<PAGE>









                             SECURITIES AND EXCHANGE COMMISSION
                                   WASHINGTON, D.C. 20549
                                         FORM 10-K

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

FOR THE FISCAL YEAR ENDED       DECEMBER 31, 1996

Commission File Number:              0-18267

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

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


1025 West Nursery Road,  Linthicum, MD.                    21090
(Address of principal executiveoffices)                   (Zip Code)

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

              (Former name, former address and former fiscal year,
                         if changed since last report)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. X Yes No

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

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
Registrant is $56.3 million as of March 25, 1997.

The number of shares outstanding of the Registrant's common stock is 112,571,959
as of March 25, 1997.

                            DOCUMENTS INCORPORATED BY REFERENCE.

                                            NONE



<PAGE>


                                           PART I


ITEM 1.  BUSINESS

A.    General Development of Business

   Noise Cancellation Technologies, Inc. ("NCT" or the "Company") believes it is
the  industry  leader in the  design,  development,  licensing,  production  and
distribution  of  electronic  systems  for Active  Wave  ManagementTM  including
systems that  electronically  reduce noise and vibration.  The Company's systems
are designed for integration into a wide range of products serving major markets
in  the  transportation,   manufacturing,   commercial,  consumer  products  and
communications  industries.  The Company has begun commercial application of its
technology,  with 16 product lines sold or currently  being sold,  including the
NoiseBuster(TM)   and   NoiseBuster   Extreme(TM),   ClearSpeech-Mic(TM)("CSM"),
Adaptive Speech Filter(TM) ("ASF"), consumer headsets, the ProActive(TM) line of
industrial/commercial  active  noise  reduction  ("ANR")  headsets,  an aviation
headset for  pilots,  an  industrial  muffler or  "silencer"  for use with large
vacuums and blowers,  quieting  headsets  for patient use in magnetic  resonance
imaging ("MRI") machines, an aircraft cabin quieting system and quieting systems
for heating, ventilation and air conditioning ("HVAC") ducts (NoiseEater(TM)).

   In 1995, the Company introduced  industrial  headsets and its Adaptive Speech
FilterTM ("ASFTM"), which the Company believes will have wide application in the
communications and automotive industries.

In keeping with the direction  established in late 1994, during 1996 the Company
continued the active practice of marketing its technology  through  licensing to
third parties for fees and subsequent  royalties.  See G. "Strategic  Alliances"
and Note 3. - "Notes to Consolidated Financial Statements."

In  1997,   the  Company  plans  to  introduce   additional   products  for  the
communications  marketplace,  and additional  industrial  headset products.  The
Company is also  refining  its  NoiseEater(TM)  product  for  introduction  into
international markets. The Company has entered into a joint venture with Applied
Acoustic  Research,  L.L.C.  ("AAR") and Johnson  Controls,  Inc. ("JCI") called
OnActive   Technologies,   L.L.C.   ("OAT")  which  is  developing   Flat  Panel
Transducer(TM)    ("FPT(TM)")    systems    utilizing    Top    Down    Surround
Sound(TM)(TDSS(TM)) for automotive applications. See C. "Technology."

   In late 1995 the Company  redefined its corporate mission to be the worldwide
leader in the  advancement  and  commercialization  of Active Wave  ManagementTM
technology.  Active  Wave  ManagementTM  is  the  electronic  and/or  mechanical
manipulation of sound or signal waves to reduce noise,  improve  signal-to-noise
ratio and/or  enhance  sound  quality.  This  redefinition  is the result of the
development of new technologies,  as previously  noted,  such as ASFTM,  TDSSTM,
FPTTM, and the Silicon Micromachined  Microphone ("SMM"),  which can be used for
products  that the  Company  believes  will be utilized  in areas  beyond  noise
attenuation and control. These technologies and products are consistent with the
shift of the  Company's  focus  to  technology  licensing  fees,  royalties  and
products that represent near term revenue generation.

   As  distribution  channels are  established  and as product  sales and market
acceptance  and  awareness  of  the  commercial   applications  of  Active  Wave
ManagementTM  build,  revenues from  technology  licensing  fees,  royalties and
product  sales  are  forecasted  to fund an  increasing  share of the  Company's
requirements.  The funding  from these  sources,  if  realized,  will reduce the
Company's dependence on engineering and development funding. This progression is
reflected in the revenue  percentages  discussed briefly below and more fully in
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

   Active Wave  ManagementTM  is an evolving  industry.  The  proportion  of the
Company's operating revenues,  including technology licensing fees, derived from
engineering  and  development  services,  is reflective  of this fact.  From the
Company's  inception  through  December  31,  1996,  approximately  22%  of  its
operating  revenues have come from the sale of products and 27% of its operating
revenues  have  come  from   licensing  of  the  Company's   technology,   while
approximately  51% of its  operating  revenues  have come from  engineering  and
development services.

   Active noise control offers many advantages over traditional  passive methods
of noise control such as  conventional  mufflers,  ear protectors and acoustical
padding.  Active noise control systems: (i) generally reduce only unwanted noise
and permit  desired  sounds such as the human voice,  music or warning  tones to
pass freely,  (ii) are more successful in attenuating low frequency noise, (iii)
contribute  to energy  savings and provide  other  economic  benefits in various
applications, and (iv) generally are smaller and lighter.

   Active Wave  ManagementTM  is the  utilization  of active  noise  attenuation
technology  and certain other  technologies  which results in the electronic and
mechanical  manipulation  of sound or  signal  waves to  reduce  noise,  improve
signal-to-noise ratio and/or enhance sound quality.

   NCT  believes  that it has the leading  position in Active Wave  ManagementTM
technology,  holding more patents and intellectual  property than any other firm
in the field. The Company also has an exclusive  license to advanced  technology
for attenuating  noise in a large space,  such as the interior of an aircraft or
the passenger compartment of an automobile,  using multiple interactive sensors,
such as microphones,  and actuators, such as speakers.  Additionally the Company
has expanded its portfolio by the acquisition of various patents.

The Company has entered into a number of  strategic  supply,  manufacturing  and
marketing   alliances  with  leading  global  companies  to  commercialize   its
technology. These strategic alliances historically have funded a majority of the
Company's  research and  development,  and  provided  the Company with  reliable
sources  of  components,  manufacturing  expertise  and  capacity,  as  well  as
extensive marketing and distribution capabilities. In exchange for this funding,
the other party  generally  received a preference  in the  distribution  of cash
and/or profits or royalties from these  alliances until such time as the support
funding, plus an "interest" factor in some instances,  is recovered.  Due to the
restructuring of various  alliances,  as described in G. "Strategic  Alliances,"
there were no  preferred  distributions  due to  strategic  allies  from  future
profits of the alliances at December 31, 1996.  NCT has  established  continuing
relationships  with  Walker  Manufacturing  Company  ("Walker")  (a  division of
Tennessee Gas Pipeline Company, a wholly owned subsidiary of Tenneco,  Inc.), AB
Electrolux  ("Electrolux"),  Foster Electric Company,  Ltd.  ("Foster"),  Analog
Devices,  Inc.  ("ADI"),  Ultra  Electronics Ltd.  ("Ultra"),  The Charles Stark
Draper Laboratory,  Inc. ("Draper"),  Coherent Technologies,  Inc. ("Coherent"),
Applied Acoustic Research, L.L.C. ("AAR"), Johnson Controls, Inc. (JCI") and New
Transducers,  Ltd.  ("NXT"),  among others,  in order to penetrate major markets
more  rapidly  and  efficiently,  while  minimizing  the  Company's  own capital
expenditures. There have been substantial changes to the terms governing certain
of the foregoing relationships as described below and in Note 3. - "Notes to the
Consolidated Financial Statements".

   In February 1995 the Company purchased from Foster Electric,  Inc. ("Foster")
the  exclusive  right  to  manufacture  headsets  in the  Far  East.  Due to the
acquisition  by the  Company in 1994 of the sole  ownership  of Chaplin  Patents
Holding Co., Inc. ("CPH"), neither the Company nor Foster believed there was any
necessity  to  continue  their  supply  joint  venture,  Foster/NCT  Supply Ltd.
("FNS").  The  Company and Foster  accordingly  dissolved  FNS.  The Company and
Foster  remain  active  in  the  Far  East  through  the   Foster/NCT   Headsets
International   ("FNH")  and  NCT  Far  East,  Inc.   ("NCTFE")   marketing  and
distribution  alliances  between the Company and  Foster.  Foster  produced  six
products for NCT in 1996.

   In March 1995,  the Company and Ultra  amended  their  teaming  agreement and
concluded  a  licensing  and  royalty  agreement  for $2.6  million and a future
royalty  of 1 1/2% of sales  commencing  in 1998.  Under  the  agreement,  Ultra
acquired the Company's  active  aircraft  quieting  business based in Cambridge,
England,  leased a portion of the  Company's  Cambridge  facility  and  employed
certain of the Company's employees.

   On November  15,  1995,  the Company and Walker  executed a series of related
agreements (the "Restructuring  Agreements")  regarding the Company's commitment
to help fund $4.0  million of product and  technology  development  work and the
transfer of the  Company's  50%  interest in WNCT to Walker.  The  Restructuring
Agreements  provided  for the  transfer  of the  Company's  interest in WNCT (an
equally  owned  partnership  between  Walker and the  Company)  to  Walker,  the
elimination  of  the  Company's  previously  expensed  obligation  to  fund  the
remaining $2.4 million of product and technology  development work, the transfer
to Walker of certain  Company owned  tangible  assets related to the business of
WNCT, the expansion of certain  existing  technology  licenses and the Company's
performance  of  certain  research  and  development  activities  for  Walker at
Walker's expense as to future activities.

   An important factor for the Company's  continuing  development is its ability
to recruit and retain key  personnel.  As of March 25, 1997,  the Company had 71
employees,  including 41 engineers and technical  staff.  Among its  engineering
staff and  consultants  are several  scientists  and inventors  that the Company
believes  are  preeminent  in the  active  noise  and  vibration  control  field
worldwide.

