiderStreet,
with an  adjustment  in the  number of shares  to  ensure  that the total  stock
delivered was worth at least $2,000,000 on May 10, 2001 and with registration of
all stock delivered.  InsiderStreet  has to date made only a partial delivery of
shares and has not  registered  any of the shares  delivered.  Discovery in this
litigation has begun. On October 23, 2001,  Theater Radio Network terminated its
representation  by outside counsel in this action due to a possible  conflict of
interest.  On February  28, 2002,  Theater  Radio  Network  (DMC Cinema)  ceased
operations,  although  that does not preclude it (or an  assignee)  from further
prosecuting the Theater Radio Network claims.  On March 26, 2002,  Theater Radio
Network  retained  new  counsel  in this  action.  On or about  October 9, 2002,
InsiderStreet.com,  Inc.  changed its name to Neometrix  Corp. On or about April
14, 2003,  Neometrix Corp. changed its name to Neometrix  Technology Group, Inc.
Management  believes  that at this stage it cannot  assess the  likelihood  of a
favorable outcome.  Further,  since the amount of damages, if any, Theater Radio
Network may recover cannot be quantified until the legal process is complete, no
amount has been recorded in the consolidated financial statements.

Production Resource Group Litigation:

     In June 2001,  Production  Resource  Group,  LLC  ("PRG")  brought  suit in
Connecticut  state  court  against us for breach of  agreements  relating to the
lease of certain Sight & Sound equipment. In December 2001, we accepted an Offer
of Judgment in the suit that  required  us to pay PRG $2.0  million.  In January
2002,  outside the scope of that  judgment,  PRG amended its complaint to allege
that Michael Parrella, our Chairman and Chief Executive Officer, in dealing with
PRG on our behalf,  committed  breaches of good faith and fair  dealing,  unfair
trade  practices and fraud. In December 2003, PRG brought suit in Delaware state
court  against  us,  Michael  Parrella,  Irene  Lebovics  (our  President  and a
Director),  John McCloy II (a Director) and Sam Oolie (a  Director),  which suit
was later amended to add Cy Hammond (our Chief Financial Officer and a Director)
as a defendant. In this lawsuit, PRG sought, among other things, the appointment
of a receiver  over our business and assets.  In May 2004,  PRG brought a second
suit in

                                      F-44
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Connecticut  state  court,  this one  against  us and Carole  Salkind,  alleging
fraudulent  transfers in connection with certain collateral Ms. Salkind holds in
connection with her loans to us.

     In October 2004, in the first  Connecticut case, PRG withdrew its complaint
against Mr. Parrella (without prejudice).

     On December 3, 2004,  we were  informed by Carole  Salkind that she entered
into a written  agreement with PRG pursuant to which PRG assigned to Ms. Salkind
all of its claims  against us and our directors  and  officers.  On December 22,
2004,  we,  all of the  individual  members  of our board of  directors  and Ms.
Salkind entered into a settlement agreement.  Under this agreement,  Ms. Salkind
irrevocably  released us and our directors from and against all claims  assigned
to Ms.  Salkind  by PRG,  except as  described  below.  In  connection  with her
release,  Ms.  Salkind  has  agreed to  dismiss  (without  prejudice)  the three
lawsuits described above.

     In consideration for entering into the settlement  agreement,  we issued to
Ms. Salkind a five-year  convertible note in the principal amount of $5 million.
The note is secured by substantially all of our assets. The note bears interest,
retroactive  to December 1, 2004, at 12% per annum payable  quarterly in arrears
beginning October 1, 2005, and bears interest at a default rate of 17% per annum
on any interest or principal not paid when due. At the election of Ms.  Salkind,
the note may be  converted  into  301,204,819  shares of our  common  stock at a
conversion price per share of $0.0166 or exchanged for shares of common stock of
any of our  subsidiaries  (other than Pro Tech) that makes a public  offering of
its common stock (at the public offering price).

     The settlement  agreement  further  provides that unless there is a default
under the note,  Ms.  Salkind  may not enforce any of the PRG claims or lawsuits
described above.  Upon full  satisfaction of the note, Ms. Salkind's  release of
the PRG claims  automatically  becomes  unqualified and Ms. Salkind must dismiss
the PRG  lawsuits  described  above,  this time with  prejudice.  However,  if a
default  occurs under the note,  all PRG claims and lawsuits  against us and our
directors  may  thereafter  be enforced by Ms.  Salkind,  including the lawsuits
previously  dismissed  without  prejudice  and  including  the  judgment of $2.0
million plus accrued  interest  described above, all to the extent necessary for
full satisfaction under the note.