   The Company was  incorporated  in Nevada on May 24, 1983. In April 1985,  the
Company  moved its  corporate  domicile to Florida and assumed its present name,
and in January 1987,  following the  assumption of control of the Company by the
present  management,  it changed its state of incorporation  to Delaware.  NCT's
executive offices, research and product development facility are located at 1025
West Nursery Road, Linthicum,  Maryland 21090;  telephone number (410) 636-8700.
NCT maintains sales and marketing offices at 1 Dock Street, Suite 300, Stamford,
Connecticut  06902;  telephone  number (203)  961-0500.  The Company's  European
operations are conducted through its product  development and marketing facility
in Cambridge, England. NCT also maintains a marketing facility in Tokyo, Japan.

B.       Business Strategy

   NCT's goal is to reinforce its position as the world's  leader in the design,
development and sale of Active Wave ManagementTM technology and products.

   The Company  revised its strategy and redefined  its mission  during 1994 and
1995. The acquisition of certain assets and all of the intellectual  property of
Active Noise and Vibration  Technologies,  Inc. ("ANVT") broadened the Company's
portfolio  of  intellectual  property  and removed  restrictions  on the Company
regarding  licensing of the Chaplin Patents to unaffiliated  third parties.  The
Company  can now  license the Chaplin  Patents  directly to  unaffiliated  third
parties,  which provides the Company with a greater  ability to earn  technology
licensing  fees and  royalties  from  such  patents.  Thus,  while  the  Company
continues to focus on products  which the Company  believes  will  generate near
term revenue,  it is increasing  its emphasis on technology  licensing  fees and
royalties. Further, the Company is working continuously to lower the cost of its
products and improve their technological performance.

   In late 1995,  as  previously  noted,  the Company  redefined  its  corporate
mission to be the worldwide leader in the advancement and  commercialization  of
Active Wave ManagementTM technology.  Active Wave ManagementTM is the electronic
and/or mechanical manipulation of sound or signal waves to reduce noise, improve
signal-to-noise   ratio  and/or  enhance  sound  quality.  The  redefinition  of
corporate  mission is reflected in the revised  business  plan which the Company
began to implement during the first quarter of 1996.

   In  the  area  of  technology  licensing  fees  and  royalties,  the  Company
successfully  concluded  negotiations  with Ultra in the first  quarter of 1995,
which  amended the teaming  agreement  and  instituted  a licensing  and royalty
agreement.  In November of 1995, the Company concluded similar negotiations with
Walker.  During the course of 1996, the Company  successfully  concluded certain
other licensing agreements. The Company is pursuing other negotiations and plans
to expand this sector of the business during 1997.

   NCT produces and sells MRI headsets and industrial  headsets  through various
distributors,  and also  licenses,  produces  and sells  ASFTM.  The  Company is
offering its  NoiseBusterTM  headset to consumer  markets at a suggested  retail
price of $79,  and is selling the  NoiseBusterTM  through  various  distribution
channels,  including specialty electronics retail stores, specialty catalogs and
direct sales by advertising a dedicated  "800"  telephone  number.  In the first
quarter of 1997,  the Company  began  shipping  its second  generation  consumer
headset  line  of  products  which  is  expanded  to  include  the   NoiseBuster
Extreme!(TM) and headsets for  communications,  cellular telephone and telephony
applications.

   In 1997,  the Company  plans to  introduce  additional  headset  products and
additional  communications systems products that improve the intelligibility and
quality of voice and data transmission and recognition.

   At the core of the  Company's  strategy  is its  leadership  in  Active  Wave
ManagementTM  technology.  NCT secured its basic  technology  by  acquiring  its
interest in the Chaplin Patents and the exclusive  ownership of 10 patents known
as the "NRDC Patents"  described below under Item D. "NCT Proprietary Rights and
Protection".  The Company further  solidified its position regarding the Chaplin
Patents through the 1994 acquisition of the intellectual property of ANVT, which
also  brought a number of other  patents to NCT.  In  addition,  the Company has
developed or acquired a number of patents,  licenses and proprietary  inventions
that improve and enhance the features and capabilities of its basic  technology.
NCT's basic and  enhanced  technologies  have enabled the Company to develop and
patent specific  product  applications in Active Wave  ManagementTM,  as well as
enter new markets such as telecommunications and audio.

   The  Company has  implemented  its  business  strategy in the past by forming
strategic  supply,  manufacturing  and marketing  alliances  with leading global
companies in an effort to commercialize its technology.  The strategic alliances
established by NCT have historically funded a majority of the Company's research
and  development  and  currently   provide   reliable   sources  of  components,
manufacturing  expertise  and  capacity,  as well  as  extensive  marketing  and
distribution  capabilities.  The Company continues this practice.  However,  the
acquisition of the intellectual  property of ANVT, as previously  noted,  allows
the Company more flexibility in the type of alliances and license  agreements it
concludes.

C.       Technology

   Active  noise  attenuation  is not a new idea.  Creating a mirror image of an
unwanted noise or sound wave and using it to cancel or reduce the original sound
wave dates  back to the early part of this  century.  The first  systems  used a
simple "delay and invert" approach and showed some promise,  but the prohibitive
cost of computing power and the inadequacy of acoustics and related technologies
limited their effectiveness.

   In the mid-1970's,  a major  breakthrough  took place with the application of
adaptive  filters  to  generate  anti-noise.   These  filters  allowed  for  the
development of active control systems that could  continuously  adapt to changes
in noise output both in the external world and from control components. A second
breakthrough  in the  mid-1970's  was  made  by  Professor  G.B.B.  Chaplin.  He
recognized that many noise sources,  particularly  machines,  exhibit 'tonal' or
repetitive  noise.   Chaplin  further  recognized  that  the  predictability  of
repetitive  noise  allows for  creation  of an accurate  anti-noise  signal and,
therefore, more effective cancellation or attenuation.

   Practical  application  of this  technology  was  still not  possible  as the
electronic  technology available at the time was insufficient for implementation
of active noise reduction systems.  Since that time, digital computer technology
has evolved to the point where cost-effective microprocessors,  known as digital
signal processors ("DSP") can perform the complex calculations involved in noise
cancellation  and  reduction.  This advance has made it feasible to apply active
noise reduction to previously  unsolveable  problems in low frequency noise at a
reasonable cost.

   Active Noise  Reduction.  Active  noise  reduction  systems are  particularly
effective at reducing low frequency noise. As opposed to a passive noise control
system  that is  designed  to mask a  noise,  active  noise  control  removes  a
significant  portion of the noise energy from the  environment by creating sound
waves that are equal in frequency but opposite in phase. The illustration  below
shows the relationship, in time, of a noise signal, an anti-noise signal and the
residual noise that results when they meet.



<PAGE>



                        ACTIVE NOISE REDUCTION

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

   Active Wave  ManagementTM.  Active Wave  ManagementTM  is the  combination of
active noise reduction  technology and certain other  technologies which results
in the electronic  and/or  mechanical  manipulation  of sound or signal waves to
reduce noise, improve signal-to-noise ratio and/or enhance sound quality.

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

   Silicon Micromachined  Microphone (SMM). In 1994, NCT purchased the exclusive
rights to manufacture and commercialize a silicon micromachined microphone.  NCT
is currently in negotiation with hearing aid manufacturers and others to provide
the SMM as a replacement for the more expensive  electret  microphones.  The SMM
has potential applications not only in the audible range of frequencies,  but in
the ultrasonic range as well.

   Adaptive  Speech  Filter(TM)   ("ASF(TM)").   The  Adaptive  Speech  FilterTM
algorithm (ASFTM) removes noise from voice  transmissions.  ASFTM parameters can
be adjusted to optimize  performance  for a particular  noise,  or can be set to
provide noise reduction across a wide range of noises. ASF applications  include
teleconferencing  systems,   cellular  telephones  and  "airphones",   telephone
switches, echo cancellers,  and communications systems in which background noise
is  predominant.  ASFTM  is  currently  available  for  use  on  three  hardware
platforms. The Company added an echo cancellation algorithm to its Windows-based
ACM version of ASF and has begun testing.

   NCT Audio.  The Company has  expanded  its audio  transducer  work to include
audio  systems  for the  reproduction  of  speech  and  music.  The  Company  is
developing Top Down Surround SoundTM ("TDSSTM") for the automobile audio market,
in both  original  equipment  manufacturer  ("OEM") and  after-market  versions.
TDSSTM employs Flat Panel  TransducersTM  ("FPTTM") to produce sound much closer
to the listener's ear than  conventional  speakers.  This placement allows for a
High Impact SoundTM listening  experience.  The Company is also developing FPTTM
for personal computers and telecommunications.  In these applications,  the slim
profile of the FPTTM allows for speaker  placement where  conventional  speakers
cannot be accommodated.

D.       NCT Proprietary Rights and Protection

   NCT believes it has the leading position in Active Wave ManagementTM, holding
a large number of patents and patent  applications.  The Company's  strategy has
been to build  upon its base of core  technology  patents  with  newer  advanced
technology  patents  developed by,  purchased by or exclusively  licensed to the
Company. In many instances, the Company has incorporated the technology embodied
in its  core  patents  into  patents  covering  specific  product  applications,
including  the  products'  design  and  packaging.  The  Company  believes  this
building-block  approach provides greater protection to the Company than relying
solely on the  original  core  patents.  As its patent  holdings  increase,  the
Company  believes  the  importance  of its core  patents  will  diminish  from a
competitive viewpoint.

   During 1994 the Company  purchased certain assets of ANVT, which included all
of  ANVT's  intellectual   property  rights.  See  Note  14.  -  "Notes  to  the
Consolidated Financial Statements".  Among the ANVT intellectual property rights
were ANVT's  interest in the 10 basic Chaplin Patents which are now solely owned
by NCT as the sole  shareholder of CPH. These patents cover  inventions  made by
Professor  G.B.B.  Chaplin in the late 1970s and early 1980s (some of which have
now expired).

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

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

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

   In  1994,  the  Company   purchased  the  exclusive  rights  to  the  silicon
micromachined   microphone   technology   developed  by  Draper  in   Cambridge,
Massachusetts.  At this time, two patents  describing the basic  technology have
been issued and one is pending.

   In 1995 the Company also acquired  several U.S. patents dealing with adaptive
speech filtering which it hopes to license to third parties.

   The Company  holds or has rights to 231  inventions  as of December 31, 1996,
including 86 United States patents and over 165  corresponding  foreign patents.
The Company has pending 204 US and foreign patent applications.  NCT's engineers
have made 86  invention  disclosures  for which the Company is in the process of
preparing patent applications.

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

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

   The Company has conducted only limited patent  searches and no assurances can
be given  that  patents  do not exist or will not be issued in the  future  that
would have an adverse effect on the Company's  ability to market its products or
maintain its  competitive  position  with respect to its  products.  Substantial
resources  may be  required  to obtain  and defend  patent  and other  rights to
protect present and future technology and other property of the Company.

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


<PAGE>


E.      Existing Products

      NCT Hearing Products

   MRI  Headphones.  Since 1991,  the Company has been  producing  active  noise
reduction  headsets for use by patients  undergoing  MRI  procedures.  NCT's MRI
headphone   reduces  the  noise   generated  by  the   gradient   coils  of  the
superconducting MRI magnet. This noise is known to be disturbing to patients and
is a factor in a  patient's  ability to tolerate  the  scanning  procedure.  The
Company's  product is an  implementation  of a patented  technology owned by NCT
which  permits the  delivery  of  anti-noise  signals and music  directly to the
patient  while the patient is in the bore of the MRI scanner.  While  undergoing
the MRI  examination,  a patient can be communicated  with by the doctor or scan
operator through NCT's system.  The Company is a supplier to Siemens,  a leading
manufacturer of MRI machines in the U.S.

   NoiseBusterTM.  NCT is currently marketing its NoiseBusterTM  personal active
noise reduction headphone for consumers at a suggested retail price of $79. This
active  headphone  selectively  reduces  unwanted  noise  generated  by aircraft
engines,  lawnmowers,  street traffic,  household  appliances and other annoying
noise  sources,  permitting  the  user to hear  desired  sounds,  such as  human
conversation,  warning  signals or music.  The  NoiseBusterTM  is a lightweight,
portable headphone wired to a small controller that can be clipped to the user's
clothing or belt. The NoiseBusterTM  contains a port where the consumer can plug
in personal audio devices such as a radio, tape player or compact disc player so
the user can enjoy music while in a noisy setting.  The product can also be used
with an aircraft's in-flight entertainment system.

   NoiseBusterTM   is  the  largest  selling   consumer  product  of  its  kind.
NoiseBusterTM  was awarded the 1994 Discover Magazine  Technological  Innovation
Award and the Electronics Industry Association's Innovation 95 Award.

   The Company is marketing the  NoiseBusterTM  through  distribution  channels,
including electronics retail stores, specialty catalogues and directly through a
toll-free "800" number. Initial product shipments were made in September 1993.

   NoiseBuster Extreme!(TM). The NoiseBuster Extreme!(TM) line is being expanded
to include communications headsets for cellular,  multimedia and telephony.  The
products will be the first ANR(TM)  offerings  for these  applications  and will
improve  speech  intelligibility  in the presence of background  noise.  Product
shipments began during the first quarter of 1997.

   NB-AVC.  In August 1994, the Company began shipping an active noise reduction
communications  headset  specifically  designed for use by  commercial  aviation
pilots.  The product is FAA-TSO certified and sold by Telex as the Airman ANRTM.
At 6.9 oz,  one-third the weight of other active noise reduction  headsets,  the
Airman  ANRTM is the  first  ultra-lightweight,  open-back  headset  of its kind
developed for the general aviation market.  A  high-performance  noise canceling
electret microphone is connected to a flexible boom. The controller pack accepts
four AA batteries for a minimum of 40 hours continuous operations and includes a
belt clip.

   ProActive(TM)  1000/1500.  In March 1995,  the  Company  began  shipping  its
ProActiveTM 1000 headphones and ProActiveTM 1500 communications  headsets. These
products are lightweight, openback in style and can provide up to 20dB of active
noise  reduction  between  30-1200Hz.  When used in work  settings  dominated by
low-frequency noise, these products improve comfort,  reduce fatigue and improve
concentration and productivity for the user. In the case of the ProActiveTM 1500
two-way and mobile  communications  version,  the clarity and intelligibility of
communications  is  improved  when the  masking  effect of  background  noise is
reduced. These products are powered by a rechargeable NICAD battery designed for
use  during a  12-hour  work day.  The  battery  fits into a small,  lightweight
belt-pack  that can be  clipped  onto the belt.  The  battery  can be  recharged
overnight using NCT's personal charger which is included with the product.

   ProActive(TM)  3000/3500. In August 1995, the Company expanded its industrial
headset  product line to include the  ProActiveTM  3000 series.  These  products
combine active noise reduction of low-frequency noise with a closed-back passive
ear muff,  appropriate for general  industrial use. This is the first product of
its kind in which the active  electronics  as well as the power source have been
totally  integrated  into the  earmuff,  providing  the user with  mobility  and
safety. The electronics are powered by a NICAD rechargeable battery specifically
designed  for use  during a  12-hour  work day.  The  battery  can be  recharged
overnight using NCT's personal charger.  The ProActiveTM 3000 active earmuff and
ProActiveTM 3500 active  communications  earmuff address the hearing  protection
requirements of a variety of industries.

   ProActive(TM)  3100/3600.  In December 1995, the Company announced a hard hat
version of its ProActiveTM 3000 line. This will be the first  implementation  of
active noise  reduction  earmuffs in a hard hat style and will address the needs
of industries such as construction,  utilities and others requiring both hearing
protection and hard hats for workers.  Product shipments commenced in the second
quarter of 1996.

      NCT Communications

   Adaptive Speech Filter ("ASF(TM)"). ASFTM removes background noise from voice
and data  transmission and recognition.  Available in real-time double precision
fixed-point  DSP,  floating-point  DSP,  and  Windows  95/Windows  NT ACM driver
versions,  ASFTM can be used as a pre-processor  for voice and data  compression
algorithms,  and also  contributes  to  improved  voice  and  data  recognition.
Additional  uses  include  teleconferencing  systems,  cellular  and  airphones,
telephone  switches,   echo  cancellers  and  communications  systems  in  which
background noise is predominant.

      ClearSpeech-Microphone ("CSM(TM)). NCT has introduced its ClearSpeech (TM)
line of  digital  communications  accessories.  These  products  employ  the NCT
patented ASF technology to cancel  background  noise from either  transmitted or
received  speech.  These  products can be used with  hands-free  cellular  phone
cradles,  two-way radios,  AM/FM radios, SMR networks and speaker phones.  Users
will benefit from clearer, more intelligible  conversations,  free of background
noise and other transmission interference.

      NCT Fans

      Duct Quieting System-NoiseEaterTM

   The Company has developed  low-cost  quieting systems for  installation  into
existing HVAC ducts.  The Company began offering this product line  commercially
as the  NoiseEaterTM  in  January  1994  selling  through  distributors,  and is
currently  offering  these systems for sale in the United  States.  In 1995, the
Company entered into license and royalty agreements for the NoiseEater(TM)  with
distributors in Europe and Japan.

      Revenues

      Product Revenues

   The following  table sets forth the percentage  contribution  of the separate
classes of the Company's products to the Company's product revenues for the year
ended December 31, 1996.

                        (000's)          As a %
          Products      Amount           of Total
          Headsets      $1,351             98.0%
          Microphones       20              1.5%
          Other              8              0.5%
             Total      $1,379            100.0%

      Technology Licensing Fees

   The following  table sets forth the percentage  contribution  of the separate
classes  of the  Company's  technology  to the  Company's  technology  licensing
revenue for the year ended December 31, 1996.


<PAGE>



                           (000's)         As a %
        Technology         Amount          of Total
        Communications     $  500            40.4%
        Audio                 713            57.6%
        Other                  25             2.0%
        Total              $1,238           100.0%


F.       Products Under Development

     NCT Hearing Products

   NB-PCU.  The Company is working with a leading  manufacturer  and supplier of
aircraft cabin  products on the  integration  of NCT's  EarPeaceTM  active noise
control  technology  into  in-flight  passenger   entertainment  systems.  As  a
component of the system, NCT is also developing a low-cost headset  specifically
for in-flight use to be used in  conjunction  with the  integrated  electronics.
NCT's  technology  electronically  reduces aircraft engine noise while enhancing
the  audibility  of desired  sounds  like  speech,  music and  warning  signals.
Lowering  the engine  drone can help  alleviate  the anxiety  and fatigue  often
associated  with  flying.  While  the  system  is in use,  passengers  inside an
aircraft  cabin  can  carry  on  conversations  at a  comfortable  level or hear
in-flight movies and music without over amplification and distortion. Production
systems should be available in the second half of 1997.

   Advanced  Digital  Electronic  Headsets.  NCT is working to develop  advanced
headset models using its proprietary  digital  technology.  Management  believes
that there is a broad market for specialty  industrial headsets that will permit
factory and assembly  workers to operate close to loud  machinery in the marine,
steel, textile, paper, construction,  road building and metalworking industries,
among others.  Conventional ear muffs and protectors are not as effective as the
Company's  active  headsets,  which can selectively  block machinery noise while
allowing  the  worker to listen to  ordinary  human  communications  and,  where
appropriate,  to hear warning signals, tones or bells. The Company is working to
develop headset models that will operate on a lightweight,  rechargeable battery
pack, thus allowing the worker to move freely about the factory.

    NCT Communications

   ClearSpeech  Product Line.  There are several  communications  products under
development.  Design improvements are being made to the current  ClearSpeech(TM)
product  line to  improve  market  penetration.  In  addition,  the  design of a
daughter card PCB for integration onto a T1 line card is being developed. NCT is
exploring  relationships with ADI and other chip manufacturers to develop custom
ICs for the ASF technology to reduce the cost of the ClearSpeech product line as
well as for use as a new product.

    NCT Microphones

Silicon  Micromachined  Microphone ("SMM"). In 1994, NCT purchased the exclusive
rights to manufacture and commercialize a silicon  micromachined  microphone.  A
small, compact,  surface-mountable  silicon actuator, the SMM provides customers
with improved and  adjustable  sensitivity,  a low noise floor and resistance to
environmental extremes. The ability to integrate additional circuitry on the SMM
chip has also proven  attractive to potential  users.  The SMM's low noise floor
and  adjustable  sensitivity  improve  voice  recognition  in high ambient noise
environments.  NCT is  working  with  voice  processing  and  computer  hardware
companies to utilize the SMM to enhance the performance of their systems. In the
first  quarter of 1996,  NCT released  initial  prototypes  of the devices.  The
Company is  currently  refining  the  manufacturing  process and  identifying  a
facility  for  production.  Production  of a general  purpose SMM is expected to
commence in 1998.