     During 2004, we recorded an expense of $3.6 million in connection  with the
settlement of PRG claims. The settlement  expense included  consideration in the
form of a convertible  note payable of $5.0 million,  the fair value of warrants
issued of $1.3 million  offset by $2.7 million of judgment and interest  expense
previously accrued.

     In  connection  with the issuance of the note,  we issued to Ms.  Salkind a
five-year  warrant  to  purchase  82,500,000  shares of our  common  stock at an
exercise price per share of $0.0166.

Founding Midcore Shareholder Litigation:

     In April 2004,  Jerrold Metcoff and David Wilson filed a complaint  against
us  and  Michael  Parrella,   our  Chairman  and  Chief  Executive  Officer,  in
Connecticut state court, which complaint was subsequently  amended to add Carole
Salkind as a defendant.  This action arose out of the August 29, 2000  Agreement
and Plan of Merger pursuant to which Messrs.  Metcoff, Wilson and others sold to
us 100% of the  outstanding  shares of a  corporation  that was merged  into and
became our  subsidiary,  Midcore  Software,  Inc. A  lookback  provision  in the
agreement  requires us to issue additional shares of our common stock to Messrs.
Metcoff and Wilson to  guarantee  a fixed value to a prior share  issuance by us
that served as partial  consideration under the agreement.  Under the formula in
the agreement, we are required to issue 26,193,025 shares for the lookback as of
August 29, 2003. In addition,  the agreement  provides for a minimum  royalty of
$1.7 million through August 29, 2003, with a payment of cash or shares of common
stock by us to reach the minimum  amount for that date.  On September  23, 2003,
Messrs.  Metcoff and Wilson  elected to receive this royalty  payment in shares.
Under the formula in the agreement,  we are required to issue 34,166,551  shares
for the royalty payment.  We did not issue any of the total of 60,359,576 shares
to Messrs. Metcoff or Wilson.

     The  complaint,  as  amended,  alleges  breaches  of the  August  29,  2000
agreement and related improper acts and omissions,  including (i) our failure to
issue the lookback and royalty shares;  (ii) our breach of  representations  and
warranties in or relating to the agreement;  (iii) "unjust enrichment" of Artera
Group in its use of  intellectual  property  owned  by the  entity  that  became
Midcore Software; (iv) misrepresentations by Mr. Parrella in connection with the
agreement  and the  operation of Midcore  Software  since  August 29, 2000;  (v)
tortuous interference by

                                      F-45
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Artera Group and Mr.  Parrella with Messrs.  Metcoff's and Wilson's  contractual
relations with NCT and Midcore  Software;  (vi) our failure to deliver documents
pertaining to resales by Messrs.  Metcoff and Wilson of the shares of our common
stock they did receive under the August 29, 2000 agreement; and (vii) fraudulent
transfers  and  civil  conspiracy  of us and  Ms.  Salkind  in a  number  of our
financing   transactions  and  in  the  treatment  of  our  assets  constituting
collateral  in these  financings.  The  complaint,  as amended,  seeks  damages,
punitive damages,  interest and attorneys' fees, all in unspecified  amounts. In
September 2004, the plaintiffs filed an application for a prejudgment attachment
and  garnishment  of the  assets  of us  and  Mr.  Parrella  to  the  extent  of
$4,200,000. Messrs. Metcoff and Wilson have not pursued that application, but if
they do, we intend,  and Mr. Parrella has told us that he intends,  to object to
it. On January 7, 2005, the court granted our motion to strike one of the claims
against  Midcore  Software in the amended  complaint,  pertaining  to  Midcore's
responsibility  for our failure to issue  shares of our common  stock to Messrs.
Metcoff and Wilson.  However,  on January 24, 2005,  Messrs.  Metcoff and Wilson
moved for permission to file a substitute  complaint that would reformulate this
claim against  Midcore  Software in an effort to remove it from the scope of the
granted  motion to strike.  On March 23,  2005,  the  plantiffs  objected to our
motion for reformulation,  and a decision is pending.  Discovery in the case has
begun.

     We have agreed to indemnify Mr.  Parrella,  to the extent  permitted by our
certificate of incorporation and applicable law, for any liabilities  (including
legal fees) Mr. Parrella may incur as a result of the claims against him in this
action.  We have submitted the claims  against Mr.  Parrella to our director and
officer indemnification insurance carrier, but the carrier has not yet responded
to confirm or initially  deny coverage.  Ms.  Salkind has demanded,  and we have
agreed,  that to the extent required in connection  with her security  interests
under  our  secured  notes to her,  we will pay the legal  fees she  incurs as a
result of the claims in this action. At December 31, 2004, approximately $19,000
in legal fees were incurred by Ms.  Salkind,  of which $15,000 was paid by us in
2004. We intend to deny and defend  against all claims against us in the action.
Mr.  Parrella and Ms.  Salkind have told us that each intends to deny and defend
against all claims against him or her in the action.