    NCT Audio

   Top Down Surround  Sound(TM).  TDSS(TM) is a novel  automobile  audio speaker
system developed by the Company.  Initial demonstrations and listener tests have
indicated a high degree of enthusiasm  for the High Impact  SoundTM which TDSSTM
generates.  The Company has established a joint venture,  OnActive, with AAR and
JCI for the automobile  audio speaker market and is also exploring  applications
for  High  Impact  SoundTM  technology  in  the  home  audio  and  home  theater
environments.

   Flat Panel Transducers(TM). Using a similar FPTTM technology to that employed
in TDSSTM, multi-media FPTTM targets such applications as notebook computers and
video telephones.  In these applications the slim profile of the FPTTM offers an
audio transducer  solution where room may be lacking to implement a conventional
speaker.

   On March 28, 1997, the Company  concluded a Cross License Agreement with NXT,
described  below  in "G.  Strategic  Alliances".  (See  Note 15,  "Notes  to the
Consolidated Financial Statements".)

    Small Fans

   Household  Appliances.  NCT has developed  fan quieting  systems for multiple
applications,  including a quiet  kitchen hood fan and a quiet  vacuum  cleaner.
NCT's active fan systems are designed with higher  efficiency than  conventional
fans and have  demonstrated  up to a 30%  reduction  in energy  usage.  The cost
sensitivity of the consumer  appliance  marketplace  has been a barrier to prior
introduction of this technology.  As a result of  relationships  NCT enjoys with
its component supply joint venture partners, the Company believes that the price
sensitivity issues of consumer product markets may be addressed in the near-term
as  miniaturization  of the  technology  continues  and the  unit  cost of NCT's
electronic  components  continues  to decline.  Management  believes  that NCT's
proprietary  technology  will be incorporated in a wide range of other products,
including air conditioners, dishwashers, clothes washers and dryers, hair dryers
and other types of fans.

    Panels and Enclosures

   Electric  Utility  Transformers.  Electric  power  distribution  by utilities
requires  the  use of  large  transformers,  often  placed  in  residential  and
commercial neighborhoods, which emit a low frequency "hum" that irritates people
living and working  nearby.  Utilities try to mask this noise by passive  means,
although  usually  not very  successfully.  The  Company  has  developed  active
enclosure and active panel systems which reduce the "hum" of  transformer  noise
by use of flat  actuators  that  cause the  enclosure  or panels to vibrate in a
manner to reduce the noise.  The Company can  install  its active  panel  system
directly to the metal sides or "skin" of an installed  transformer,  thus making
its systems available to retrofit markets as well as to OEMs. As an alternative,
an active enclosure can be built to house the transformer.

   In March 1995, the Company entered into an agreement with QuietPower Systems,
Inc., ("QSI") (see Item 13. "Certain Relationships and Related Transactions" and
Note 8. -  "Notes  to the  Consolidated  Financial  Statements")  by  which  QSI
received  the  exclusive  rights  to  market,  sell and  distribute  transformer
quieting  products and gas turbine  quieting  products in the utility  industry.
Under  the  agreement  QSI  funds  development  of the  systems.  The  agreement
generally  provides  that the Company  manufactures  the products and receives a
royalty of 6% from QSI on the sales of the products.

G.      Strategic Alliances

   The Company's strategy is to obtain technology  licensing fees and royalties,
and,  in certain  areas,  to produce,  market and sell Active Wave  ManagementTM
products.

    The Company's  transition from a concern  primarily  engaged in research and
development  to one engaged in the licensing  production,  marketing and sale of
Active  Wave  ManagementTM  systems  is  predicated  upon the  establishment  of
strategic alliances with major domestic and international  business concerns. In
exchange  for the  benefits  to  such  concerns'  own  products  offered  by the
Company's  technology,  these  alliances  provide  marketing,  distribution  and
manufacturing  capabilities for the Company's products and enable the Company to
limit the expense of its own research and  development  activities.  In order to
ensure  dependable  sources of supply and to maintain  quality  control and cost
effectiveness  for  components  and  integrated  circuits  incorporated  in  the
Company's  systems,  an important element of the Company's  strategy has been to
identify and enter into alliances with  integrated  circuit  manufacturers  that
will develop and produce  custom-made  chips for NCT product  applications,  and
with  manufacturers of components that will supply and integrate  components for
NCT systems. The following is a summary of the Company's key alliances:




<PAGE>


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


                                          Date Initial
                                          Relationship
         Key Strategic Alliances          Established    Applications

Walker Manufacturing Company (a division    Nov. 1989    Mufflers,
of Tennessee                                             Industrial
Gas Pipeline Company).............                       Silencers and Other
                                                         Vehicular
                                  Applications
AB Electrolux.....................          Oct. 1990    Consumer Appliances

Foster Electric Company, Ltd......          Mar. 1991    Headsets and
                                                         Electronics
Ultra Electronics, Ltd............          June 1991    Aircraft Cabin
                                Quieting Systems
Analog Devices, Inc...............          June 1992    Integrated Circuits
                                                         and Related
                                                         Products
Harris Corporation................          Sept. 1993   Integrated Circuits
                                 and Electronic
                                                         Components
The Charles Stark Draper Laboratory, Inc    July 1994    Microphones

Coherent Communications System              June 1995    Telecommunications
Corporation

Applied Acoustic Research, L.L.C..          Aug. 1995    TDSSTM

Johnson Controls, Inc.                       May 1996    TDSS(TM)

New Transducers Ltd.                        Mar. 1997    FPT(TM)

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


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

   In  November  1989,  NCT  signed  its  strategic   alliance  with  Walker,  a
world-leading  manufacturer  of  automotive  parts and  mufflers.  The  alliance
consisted of a Joint Venture and  Partnership  Agreement  with  ownership in the
resulting joint venture WNCT shared equally between NCT Muffler, Inc. and Walker
Electronic  Mufflers,  Inc. ("WEM"),  a wholly owned subsidiary of Tennessee Gas
Pipeline Company.  WNCT conducts research and develops,  manufactures,  markets,
sells and distributes  electronic mufflers  principally for use on non-military,
land-based  vehicles  on an  exclusive  basis,  and  for the  industrial  (e.g.,
compressors, diesel generators and gas turbines), marine, consumer and aerospace
sectors on a  non-exclusive  basis.  The  agreement  between  NCT and Walker was
expanded  and  extended  in  1991.  WNCT  is  currently  producing  and  selling
industrial silencers.

   In December  1993,  Tenneco  Automotive,  another  division of Tennessee  Gas
Pipeline  Company,  and the Company entered into an agreement  pursuant to which
Tenneco Automotive  purchased 1,110,083 shares of the Company's common stock for
$3.0 million in cash.  Pursuant to the agreement,  the Company  contributed $1.0
million to the capital of the WNCT  following  which WNCT repaid $1.0 million of
the capital advances  previously made to WNCT by WEM and  representatives of WEM
and the Company agreed to restructure WNCT. Such  restructuring  included giving
WNCT  worldwide  rights for the  manufacture  and sale of all  muffler  products
except those  manufactured  and sold in the consumer and defense  markets.  WNCT
also was  expanded  to have,  in  addition  to  rights  it has with  respect  to
vehicular  mufflers,  worldwide  non  exclusive  rights  to  all  silencing  and
vibration  applications  (e.g.,  mufflers,  cabin quieting,  engine mounts,  fan
quieting and engine block quieting) for all vehicles except trains, aircraft and
watercraft.  The  Company  committed  to help fund $4.0  million of product  and
technology  development work of the Company  attributable to WNCT. Also pursuant
to the  agreement  with  Tenneco  Automotive,  Walker's  right  to  acquire  the
Company's  interest in WNCT upon the occurrence of certain events was eliminated
and  Tenneco  Automotive  had the  right to have a  representative  serve on the
Company's Board of Directors.

   On November  15,  1995,  the Company and Walker  executed a series of related
agreements  (the  "Restructuring  Agreements")  and concluded  previously  noted
negotiations  with  Tenneco   Automotive  and  Walker  regarding  the  Company's
commitment to help fund $4.0 million of product and technology  development work
and  the  transfer  of the  Company's  50%  interest  in  WNCT  to  Walker.  The
Restructuring  Agreements provided for the transfer of the Company's interest in
WNCT to Walker, the elimination of the Company's  previously expensed obligation
to fund the remaining  $2.4 million of product and technology  development  work
noted above,  the transfer to Walker of certain  Company owned  tangible  assets
related to the  business of WNCT,  the  repurchase  by the Company of its common
stock which it had sold to Tenneco Automotive in December 1993, the expansion of
certain existing  technology  licenses and the Company's  performance of certain
research and development  activities for Walker at Walker's expense as to future
activities (see Note 3. - Notes to the Consolidated Financial Statements).

      AB Electrolux (Sweden)

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

      Foster Electric Company, Ltd. (Japan)

   In March 1991, NCT and Foster, the largest original equipment manufacturer of
speakers in the world and a major producer of stereo headsets and  high-fidelity
components for the consumer electronics and automotive industries, established a
joint  venture,  FNH,  to develop,  design,  manufacture  and sell active  noise
attenuation  headset  systems.  Foster  is  responsible  for  production  of the
NoiseBusterTM   consumer  headset,  the  aviation  headset  and  the  industrial
headsets. Ownership was shared equally between Foster and NCT.

   In addition to their headset  joint  venture,  in April 1991,  NCT and Foster
entered into a supply joint venture, FNS, (owned 30% by NCT) to build and supply
the customized  components NCT requires to build its active  systems,  including
sensors, microphones,  amplifiers, transducers and controllers. These components
were  sold by FNS to NCT which  distributes  them to other  NCT  production  and
distribution ventures and customers.