Artera Trademark Oppositions:

     In December 2002,  Altera  Corporation filed oppositions to the granting of
all of our pending U.S. trademark  registration  applications for "Artera Turbo"
and  of  some  of our  pending  U.S.  trademark  registration  applications  for
"Artera." In June 2004, Altera  Corporation filed oppositions to the granting of
our  trademark  registration  applications  for "Artera  Turbo" and  "Artera" in
Australia.  The alleged basis for all of these oppositions is, in essence,  that
the  Artera  marks  are  confusingly  similar  to Altera  Corporation's  mark of
"Altera,"  which was  registered  in a number of product and service  categories
prior to the initial  filing of the  "Artera  Turbo" and  "Artera"  applications
being opposed. We intend to defend against these oppositions vigorously.

     We believe that there are no other lawsuits,  patent  infringement  claims,
matters or unasserted  claims other than the matters  discussed above that could
have a material adverse effect on our financial  position or operating  results.
Based upon  information  currently  available  to us, we believe  that  adequate
provisions  have been  estimated  and  included  in our  consolidated  financial
statements for these matters.

23.  Commitments and Contingencies:

     We are 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

                                      F-46
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

Leases:

                                  (In thousands of dollars)
    Year ending December 31,               Amount
  ---------------------------         ----------------
         2005                          $          700
         2006                                     625
         2007                                     605
         2008                                     511
         2009                                     403
         2010 and thereafter                       92
                                       ----------------
    Total minimum lease payments       $        2,936
                                       ================

     Rent expense was $0.7 million,  $0.7 million and $0.8 million for the years
ended December 31, 2002, 2003 and 2004, respectively.

Benefit Plan Liability:

     In April  1996,  we  established  the NCT  Group,  Inc.  Benefit  Plan (the
"Benefit  Plan")  which  provides,  among other  coverage,  various  health care
benefits  to  employees  and  directors  of our  United  States  operations.  We
administer  this  modified   self-insured  Benefit  Plan  through  a  commercial
third-party  administrative health care provider.  Our maximum aggregate benefit
exposure in each  Benefit  Plan fiscal  year is limited to $0.6  million,  while
individual  benefit  exposure  in each  Benefit  Plan  fiscal year is limited to
$45,000.  Benefit claims in excess of these individual or maximum aggregate stop
loss limits are  covered by a  commercial  insurance  provider to which we pay a
nominal premium for such stop loss coverage.  We record benefit claim expense in
the period in which the benefit claim is incurred. We believe we have sufficient
accruals to meet our obligation at December 31, 2004.

Advertising Commitments:

     As of December 31, 2004,  we are obligated  under Sight & Sound  technology
and services agreements to pay up to 25% of advertising revenue to the locations
airing and displaying  advertisements.  The amounts under these  agreements were
negligible at December 31, 2004.

Contingencies:

     Under the September 30, 2004 private  equity credit  agreement with Crammer
Road, we are required to put at least $5 million (the minimum commitment amount)
of our common  stock,  in exchange for cash,  at a discount to market of 9% (see
Note 15). This credit  agreement  provides that shares of up to $50 million (the
maximum  commitment  amount)  of our common  stock may be sold to  Crammer  Road
pursuant to put notices  delivered by us to Crammer  Road.  We are  obligated to
register for resale no less than 150% of the minimum commitment amount.

24.      Segment Information:

     Management  views NCT as being  organized into three  reportable  operating
segments:  communications,  media and technology.  Reportable segment data as of
December  31,  2002,  2003 and 2004 and for the years then ended are provided in
the table below. Information about our operating segments is found following the
table.  Information  about the goodwill and related  impairment of our operating
segments is found in Note 2.

     The Other data columns are used to reconcile the reportable segment data to
the  consolidated  financial  statements and is segregated  into two categories,
other-corporate  and  other-consolidating.  Other-corporate  consists  of  items
maintained at our corporate headquarters and not allocated to the segments. This
includes most of our debt and related cash,  cash  equivalents  and net interest
expense, litigation liabilities and non-operating fixed assets. Also included in
the  components of revenue  attributed to  other-corporate  are license fees and
royalty  revenue  from  subsidiaries   that  are  offset   (eliminated)  in  the
other-consolidating column.  Other-consolidating consists of items eliminated in
consolidation, such as intersegment revenue.