   In December 1993,  Foster and the Company entered into an agreement  pursuant
to which Foster purchased  740,055 shares of the Company's common stock for $2.0
million (the "Foster Shares"). Under the terms of the agreement, Foster paid the
purchase  price by means of a cash payment of one cent ($.01) per share (the par
value of the common stock) and the delivery of a series of promissory notes (the
"Foster  Notes")  in  aggregate  principal  amount  equal to the  balance of the
purchase  price.  The Foster Notes were full  recourse  notes of Foster  bearing
interest at one percent  above the rate of  three-year  United  States  Treasury
Notes and were to mature on April 17, 1997. The Foster Notes were collateralized
by the  Foster  Shares  until  paid or  "earned  out" as  described  in the next
paragraph. As of December 31, 1995, the Foster Notes had been paid in full.

   Foster and the Company also agreed that Foster would  provide and the Company
would purchase $2.0 million of various product and market  development  services
deemed necessary by the Company for the commercialization of several new headset
and other products and the further development of the Company's Japanese markets
during the period from  December  1993 to April 1997.  The Company  would define
each project or phase of this work and Foster would provide  related budgets and
performance  milestones.  Upon  completion  of each such  project or phase,  the
agreed budgeted amount therefor would be billed to the Company and will be paid,
at the  Company's  election,  either in cash or by  discharge  of an  equivalent
amount of the Foster Notes,  in which latter event an appropriate  number of the
Foster Shares would be released from the collateralization restrictions.

   In February 1995, the Company and Foster agreed to liquidate FNS.  Foster and
the Company have agreed that the  acquisition  of certain  assets of ANVT by NCT
(see Note 14. - Notes to the  Consolidated  Financial  Statements)  removed  the
necessity for the continued  existence of FNS. An orderly liquidation of FNS was
completed in April 1995.  The agreement  provided for the  Company's  repurchase
from Foster for $0.6 million of the exclusive  headset  manufacturing  rights in
the Far East (see FNH note above) and an  immediate  minimum 5% reduction in the
price of headset products to be produced by Foster for the Company.  The Company
accrued a $0.8 million charge in 1994 relating to this agreement,  of which $0.2
million was reflected as a current liability at December 31, 1994.

   On July 28, 1995, Foster Electric Co., Ltd.  ("Foster"),  Foster NCT Headsets
International  ("FNH") and the Company executed a letter agreement  amending the
1991 agreement covering the headset joint venture company, FNH. Pursuant to that
agreement  Foster  acquired the  Company's  50% interest in FNH and a license to
manufacture  headsets  for FNH and NCT with  tooling  currently  owned by NCT in
consideration  for  Foster's  assumption  of FNH's  outstanding  liabilities  of
$303,000. The agreement also grants FNH the right to sell certain headsets on an
exclusive  basis in Japan and a non-exclusive  basis  throughout the rest of the
Far East, in consideration for a royalty on the sale of such headsets.

   The Company and Foster remain active in the Far East through  NCTFE,  a sales
and marketing joint venture between the Company and Foster.  Foster produced six
products for NCT in 1995, primarily industrial headsets

   The Company's Far East marketing and product showroom  facility is maintained
at Foster's facilities in Tokyo, Japan.

      Ultra Electronics Ltd. (U.K.)

   Since 1991, NCT and Ultra and its predecessor,  part of the Dowty Group, have
been designing and developing  systems to enhance  passenger comfort by quieting
aircraft  passenger  compartments in certain  propeller driven  aircraft,  which
Ultra sells to the worldwide  turbo-prop aircraft market. In May 1993, Ultra and
the  Company  signed a teaming  agreement  to produce  and install the NCT cabin
quieting system on the SAAB 340 aircraft.  Deliveries under this agreement began
in 1994. In March 1995, the Company and Ultra amended the teaming  agreement and
concluded a licensing and royalty agreement for $2.6 million. In addition, Ultra
will pay the Company a royalty of 1 1/2% of sales of products  incorporating NCT
technology beginning in 1998.

      Analog Devices, Inc. (U.S.)

   In June 1992,  NCT and ADI formed an equally  owned joint  venture to design,
develop,  and  manufacture  computer chips to be  incorporated  in the Company's
active noise and vibration  control  systems.  ADI is a leading  manufacturer of
precision,  high-performance  integrated  circuits  used in analog  and  digital
signal  processing  applications.  Under the terms of the  agreement,  ADI, as a
subcontractor to the joint venture,  will complete the design and development of
specialized chips incorporating NCT's technology.

      Harris Corporation (U.S.)

   In September  1993,  the Company and Harris entered into an agreement to form
an equally owned limited  liability  company to design,  develop and manufacture
custom electronic components incorporating NCT patents and technology for use in
the  Company's  active  noise and  vibration  control  systems  and to sell such
components  to NCT and NCT's  customers.  Harris  is a  worldwide  designer  and
supplier of  advanced  electronic  systems,  semi-custom  and custom  integrated
circuits and semiconductors, communications systems and equipment and electronic
office products. Under the terms of the agreement, Harris, as a subcontractor to
the limited  liability  company,  is working  with the Company in the design and
development of custom and semi-custom electronic components and will manufacture
the specialized components incorporating the Company's technology.

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

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

      Coherent Communications Systems Corporation (U.S.)

   In  June  1995,  NCT and  Coherent  of  Leesburg,  Virginia  entered  into an
agreement whereby NCT granted a license to Coherent to sell and Coherent and NCT
will work together to develop and sell certain telecommunication products.

      Applied Acoustic Research, L.L.C, (U.S.)

   In December, 1995, NCT and AAR of State College,  Pennsylvania formed a joint
venture, OnActive Technologies,  L.L.C. ("OAT"), to commercialize advanced audio
applications,  such as FPTTM and TDSSTM,  into total audio systems and solutions
for the ground based vehicle market. Both partners,  who own equal shares of the
joint venture, have licensed their proprietary technology to the joint venture.

   In May, 1996,  Hoover  Universal,  Inc., a wholly owned subsidiary of Johnson
Controls,  Inc.  ("JCI")  acquired a 15% equity interest in OAT for $1.5 million
and acquired  rights to certain of the Company's and AAR's related patents for a
total of $1.5  million,  half of which was paid to the Company and half of which
was paid to AAR.

      New Transducers Ltd (UK).

     On March 28, 1997, the Company and New Transducers Ltd.  ("NXT"),  a wholly
owned  subsidiary  of Verity  Group PLC  ("Verity")  executed a cross  licensing
agreement.  Under terms of the agreement,  the Company will license  patents and
patents pending which relate to FPT(TM)  technology to NXT, and NXT will license
patents and patents pending which relate to parallel  technology to the Company.
In  consideration  of the  license,  NCT  recorded a $3.0  million  license  fee
receivable  from  NXT as well as  royalties  on  future  licensing  and  product
revenue. Concurrently with the cross licensing agreement, the Company and Verity
executed agreements granting each an option for a four year period commencing on
March 28, 1998,  to acquire a specified  amount of the common stock of the other
subject to certain  conditions and  restrictions.  With respect to the Company's
option to Verity, 3.8 million shares of common stock  (approximately 3.4% of the
then  issued and  outstanding  common  stock) of the Company are covered by such
option, and 5.0 million ordinary shares  (approximately  2.0% of the then issued
and outstanding  ordinary shares) of Verity are covered by the option granted by
Verity to the Company. The exercise price under each option is the fair value of
a share of the  applicable  stock on March 28, 1997,  the date of grant.  If the
Company does not obtain stockholder  approval of an amendment to its Certificate
of  Incorporation  increasing its  authorized  common stock capital by an amount
sufficient  to provide  shares of the Company's  common stock  issuable upon the
full  exercise  of the option  granted to Verity by  September  30,  1997,  both
options  expire.   (See  Note  15.  -  "Notes  to  the  Consolidated   Financial
Statements".)

H.       Marketing and Sales

   In addition to marketing its Active Wave ManagementTM  technology and systems
through its  strategic  alliances as described  above,  the Company also uses an
internal sales force of eight people, its executive officers and directors,  and
two independent sales representatives. The independent sales representatives may
earn  commissions of generally up to 6% of revenues  generated from sales of NCT
products to customers  introduced  to NCT by them,  and up to 5% of research and
development funding revenues provided by such customers.  The Company intends to
continue  to expand its  internal  sales force on a limited  basis as  resources
become available.

   Note  12. - "Notes  to the  Consolidated  Financial  Statements"  sets  forth
financial  information relating to foreign and domestic operations and sales for
the years ended December 31, 1996, 1995 and 1994.

   The Company does not have a significant  foreign  exchange  transaction  risk
because the majority of its non-U.S.  revenue is in U.S. dollars.  The remaining
revenue is in British pounds sterling and the Company's  underlying cost is also
in pounds sterling creating a natural foreign exchange protection.

I.       Competition

   The Company is aware of a number of direct competitors in the field of Active
Wave  Management(TM).  Indirect  competition also exists in the field of passive
sound and vibration  attenuation.  The Company's  principal known competitors in
active control systems are Andrea  Electronics  Corporation,  Bose  Corporation,
Digisonix  (a division of Nelson  Industries,  Inc.),  Group Lotus PLC and Lotus
Cars Limited,  Lord  Corporation,  Matsushita  Electric  Industrial  Co.,  Ltd.,
Sennheiser Electronic Corp. and Sony Corporation, among others. To the Company's
knowledge,  each of such  entities  is  pursuing  its own  technology  in active
control  systems,  either on its own or in  collaboration  with others,  and has
recently  commenced attempts to commercially  exploit such technology.  NCT also
believes that a number of other large companies,  such as the major domestic and
foreign automobile and appliance manufacturers, and aircraft parts suppliers and
manufacturers,  have research and  development  efforts  underway in Active Wave
Management(TM) and active noise and vibration control.  Many of these companies,
as  well  as the  Company's  potential  competitors  in the  passive  sound  and
vibration  attenuation  field and other  entities  which  could enter the active
noise  and  vibration   attenuation  field  and  other  fields  of  Active  Wave
Management(TM)  as  the  industry  develops,   are  well  established  and  have
substantially greater management,  technical,  financial,  marketing and product
development resources than the Company.

J.       Government Contracts

   The Company has acted as a government  subcontractor  in connection  with its
performance of certain engineering and development  services.  No such contracts
were in effect during 1996.  Government contracts provide for their cancellation
at  the  government's  sole  discretion,   in  which  event  the  contractor  or
subcontractor may recover its actual costs up to the date of cancellation,  plus
a specified profit percentage. Governmental expenditures for defense are subject
to the political process and to rapidly changing world events, either or both of
which may result in significant reductions in such expenditures in the proximate
future.  Government  contracts  are  not  viewed  as a  significant  part of the
Company's business.

K.       Research and Development

Company-sponsored  research and  development  expenses  aggregated $7.0 million,
$4.8 million and $9.5 million for the fiscal years ended December 31, 1996, 1995
and 1994, respectively.

L.       Environmental Regulation Compliance

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

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

M.       Employees

   The Company had 71  employees on March 25,  1997.  None of such  employees is
represented  by a labor union.  The Company  considers  its  relationships  with
employees to be satisfactory.


ITEM 2.  PROPERTIES

   The  Company's  executive  office is located at the site of its  research and
technical   support   laboratory  in  Linthicum,   Maryland,   where  it  leases
approximately  40,000  square feet of space under  leases  which  expire in July
2000. The leases provide for current monthly rentals of  approximately  $35,000,
subject to annual inflationary adjustments

   The Company maintains a sales and marketing office in Stamford, Connecticut
where it leases  approximately  5,000  square  feet of space under a lease which
expires  in  December  2001  and  provides  for  a  current  monthly  rental  of
approximately $5,000.

   The Company's United Kingdom  operations are conducted in Cambridge,  England
where it leases 12,500 square feet of space under a lease which expires in March
1999, and provides for a current monthly rental of approximately $14,000.


ITEM 3.  LEGAL PROCEEDINGS

   On or about June 15, 1995,  Guido  Valerio  filed suit against the Company in
the  Tribunal  of Milan,  Milan,  Italy.  The suit  requests  the Court to award
judgment in favor of Mr.  Valerio as follows:  (i)  establish and declare that a
proposed independent sales representation  agreement submitted to Mr. Valerio by
the Company and signed by Mr.  Valerio but not  executed by the Company was made
and entered  into  between Mr.  Valerio and the Company on June 30,  1992;  (ii)
declare that the Company is guilty of breach of contract and that the  purported
agreement  was  terminated  by  unilateral  and  illegitimate  withdrawal by the
company;  (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions  to which Mr.  Valerio  would have been  entitled if the Company had
followed up on certain alleged  contacts made by Mr. Valerio for an amount to be
assessed by technicians and  accountants  from the Court Advisory  Service;  (v)
order the  Company  to pay  damages  for the harm and  losses  sustained  by Mr.
Valerio in terms of loss of  earnings  and  failure to receive due payment in an
amount such as shall be determined following preliminary  investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay  damages for the harm done to Mr.  Valerio's  image for an amount
such as the judge shall deem  equitable and in case for no less than 500 million
Lira  ($3.1  million).  The  Company  retained  an  Italian  law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the  Company,  through  its  Italian  counsel,  filed a brief of reply  with the
Tribunal of Milan  setting  forth the  Company's  position  that:  (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is  groundless  since the parties  never  entered into an  agreement,  and (iii)
because Mr.  Valerio is not enrolled in the official  Register of Agents,  under
applicable  Italian law Mr. Valerio is not entitled to any  compensation for his
alleged  activities.  A preliminary  hearing before the Tribunal was held on May
30, 1996,  certain pretrial  discovery has been completed and a hearing before a
Discovery  Judge was held on October 17, 1996.  Submissions of the parties final
pleadings  were to be  made in  connection  with  the  next  hearing  which  was
scheduled for April 3, 1997. On April 3, 1997,  the  Discovery  Judge  postponed
this hearing to May 19, 1998, due to reorganization  of all proceedings  pending
before the Tribunal of Milan.  Management  is of the opinion that the lawsuit is
without  merit and will  contest it  vigorously.  In the opinion of  management,
after consultation with outside counsel, resolution of this suit should not have
a material  adverse  effect on the Company's  financial  position or operations.
However,  in the event  that the  lawsuit  does  result in a  substantial  final
judgment against the Company,  said judgment could have a severe material effect
on quarterly or annual operating results.


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

      There were no matters  submitted to a vote of security  holders during the
fourth quarter of the year ended December 31, 1996.




<PAGE>


                                          PART II

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

(a) The Company's common stock is currently traded on the NASDAQ National Market
System under the symbol "NCTI".  High and low last sale information for 1996 and
1995 for the common stock for specified quarterly periods is set forth below:

                          1996                    1995
                     HIGH       LOW          HIGH       LOW
      1st Quarter     7/8      17/32       1 3/16       9/16
      2nd Quarter   1 5/32     21/32       1 3/16       9/16
      3rd Quarter    15/16      5/8        1 9/16       1/2
      4th Quarter    11/16     11/32       1 1/16       9/16

(b) At December 31, 1996, there were  approximately  3,856 record holders of the
Company's common stock.

(c) The Company has neither  declared  nor paid any  dividends  on its shares of
common  stock  since  inception.  Any  decisions  as to the  future  payment  of
dividends will depend on the earnings and financial  position of the Company and
such  other  factors  as the Board of  Directors  deems  relevant.  The  Company
anticipates that it will retain earnings,  if any, in order to finance expansion
of its operations.

ITEM 6.  SELECTED FINANCIAL DATA

   The selected consolidated financial data set forth below are derived from the
historical  financial  statements  of the  Company.  The data set forth below is
qualified in its entirety

<PAGE>


   by and  should  be read  in  conjunction  with  the  Company's  "Consolidated
Financial  Statements"  and  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations" that are included elsewhere herein.


                                   (In Thousands of Dollars and Shares)
                                         Years Ended December 31,
                             ---------------------------------------------------
                               1992       1993       1994       1995       1996
                             ---------------------------------------------------
STATEMENTS OF OPERATIONS
DATA:
REVENUES
 Product Sales                    $740     $1,728     $2,337   $1,589     $1,379
 Engineering and                 3,779      3,598      4,335    2,297        547
development services
 Technology licensing fees
and other                           62         60        452    6,580      1,238
      Total revenues                                                    _
                                $4,581     $5,386     $7,124  $10,466     $3,164
COSTS AND EXPENSES:
 Cost of sales                    $608     $1,309     $4,073   $1,579     $1,586
 Cost of engineering and         2,748      2,803      4,193    2,340        250
development services
 Selling, general and            5,151      7,231      9,281    5,416      4,890
administrative
 Research and development        4,214      7,963      9,522    4,776      6,974
 Interest (income) expense,      (169)      (311)      (580)     (49)         17
net
 Compensation                    7,442                   ---      ---        ---
expense-removal of vesting                     --
condition                                     (1)
 Equity in net (income)            117   3,582(2)      1,824     (80)         80
loss of unconsolidated
affiliates
 Other expense, net
                                    89        ---        718      552        192
      Total costs and
expenses                       $20,200    $22,577    $29,031  $14,534    $13,989
 Net loss                    $(15,619)($(17,191)(2)$(21,907) $(4,068)  $(10,825)
 Weighted average number of
common
   shares outstanding(3)
                                61,712     70,416     82,906   87,921    101,191
 Net loss per share
                             $(0.25)(1)$(0.24)(2)    $(0.26)  $(0.05)    $(0.11)

                                                 December 31,
                             ---------------------------------------------------
                               1992       1993       1994       1995       1996
                             ---------------------------------------------------
BALANCE SHEET DATA:
 Total assets                  $15,771    $29,541    $12,371  $9,583     $5,881
 Total liabilities               2,069      6,301      6,903   2,699      3,271
 Long-term debt                    ---        ---        ---     105         --
 Accumulated deficit          (29,682)   (46,873)   (68,780) (72,848)  ($83,673)
 Stockholders equity(4)         13,702     23,239      5,468   6,884      2,610
 Working capital                11,038     19,990        923   1,734    (1,312)
(deficiency)

(1)Includes a one-time  non-cash  charge of $7,441,875 or $.12 per share for the
   year  ended  December  31,  1992,  related  to the  removal  of  the  vesting
   conditions to certain  warrants.  This charge  removed any  potential  future
   charge to earnings related to such warrants.

(2)In connection with the sale of Common Stock to Tenneco Automotive in December
   1993, the Company  recognized  its share of cumulative  losses not previously
   recorded  with  respect  to  its  joint  venture  with  Walker  amounting  to
   $3,581,682.

(3) Does not include  shares  issuable  upon the exercise of  outstanding  stock
    options and warrants, since their effect would be antidilutive.


(4) The Company has never declared nor paid cash dividends on its Common Stock.




<PAGE>


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

      General Business Environment

   The Company is in transition from a firm focused  principally on research and
development of new technology to a firm focused on the  commercialization of its
technology through technology licensing fees, royalties and product sales. Prior
to 1995, the Company  derived the majority of its revenues from  engineering and
development  funding  provided by  established  companies  willing to assist the
Company in the development of its active noise and vibration control technology,
and  from  technology  licensing  fees  paid by such  companies.  The  Company's
strategy generally has been to obtain technology  licensing fees when initiating
joint ventures and alliances with new strategic partners.  Revenues from product
sales were limited to sales of specialty  products and prototypes.  In 1996, the
Company received  approximately  17% of its operating  revenues from engineering
and development  funding,  compared with 22% in 1995. Since 1991,  revenues from
product sales have  generally  been  increasing,  although in 1996 product sales
declined due to delays in production  and reduced  pricing of certain  products.
Management expects that technology  licensing fees,  royalties and product sales
will   become   the   principal   source  of  the   Company's   revenue  as  the
commercialization of its technology proceeds.

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

   Notes 1. and 15. to the accompanying  Consolidated  Financial  Statements and
the liquidity and capital  resources  section which follows describe the current
status of the  Company's  available  cash balances and the  uncertainties  which
exist that raise  substantial doubt as to the Company's ability to continue as a
going concern.

   As previously disclosed,  the Company implemented changes in its organization
and focus in late 1994.  Additionally,  in late 1995 the Company  redefined  its
corporate   mission  to  be  the  worldwide   leader  in  the   advancement  and
commercialization   of  Active  Wave   ManagementTM   technology.   Active  Wave
ManagementTM is the electronic and/or mechanical manipulation of sound or signal
waves to reduce  noise,  improve  signal-to-noise  ratio  and/or  enhance  sound
quality. This redefinition is the result of the development of new technologies,
as previously  noted,  such as ASFTM,  TDSSTM,  FPTTM, and the SMM, which create
products  that the Company  believes  will be utilized in areas beyond noise and
vibration reduction and control.  These technologies and products are consistent
with shifting the Company's focus to technology  licensing  fees,  royalties and
products  that  represent  near term revenue  generation.  The  redefinition  of
corporate  mission is reflected in the revised  business  plan which the Company
began to implement in the first quarter of 1996.