                                      F-47
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

<TABLE>
<CAPTION>

                                                                      (In thousands of dollars)
                                                                                   Total
                                        Communi-                                 Reportable   ---------- Other ----------   Grand
                                        cations        Media       Technology     Segments     Corporate    Consolidating   Total
                                      ------------   ----------    -----------  ------------  -----------   ------------------------
<S>                                     <C>          <C>            <C>         <C>            <C>           <C>           <C>
 2004:
License Fees and Royalties - External   $  1,116     $   2,140      $    166    $    3,422     $     566     $     (566)   $  3,422
Other Revenue - External                   1,882           171             -         2,053             -              -       2,053
Revenue - Other Operating Segments         1,094             5             -         1,099            (3)        (1,096)          -
Interest (Income) Expense, net             3,265         3,030          (385)        5,910        36,757              -      42,667
Depreciation/Amortization                  1,019         1,643             2         2,664           111         (2,392)        383
Net Loss                                 (13,530)       (7,483)          196       (20,817)      (46,200)         2,391     (64,626)
Segment Assets                            14,754        22,731           756        38,241         2,377        (35,164)      5,454
Capital Expenditures                          79             -             -            79             -              -          79


 2003:
License Fees and Royalties - External   $    843      $  2,140      $     14    $    2,997     $      16     $        -    $  3,013
Other Revenue - External                   1,722           123             -         1,845             -              -       1,845
Revenue - Other Operating Segments         1,116             9             -         1,125           173         (1,298)          -
Interest (Income) Expense, net             2,593         2,796          (353)        5,036         9,252              -      14,288
Depreciation/Amortization                  1,003         1,826           115         2,944           166         (2,386)        724
Net Loss                                 (14,398)       (4,038)          (37)      (18,473)     (130,523)       118,696     (30,300)
Segment Assets                            21,279        24,548         2,017        47,844         2,486        (37,555)     12,775
Capital Expenditures                         150             -             -           150             -              -         150


 2002:
License Fees and Royalties - External   $  2,334      $  2,140      $      -    $    4,474     $      19     $        -    $  4,493
Other Revenue - External                   2,655           171             -         2,826             -              -       2,826
Revenue - Other Operating Segments           974           (41)            -           933       (10,141)         9,208           -
Interest (Income) Expense, net             1,922         1,575          (186)        3,311         4,400              -       7,711
Depreciation/Amortization                  1,107         2,026           115         3,248           198         (2,141)      1,305
Net Loss                                 (10,836)       (8,520)         (797)      (20,153)      (16,334)        (3,618)    (40,105)
Segment Assets                            21,865        25,579         2,383        49,827        14,730        (50,988)     13,569
Capital Expenditures                          18             -             -            18             -              -          18

</TABLE>

Communications:

Artera Group, Inc.:

     Artera  develops and markets our Artera Turbo  software-based  service that
improves the effective  performance of communication  lines for Internet and LAN
based applications such as web browsing,  e-mail and file transfers. The service
accomplishes  these  improvements  by  employing  a  number  of  patent-pending,
performance   enhancement   techniques  that  decrease  the  size  and  increase
efficiencies in the movement,  storage and delivery of electronic  data.  Artera
Turbo speeds up the normal speed of a 56k dial-up line, to speeds  comparable to
digital  subscriber  lines.  Artera  Turbo also  accelerates  other  connections
including cable, DSL and integrated services digital networks.

Pro Tech Communications, Inc.:

     Pro  Tech   develops,   manufactures   and   distributes   headphones   and
communications  headset  products  and systems  into the contact  center,  quick
service restaurant,  cellular/mobile  telephone and consumer audio markets.  Pro
Tech currently offers headsets, amplifiers and headphones.

Noise Cancellation Technologies (Europe) Ltd.:

     NCT Europe  provides  research  and  engineering  services  in the field of
active sound  control  technology  to our other  business  units as needed.  NCT
Europe also provides technical sales support services to NCT for European sales.

                                      F-48
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

ConnectClearly.com, Inc.:

     ConnectClearly   was   established   to   focus  on  the   development   of
Internet-telephony-based voice applications targeted to the e-commerce and e-CRM
(electronic customer relationship  management) markets. Our proprietary Internet
telephony  software would be the basis for developing a user-friendly  "click to
talk" application for improving the completion rate of Internet  transactions by
allowing for real-time customer service access by a user.  Principal markets for
ConnectClearly are the telecommunications industries and principal customers are
original equipment manufacturers, system integrators and end users.