   As  distribution  channels are  established  and as product  sales and market
acceptance  and  awareness  of  the  commercial   applications  of  Active  Wave
ManagementTM  build as  anticipated  by  management,  revenues  from  technology
licensing fees, royalties and product sales are forecasted to fund an increasing
share  of the  Company's  requirements.  The  funding  from  these  sources,  if
realized,  will reduce the Company's  dependence on engineering  and development
funding.  The beginning of this process is shown in the shifting  percentages of
operating revenue, discussed below.

   In January 1996, the Company  adopted a plan that  management  believed would
generate  sufficient funds for the Company to continue its operations into 1997.
Under this plan, as amended,  the Company needed to generate  approximately  $17
million to fund its  operations  for 1996.  The Company  believed  that it could
generate these funds from  operations in 1996,  and the additional  cash funding
obtained  from sales of common  stock  (refer to Notes 1. and 6. - "Notes to the
Consolidated  Financial  Statements.").  The  Company  did not meet its  revenue
targets for 1996.

   Success in generating  technology licensing fees, royalties and product sales
are  significant  and critical to the Company's  ability to overcome its present
financial difficulties. The Company cannot predict whether it will be successful
in obtaining market  acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues.

   From the  Company's  inception  through  December  31,  1996,  its  operating
revenues,  including technology licensing fees and royalties,  product sales and
engineering  and  development  services,  have  consisted of  approximately  22%
product  sales,  51%  engineering  and  development  services and 27% technology
licensing fees.

   The  Company  has  entered   into  a  number  of  alliances   and   strategic
relationships  with established firms for the integration of its technology into
products.  The speed with which the Company can achieve the commercialization of
its  technology  depends in large  part upon the time  taken by these  firms and
their  customers  for  product  testing,  and  their  assessment  of how best to
integrate  the  technology  into their  products  and into  their  manufacturing
operations.  While the  Company  works with these  firms on product  testing and
integration,  it is not always able to influence how quickly this process can be
completed.

   The Company began shipping ProActiveTM headsets in 1995 and continues to sell
NoiseBuster(TM)  consumer headsets.  The Company is now selling products through
three  of  its  alliances:   Walker  is  manufacturing  and  selling  industrial
silencers;  Siemens  is buying  and  contracting  with the  Company  to  install
quieting  headsets for patient use in Siemens' MRI  machines;  and in the fourth
quarter of 1994 Ultra began installing  production model aircraft cabin quieting
systems  in  the  SAAB  340  turboprop   aircraft.   Management  believes  these
developments  and  those  previously  disclosed  help  demonstrate  the range of
commercial  potential for the Company's  technology  and will  contribute to the
Company's  transition from  engineering and development to technology  licensing
fees, royalties and product sales.

   The  availability  of  high-quality,   low-cost  electronic   components  for
integration   into   the   Company's   products   also   is   critical   to  the
commercialization of the Company's  technology.  The Company is working with its
strategic  partners  and  other  suppliers  to  reduce  the size and cost of the
Company's  systems,  so  that  the  Company  will  be  able  to  offer  low-cost
electronics and other components suitable for high-volume production.

   The Company has continued to make  substantial  investments in its technology
and  intellectual  property and has incurred  development  costs for engineering
prototypes,  pre-production models and field testing of several products. During
1994,  the  Company   acquired  a  license  to  two  patents  in  the  field  of
micro-machined  microphones and concluded the acquisition of all of the patents,
know-how and  intellectual  property of a former  competitor,  ANVT.  Management
believes that the Company's  investment  in its  technology  has resulted in the
expansion  of  its  intellectual  property  portfolio  and  improvement  in  the
functionality, speed and cost of components and products.

   The  Company  has  become   certified  under  the   International   Standards
Organization  product quality program known as "ISO 9000",  and has successfully
undergone two quality  audits.  Since the third quarter of 1994, the Company has
reduced its worldwide  work force by 59% from 173 to 71 current  employees as of
March 25, 1997.

   Because the Company did not met its revenue targets for 1996, it entered into
certain transactions, which provided additional funding as follows:

   On March 28, 1996, the Company sold 2,000,000 shares of its common stock in a
private placement that provided net proceeds to the Company of $0.7 million. The
purchaser  of the  common  stock was  subject to  certain  resale  and  transfer
restrictions  including those under  Regulation D of the Securities Act of 1933,
as amended.  The stock purchase  agreement relating to this sale of common stock
required the Company to file a  registration  statement  with the Securities and
Exchange  Commission  covering the  registration of the shares for resale by the
purchaser.   Such  a  registration  statement  was  declared  effective  by  the
Commission on September 3, 1996.

   On April 10, 1996, the Company sold 1,000,000  shares,  in the aggregate,  of
its common stock to three  institutional  investors in a private  placement that
provided net  proceeds to the Company of $0.3  million.  Contemporaneously,  the
Company sold secured convertible term notes in the aggregate principal amount of
$1.2 million to those institutional investors and granted them each an option to
purchase an aggregate of $3.45  million of  additional  shares of the  Company's
common stock.  The per share  conversion  price under the notes and the exercise
price  under the options  were to be equal to the price  received by the Company
for the  sale of the  1,000,000  shares  subject  to  certain  adjustments.  The
conversion  of the notes and the  exercise of the options  were both  subject to
stockholder approval of an appropriate amendment to the Company's Certificate of
Incorporation  increasing  its  authorized  capital to provide for the requisite
shares. On July 17, 1996, the Company's  stockholders  authorized an increase in
the Company's  authorized  common stock capital to 140,000,000  shares of common
stock.

   On  August  13,  1996,  the three  institutional  investors  converted  their
secured,  convertible  term notes and  exercised  their  options  in full.  As a
result,  the Company issued 13,403,130  shares, in the aggregate,  of its common
stock to such  investors,  received  $3.45  million  in cash,  and  effected  by
conversion  to its  common  stock the  payment  of the notes  together  with the
accrued interest thereon.

   In conjunction  with the foregoing sale of common stock and convertible  term
notes,  the  Company  also  agreed  to file a  registration  statement  with the
Securities and Exchange Commission ("SEC") covering the applicable shares and to
use its best efforts to have such registration  statement  declared effective by
the SEC as soon as practicable.  The relevant agreements provide for significant
monetary  penalties  in the event such  registration  statement  is not declared
effective on or before November 14, 1996, and in the event its  effectiveness is
suspended for other than brief permissible  periods.  However,  the registration
statement was declared effective by the SEC on September 3, 1996.

   On August 29, 1996,  the Company sold 1.8 million  shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common  stock in  November,  1995.  The  Company  received  $0.9  million of net
proceeds.  The purchaser is subject to certain resale and transfer  restrictions
with respect to these shares.

   On November  19,  1996,  the Company  entered  into an  agreement  to sell an
aggregate  amount  of  $3.0  million  of  non-voting  subordinated   convertible
debentures  (the  "Debentures")  in a private  placement  to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before  November 27,  1996.  The  Debentures,  issued  pursuant to  Regulation S
promulgated  under the Securities  Act of 1933 ("the  November 1996  Financing")
were to be due  December  31,  1999  and earn 8%  interest  per  annum,  payable
quarterly in either cash or the  Company's  common stock at the  Company's  sole
option.  Subject to certain common stock resale restrictions,  the Investor,  at
its  discretion,  would be able to convert the principal and interest due on the
Debentures  into the Company's  common stock at any time on or after January 20,
1997.  In the event of such a  conversion,  the  conversion  price  would be the
lesser of 85% of the  closing  bid price of the  Company's  common  stock on the
closing  date or 70% of the average  closing bid price for the five trading days
immediately preceding the conversion.  To provide for the above noted conversion
and  interest  payment  options,  the Company  would,  at  closing,  reserve and
subsequently cause to be deposited with an escrow agent 15 million shares of the
Company's common stock. Subject to certain conditions,  the Company also had the
right to require the Investor to convert all or part of the Debentures under the
above noted conversion  price conditions after February 15, 1998.  Subsequent to
the closing date of the above financing, the Company was to use its best efforts
to carry out the  necessary  actions to effect at least a 10:1 reverse  split of
the Company's common stock.

      The November  1996  financing was not  completed as described  above.  The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained  subscriptions  for $3.9 million of such amount,  of which $3.4 million
was completed with five investors that are different than the Investor described
above,  between  January  15,  1997 and March 25,  1997,  which  resulted in net
proceeds  to the  Company  of  $3.2  million.  An  additional  $0.5  million  of
debentures  has been  subscribed  for by one  investor  is to close  after  that
investor  converts  $0.75  million of its current  holdings  of $1.5  million of
debentures  into common stock of the Company.  The terms of the  debentures  are
similar to those described above,  but the conversion  price, if the average bid
price of the stock for the five days  preceding  conversion is used as the basis
for computing  conversion,  ranges from 75% to 60% of that price and there is no
requirement  that the  Company use its best  efforts to carry out the  necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.

   Management  believes that the funding  provided by increased  product  sales,
technology  licensing fees,  royalties,  and cost savings, if realized,  coupled
with the  additional  capital  referred to above,  should  enable the Company to
continue  operations  into 1998.  If the  Company  is not able to  realize  such
increased  technology  licensing fees,  royalties and product sales, or generate
additional  capital,  it  will  have to  further  cut its  level  of  operations
substantially  in order to  conserve  cash.  (Refer to  "Liquidity  and  Capital
Resources"  below  and  to  Note  1. -  "Notes  to  the  Consolidated  Financial
Statements" for a further discussion relating to continuity of operations.)

      Results of Operations

Year ended December 31, 1996 compared with year ended December 31, 1995.

   Total  revenues in 1996  decreased by 70% to $3,164,000  from  $10,466,000 in
1995.  Total  expenses  during  the same  period  decreased  by 4% or  $545,000,
reflecting the continuing  results of cost reduction  plans,  and the refocus of
expenditures to more immediate markets.