Media:

Distributed Media Corporation:

     DMC,  through our Hospital  Radio Network  business,  uses our  proprietary
digital technology to deliver audio and visual advertising  messages  integrated
with CD-quality music to a variety of professional  venues.  In particular,  our
Hospital Radio Network business develops Sight & Sound networks in hospitals and
other health care venues and to date has primarily  focused on  installations in
New York City metropolitan area hospitals and outpatient health care facilities.
These Sight & Sound  networks  allow  advertisers  to deliver their  messages to
healthcare  professionals  in  their  workplace  and to  numerous  patients  and
visitors in these facilities.

Technology:

Advancel Logic Corporation:

     Advancel  participates in the native Java embedded  microprocessor  market.
Advancel's  objective  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 developed a family of processor cores that can
execute  instructions  written  both in Java byte  code and the  C/C++  computer
language, significantly enhancing the rate of instruction execution, which opens
up many potential new  applications,  including next generation home appliances,
automotive applications, smart cards for a variety of applications, hearing aids
and mobile communications devices.

25.  Geographical Information (by country of origin) - Total Segments:

                                        (In thousands of dollars)
                                         As of December 31, and
                                        For the Years then Ended
                         ----------------------------------------------------
                               2002              2003             2004
                         ----------------   ---------------   --------------
Revenue
   United States         $         4,460    $        2,290    $       2,145
   Europe                          2,453             2,179            2,230
   Far East                          406               389            1,100
                         ----------------   ---------------   --------------
     Total               $         7,319    $        4,858    $       5,475
                         ================   ===============   ==============

Identifiable Assets
   United States         $        13,464    $       12,689    $       5,353
   Europe                            105                86              101
   Far East                            -                 -                -
                         ----------------   ---------------   --------------
     Total               $        13,569    $       12,775    $       5,454
                         ================   ===============   ==============

                                      F-49
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

26.  Selected Quarterly Financial Data (Unaudited):

     The following  tables contain  selected  quarterly  financial data for each
quarter of 2004 and 2003. We believe 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>

                                                (Unaudited; in thousands of dollars, except per share data)
                                                                Year Ended December 31, 2004
                                              ----------------------------------------------------------------
                                              1st Quarter  2nd Quarter  3rd Quarter   4th Quarter  Full Year
                                              -----------  -----------  -----------  -----------   -----------
<S>                                            <C>          <C>          <C>          <C>           <C>
Net revenue                                    $   1,194    $   1,440    $   1,439    $   1,402     $   5,475
Gross profit                                         962        1,226        1,208          972         4,368
Loss attributable to common stockholders         (16,141)     (12,256)     (12,245)     (31,072)      (71,714)
Loss per share - basic and diluted *           $   (0.03)   $   (0.02)   $   (0.02)   $   (0.05)    $   (0.11)


                                                                Year Ended December 31, 2003
                                              ----------------------------------------------------------------
                                              1st Quarter  2nd Quarter  3rd Quarter   4th Quarter  Full Year
                                              -----------  -----------  -----------  -----------   -----------

Net revenue                                    $   1,182    $   1,050    $   1,190    $   1,436     $   4,858
Gross profit                                         971          869          945        1,219         4,004
Loss attributable to common stockholders          (7,750)      (8,730)      (3,068)     (13,700)      (33,248)
Loss per share - basic and diluted *           $   (0.02)   $   (0.02)   $   (0.01)   $   (0.02)    $   (0.06)

</TABLE>

Footnotes:
---------
* Loss per share for each quarter is computed using the weighted-average  number
of shares  outstanding  during that quarter and loss per share for the full year
is computed using the  weighted-average  number of shares outstanding during the
year. Therefore,  the sum of the four quarters' loss per share may not equal the
full-year loss per share.

4th Quarter 2004:
-----------------
Includes $3.6 million for settlement of PRG claims.

3rd Quarter 2004:
-----------------
Includes a $4.6 million gain on the  dissolution and liquidation of Artera Group
International Limited.

2nd Quarter 2003:
-----------------
Includes $1.5 million charge for consulting expenses relating to the issuance of
options.

3rd Quarter 2003:
-----------------
Includes  $(4.9) million gain for  settlement of litigation  relating to some of
our convertible instruments.

4th Quarter 2003:
-----------------
Includes $4.7 million charge for consulting expenses relating to the issuance of
options.  Also includes $5.0 million  interest expense relating to the increased
issuance of our convertible debt.

27.  Subsequent Events:

Transactions with Carole Salkind and Affiliates:

     On January 7, 2005, we entered into a three-year  consulting agreement with
Morton Salkind to provide us ongoing financial and consulting  advisory services
as we may  reasonably  request  from  time to time.  As  compensation  for these
consulting services,  we have agreed to pay to Mr. Salkind a monthly $5,000 cash
fee payable at the end of the term of the agreement  and to provide Mr.  Salkind
with  the use of an  automobile  owned  or  leased  by us,  together  with  auto
insurance  coverage,  through the term of the  agreement.  Our expected costs to
provide this automobile are $10,800 per year.

                                      F-50
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     On January 26, 2005, we issued Ms.  Salkind an 8%  convertible  note in the
principal  amount of $400,000,  for which Ms.  Salkind paid us $400,000 in cash.
The note is due July 26,  2005 and may be  converted  into  shares of our common
stock at a  conversion  price per share of $0.0172 and  exchanged  for shares of
common  stock of any of our  subsidiaries  (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
6,750,000 shares of our common stock at an exercise price per share of $0.0172.

     Also on January 26, 2005, we refinanced  two 8%  convertible  notes that we
defaulted on by  non-payment  in January 2005 (two notes dated July 16, 2004) by
issuing  Ms.  Salkind  an  8%  convertible  note  in  the  principal  amount  of
$11,291,006,  representing  the aggregate  principal  rolled over  ($9,869,467),
default penalty (10% of the principal in default) and accrued interest. The note
is due on July 26, 2005 and may be converted  into shares of our common stock at
a conversion price per share of $0.0172 and exchanged for shares of common stock
of any of our subsidiaries (other than Pro Tech) that makes a public offering of
its common stock (at the public offering price). In connection with the issuance
of this note, we issued Ms. Salkind a five-year warrant to purchase  186,000,000
shares of our common stock at an exercise price per share of $0.0172.

     On February 9, 2005, we issued Ms.  Salkind an 8%  convertible  note in the
principal  amount of $400,000,  for which Ms.  Salkind paid us $400,000 in cash.
The note is due August 9, 2005 and may be  converted  into  shares of our common
stock at a  conversion  price per share of $0.018  and  exchanged  for shares of
common  stock of any of our  subsidiaries  (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
6,750,000 shares of our common stock at an exercise price per share of $0.018.

     Also on February 9, 2005, we refinanced  two 8%  convertible  notes that we
defaulted on by non-payment in February 2005 (two notes dated August 2, 2004) by
issuing  Ms.  Salkind  an  8%  convertible  note  in  the  principal  amount  of
$15,986,794,  representing the aggregate  principal  rolled over  ($13,987,645),
default penalty (10% of the principal in default) and accrued interest. The note
is due on August 9, 2005 and may be converted into shares of our common stock at
a conversion  price per share of $0.018 and exchanged for shares of common stock
of any of our subsidiaries (other than Pro Tech) that makes a public offering of
its common stock (at the public offering price). In connection with the issuance
of this note, we issued Ms. Salkind a five-year warrant to purchase  263,250,000
shares of our common stock at an exercise price per share of $0.018.

     On February 16, 2005, we issued Ms. Salkind an 8%  convertible  note in the
principal  amount of $400,000,  for which Ms.  Salkind paid us $400,000 in cash.
The note is due August 16, 2005 and may be  converted  into shares of our common
stock at a  conversion  price per share of $0.0184 and  exchanged  for shares of
common  stock of any of our  subsidiaries  (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
6,750,000 shares of our common stock at an exercise price per share of $0.0184.

     On  February  21,  2005,  we  refinanced  an 8%  convertible  note  that we
defaulted on by  non-payment  dated August 10, 2004 by issuing Ms. Salkind an 8%
convertible note in the principal amount of $457,762, representing the principal
rolled over  ($400,000),  default  penalty (10% of the principal in default) and
accrued interest.  The note matures on August 21, 2005 and may be converted into
shares of our  common  stock at a  conversion  price per  share of  $0.0195  and
exchanged for shares of common stock of any of our subsidiaries  (other than Pro
Tech) that makes a public  offering of its common stock (at the public  offering
price).  In connection  with the issuance of this note, we issued Ms.  Salkind a
five-year  warrant  to  purchase  7,750,000  shares  of our  common  stock at an
exercise price per share of $0.019.

     On March 8, 2005,  we issued  Ms.  Salkind  an 8%  convertible  note in the
principal  amount of $390,000,  for which Ms.  Salkind paid us $390,000 in cash.
The note is due September 8, 2005 and may be converted into shares of our common
stock at a  conversion  price per share of $0.018  and  exchanged  for shares of
common  stock of any of our  subsidiaries  (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
7,000,000 shares of our common stock at an exercise price per share of $0.018.

                                      F-51
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     On March 11, 2005, we refinanced an 8%  convertible  note that we defaulted
on by  non-payment  dated  September  2,  2004  by  issuing  Ms.  Salkind  an 8%
convertible note in the principal amount of $457,201, representing the principal
rolled over  ($400,000),  default  penalty (10% of the principal in default) and
accrued  interest.  The note matures on September  11, 2005 and may be converted
into shares of our common  stock at a  conversion  price per share of $0.018 and
exchanged for shares of common stock of any of our subsidiaries  (other than Pro
Tech) that makes a public  offering of its common stock (at the public  offering
price).  In connection  with the issuance of this note, we issued Ms.  Salkind a
five-year  warrant  to  purchase  7,750,000  shares  of our  common  stock at an
exercise price per share of $0.018.

     On March 23 2005, we refinanced an 8% convertible note that we defaulted on
by non-payment  dated September 2, 2004 by issuing Ms. Salkind an 8% convertible
note in the principal amount of $2,001,439.22, representing the principal rolled
over  ($1,751,034.50),  default  penalty  (10% of the  principal in default) and
accrued  interest.  The note matures on September  23, 2005 and may be converted
into shares of our common stock at a  conversion  price per share of $0.0183 and
exchanged for shares of common stock of any of our subsidiaries  (other than Pro
Tech) that makes a public  offering of its common stock (at the public  offering
price).  In connection  with the issuance of this note, we issued Ms.  Salkind a
five-year  warrant  to  purchase  33,000,000  shares of our  common  stock at an
exercise price per share of $0.0183.

     On March 29,  2005,  we issued Ms.  Salkind an 8%  convertible  note in the
principal  amount of $390,000,  for which Ms.  Salkind paid us $390,000 in cash.
The note is due  September  29,  2005 and may be  converted  into  shares of our
common stock at a conversion  price per share of $0.018 and exchanged for shares
of common stock of any of our subsidiaries (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
7,000,000 shares of our common stock at an exercise price per share of $0.018.

Series I Preferred Stock:

     On March 16, 2005, we entered into preferred  stock purchase  agreements to
issue an aggregate of  approximately  975.6 shares of our newly created series I
convertible  preferred  stock  to four  of our  executive  officers,  one of our
non-executive officers, a holder of shares of preferred stock of our subsidiary,
Artera Group Inc., and Steven Salkind, the son of Carole Salkind, the beneficial
owner of  approximately  91% of our  common  stock.  The  consummation  of these
transactions  occurred on March 22,  2005.  The series I  preferred  stock has a
stated  value of $1,000  per share.  No  dividends  are  payable on the series I
preferred  stock. The series I preferred stock is junior in rank to our series H
convertible  preferred  stock,  but senior in rank to our  common  stock and has
preferences  over the common  stock with respect to  distributions  and payments
upon our  liquidation,  dissolution  or  winding  up.  The  holders  of series I
preferred  stock have no voting rights (except as may be required by law).  Each
share of series I  preferred  stock is  convertible  into  approximately  47,619
shares of our common  stock,  determined  by dividing the $1,000 stated value by
the fixed conversion price of $0.0210 per share. The approximately  975.6 issued
and  outstanding  shares of our series I preferred  stock are  convertible  into
approximately  46,455,127  shares of our  common  stock.  However,  the series I
preferred stock is not convertible until 20 days after our stockholders  approve
an increase in the number of authorized shares of our common stock.

     Of the approximately  975.6 shares, we issued an aggregate of approximately
305.6 shares of our series I preferred stock to four executive  officers and one
non-executive  officer as payment for accrued but unpaid  incentive cash bonuses
of $490,000 (before income tax withholding). The specific terms of each of these
five agreements are as follows:

<TABLE>
<CAPTION>

                                                                                     Net Bonus
                                                                          Gross       Amount
                                                                          Bonus      After Tax        Shares
Holder                                                                   Amount     Withholding      Purchased
------                                                                   -------    -----------    --------------
<S>                                                                   <C>           <C>                     <C>
Michael J. Parrella, Chief Executive Officer and Chairman             $  125,000    $    81,000             81
Irene Lebovics, President                                                 46,000         27,000             27
Cy E. Hammond, Senior Vice President and Chief Financial Officer          72,000         41,000             41
R. Wayne Darville, Chief Operating Officer, Artera Group, Inc.           100,000      63,332.52       63.33252
Non-Executive Officer                                                    147,000      93,225.14       93.22514
</TABLE>

                                      F-52
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

     We also issued 160 shares of series I preferred  stock to an  individual in
exchange for 271 shares of series A convertible preferred stock of Artera Group.

     In March 2005, we issued 510 shares of our series I  convertible  preferred
stock to Steven Salkind as payment of an aggregate of accrued consulting fees of
$510,000  including  amounts  due  through  June  12,  2005,   representing  all
consulting fees payable to the consulting  entities.  These  consulting fees had
previously been assigned to Steven Salkind by these entities.

Incentive Compensation of Management:

     On March 31,  2005  three  executives  agreed  to waive a portion  of their
incentive  bonus  (see  Note 20)  earned  in 2004.  These  amounts  waived  were
$326,000,  107,000 and $158,000 for the Chief Executive  Officer,  President and
Chief  Financial  Officer,  respectively.  Further,  the payment of a portion of
these bonus amounts are subject to certain limitations..  In addition, effective
January 1, 2005 this bonus  arrangement  has been  revised and  bonuses  will be
calculated on certain actual cash inflows.  Bonuses based on equity or financing
cash inflows will cease effective June 30, 2005.

                                      F-53
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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. and  subsidiaries  as of
December  31, 2003 and 2004 and for each of the years ended  December  31, 2002,
2003 and 2004 taken as a whole. The 2002, 2003 and 2004 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/ Eisner LLP
-------------------
    Eisner LLP


New York, New York
February 25, 2005

                                      F-54
<PAGE>

<TABLE>
<CAPTION>

                                                              SCHEDULE II

NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)


------------------------------------------------------------------------------------------------------------------------------------
               Column A                                 Column B              Column C                   Column D       Column E
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Charged      Charged to
                                                        Balance at      to costs        other                           Balance at
                                                        beginning          and        accounts -       Deductions -       end of
              Description                                of year        expenses      Describe          Describe           year
---------------------------------------
<S>                       <C> <C>                       <C>             <C>         <C>                <C>               <C>
Allowance for doubtful accounts:
      Year ended December 31, 2002                      $    298        $    77     $   (29) (a)       $   (6) (b)       $    340
      Year ended December 31, 2003                           340              8          (7) (a)            -                 341
      Year ended December 31, 2004                           341             42         (30) (a)            -                 353

Reserve for uncollectible amounts:
      Year ended December 31, 2002                         1,000              -           -                 -               1,000
      Year ended December 31, 2003                         1,000              -           -                 -               1,000
      Year ended December 31, 2004                         1,000            102           -                 -               1,102

Allowance for inventory obsolescence:
      Year ended December 31, 2002                           791            239           -              (626) (b)            404
      Year ended December 31, 2003                           404              -           -              (122) (b)            282
      Year ended December 31, 2004                           282            114           -               (54) (b)            342

Accumulated depreciation:
      Year ended December 31, 2002                         4,594            852         186  (c)       (1,836) (b)          3,796
      Year ended December 31, 2003                         3,796            429          25  (c)       (1,606) (b)          2,644
      Year ended December 31, 2004                         2,644            249          20  (c)         (193) (b)          2,720

Accumulated goodwill amortization:
      Year ended December 31, 2002                         1,124              -           -                 -               1,124
      Year ended December 31, 2003                         1,124              -           -                 -               1,124
      Year ended December 31, 2004                         1,124              -           -              (424) (d)            700

Accumulated patent and other intangibles amortization:
      Year ended December 31, 2002                         3,886            453       2,116  (e)       (2,495) (f)          3,960
      Year ended December 31, 2003                         3,960            296           -                 -               4,256
      Year ended December 31, 2004                         4,256            140           -                (4) (f)          4,392
</TABLE>

Attention  is  directed  to  the  foregoing  report  of  independent  registered
accounting firm and to the notes to our consolidated financial statements.

Footnotes:
---------
(a) Accounts written off directly to expense.
(b) Accounts previously reserved for, written off in current year.
(c) Currency translation adjustments.
(d) Impairment of goodwill.
(e) Write-down intangibles to estimated fair value.
(f) Write-off fully amortized intangibles.

                                      F-55
<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, on April 7, 2005.


                                         NCT GROUP, INC.

                                         By:  /s/ MICHAEL J. PARRELLA
                                              ----------------------------------
                                              Michael J. Parrella
                                              Chief Executive Officer and
                                              Chairman of the Board of Directors


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                          Title                      Date
--------------------------------------------------------------------------------


/s/ MICHAEL J. PARRELLA         Chief Executive Officer and        April 7, 2005
-------------------------   Chairman of the Board of Directors
   Michael J. Parrella         (Principal Executive Officer)


/s/ IRENE LEBOVICS                President and Director           April 7, 2005
-------------------------
   Irene Lebovics

/s/ CY E. HAMMOND              Senior Vice President, Chief        April 7, 2005
-------------------------     Financial Officer and Director
   Cy E. Hammond               (Principal Financial Officer)


/s/ JOHN J. MCCLOY                       Director                  April 7, 2005
-------------------------
   John J. McCloy II


/s/ SAMUEL A. OOLIE                      Director                  April 7, 2005
-------------------------
   Samuel A. Oolie

                                       S-1