   Technology  licensing fees decreased by 81% or $5,342,000 to $1,238,000.  The
1995 amount was derived  principally from a $2.6 million license fee from Ultra,
a $ 3.3  million  license fee from Walker and other  licenses  aggregating  $0.7
million.  The 1996 amount is derived from smaller,  more numerous  license fees,
reflecting the Company's  continuing emphasis on expanding  technology licensing
fee revenue and the shortfall in  generation of such revenue  referred to above.
See Note 3. - "Notes to the Consolidated Financial Statements".

   Product sales decreased by 13% to $1,379,000  reflecting  decreased  aviation
headset sales, decreased NoiseBuster(TM) sales at lower prices and a decrease in
industrial  silencer  sales in connection  with the transfer of that business to
Walker.

   Engineering and development services decreased by 76% to $ 547,000, primarily
due to a deemphasis of  engineering  development  funding as a primary source of
revenue,  the  elimination  of funding from Ultra for aircraft cabin quieting in
connection  with the transfer of that  business to Ultra in the first quarter of
1995,  a decrease in the amount of muffler  development  funding  from Walker in
connection with the transfer of that business to Walker in the fourth quarter of
1995 and staff reductions.

   Cost of product sales  increased 0.4% to $1,586,000  from  $1,579,000 and the
product margin  decreased to (15)% from 1% in 1995. The negative  margin in 1996
was  primarily due to the lower sales price of the  NoiseBusterTM  and a reserve
for tooling  obsolescence  in the amount of $300,000.  In 1995,  the low product
margin was primarily due to the lower sales price of the NoiseBusterTM.

   Cost of  engineering  and  development  services  decreased  89% to  $250,000
primarily due to the changes noted above.

   Selling, general and administrative expenses for the year decreased by 10% to
$4,890,000  from  $5,416,000 for 1995. Of this  decrease,  $616,000 was directly
attributable  to reductions in salaries and related  expenses.  Advertising  and
marketing expenses  decreased by 32% to $463,000.  Office and occupancy expenses
decreased by 6% or $19,000. Professional fees increased by 6% to $1,818,000.
Travel and entertainment increased by 18% or $71,000.

   Depreciation and amortization included in selling, general and administrative
expenses increased by $285,000 or 143%, from $199,000 to $484,000, primarily due
to  increased  amortization  of  patents  allocated  to  selling,   general  and
administrative expenses from research and development.

   Research and development expenditures for 1996 increased by 46% to $6,974,000
from  $4,776,000  for 1995,  primarily  due to  increases to  internally  funded
development projects.

   In 1996, interest income decreased to $28,000 from $53,000 in 1995 reflecting
the decrease in 1996 of available funds to invest.

   Under all of the Company's  existing  joint venture  agreements at the end of
1996,  the Company is not  required to fund any  capital  requirements  of these
joint ventures beyond its initial capital contribution.  In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its  investment  and the Company has no obligation or intention to
fund such additional  losses, the Company suspends applying the equity method of
accounting for its investment.  As of December 31, 1995, the Company  recognized
$80,000 of income  relating to its 1995 profit in OAT. As of December  31, 1996,
the Company  reversed  the $80,000 of income  which  related to its share of the
1996 loss in OAT.

   The  Company  has net  operating  loss  carryforwards  of $67.4  million  and
research and development credit carryforwards of $1.2 million for federal income
tax purposes at December 31, 1996. No tax benefit for these operating losses has
been recorded in the Company's  financial  statements.  The Company's ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

Year ended December 31, 1995 compared with year ended December 31, 1994.

   Total  revenues in 1995 increased by 47% to  $10,466,000  from  $7,124,000 in
1994.  Total expenses  during the same period  decreased by 50% or  $14,497,000,
reflecting the continuing results of cost reduction plans.

   Technology  licensing  fees  increased by 1,356% or $6,128,000 to $6,580,000,
reflecting the Company's  continuing emphasis on expanding  technology licensing
fee revenue.  The 1995 amount is principally derived from a $2.6 million license
fee from  Ultra,  a $ 3.3 million  license  fee from  Walker and other  licenses
aggregating  $0.7  million.  In 1994,  technology  license fees amounted to $0.5
million. See Note 3. - "Notes to the Consolidated Financial Statements".

   Product sales decreased by 32% to $1,589,000 reflecting a reduction in orders
for MRI headsets from Siemens, decreased revenue from NoiseBusterTM sales due to
reductions  in  average  price and units  sold,  and a  decrease  in  industrial
silencer sales in connection with the transfer of that business to Walker.

   Engineering  and  development  services  decreased  by  47%  to $  2,297,000,
primarily  due to the  elimination  of  funding  from Ultra for  aircraft  cabin
quieting in connection  with the transfer of that business to Ultra in the first
quarter of 1995,  a decrease in the amount of muffler  development  funding from
Walker in connection  with the transfer of that business to Walker in the fourth
quarter of 1995 and staff reductions.

   Cost of product sales  decreased 61% to $1,579,000  from  $4,073,000  and the
product margin  increased to 1% from (74%) in 1994. The negative  margin in 1994
was  primarily  due to a reserve for slow moving and  obsolete  inventory in the
amount of  $1,855,300.  In 1995, the low product margin was primarily due to the
lower sales price of the NoiseBusterTM.

   Cost of  engineering  and  development  services  decreased 44% to $2,340,000
primarily  due to the  changes in the Ultra and Walker  relationships,  as noted
above.

   Selling, general and administrative expenses for the year decreased by 42% to
$5,416,000 from  $9,281,000 for 1994. Of this decrease,  $1,202,000 was directly
attributable  to reductions in salaries and related  expenses.  Advertising  and
marketing expenses  decreased by 65% to $677,000.  Office and occupancy expenses
decreased by 73% or $537,000.  Professional  fees increased by 55% to $1,933,000
primarily due to legal fees related to  litigation  and patent  prosecution  and
maintenance. Travel and entertainment decreased by 58% or $533,000.

   Depreciation and amortization included in selling, general and administrative
expenses decreased by $22,000 or 10%, from $221,000 to $199,000.

   Research and development expenditures for 1995 decreased by 50% to $4,776,000
from $9,522,000 for 1994,  primarily due to  realizations  from the cost savings
plans and staff reductions.

   In  1995,  interest  income  decreased  to  $53,000  from  $587,000  in  1994
reflecting the decrease in 1995 of available funds to invest.

   Under all of the Company's  existing  joint venture  agreements at the end of
1995,  the Company is not  required to fund any  capital  requirements  of these
joint ventures beyond its initial capital contribution.  In accordance with U.S.
generally accepted accounting principles, when the Company's share of cumulative
losses equals its  investment  and the Company has no obligation or intention to
fund such additional  losses, the Company suspends applying the equity method of
accounting for its  investment.  The agreement with Tenneco  Automotive  entered
into in December 1993 resulted in the recognition of 1994 losses with respect to
the joint venture with Walker in the amount of $1,453,200.  The aggregate amount
of the Company's  share of losses in all of its joint  ventures in excess of the
Company's investments which has not been recorded was approximately $0.9 million
at December 31, 1994.  Due to the Company's sale and transfer of its interest in
various of its joint ventures in 1995, there was no such unrecorded losses as of
December 31, 1995.

   The  Company  has net  operating  loss  carryforwards  of $58.7  million  and
research and development credit carryforwards of $1.2 million for federal income
tax purposes at December 31, 1996. No tax benefit for these operating losses has
been recorded in the Company's  financial  statements.  The Company's ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

      Liquidity and Capital Resources

   The  Company  received  $0.1  million  from the  exercise  of stock  purchase
warrants and options during 1996, $0.7 million in 1995 and $1.0 million in 1994.

   In January 1996, the Company  adopted a plan that  management  believed would
generate  sufficient funds for the Company to continue its operations into 1997.
Under this plan,  the Company  needed to generate  approximately  $19 million to
fund its operations for 1996. The Company  believed that it could generate these
funds from operations in 1996,  although there was no certainty that the Company
would achieve this goal.  Included in such amount was approximately $8.9 million
in sales of new products and approximately $9.0 million of technology  licensing
fees and royalties. During 1996, the Company generated $1.2 million in licensing
fees and $1.4 million in product sales.

   Because the Company  did not meet its  revenue  targets for 1996,  it entered
into the following transactions:

   On March 28, 1996, the Company sold 2,000,000 shares of its common stock in a
private placement that provided net proceeds to the Company of $0.7 million. The
purchaser  of the  common  stock was  subject to  certain  resale  and  transfer
restrictions  including those under  Regulation D of the Securities Act of 1933,
as amended.  The stock purchase  agreement relating to this sale of common stock
required the Company to file a  registration  statement  with the Securities and
Exchange  Commission  covering the  registration of the shares for resale by the
purchaser.   Such  a  registration  statement  was  declared  effective  by  the
Commission on September 3, 1996.

   On April 10, 1996, the Company sold 1,000,000  shares,  in the aggregate,  of
its common stock to three  institutional  investors in a private  placement that
provided net  proceeds to the Company of $0.3  million.  Contemporaneously,  the
Company sold secured convertible term notes in the aggregate principal amount of
$1.2 million to those institutional investors and granted them each an option to
purchase an aggregate of $3.45  million of  additional  shares of the  Company's
common stock.  The per share  conversion  price under the notes and the exercise
price  under the options  were to be equal to the price  received by the Company
for the  sale of the  1,000,000  shares  subject  to  certain  adjustments.  The
conversion  of the notes and the  exercise of the options  were both  subject to
stockholder approval of an appropriate amendment to the Company's Certificate of
Incorporation  increasing  its  authorized  capital to provide for the requisite
shares. On July 17, 1996, the Company's  stockholders  authorized an increase in
the Company's  authorized  common stock capital to 140,000,000  shares of common
stock.

   On  August  13,  1996,  the three  institutional  investors  converted  their
secured,  convertible  term notes and  exercised  their  options  in full.  As a
result,  the Company issued 13,403,130  shares, in the aggregate,  of its common
stock to such  investors,  received  $3.45  million  in cash,  and  effected  by
conversion  to its  common  stock the  payment  of the notes  together  with the
accrued interest thereon.

   On August 29, 1996,  the Company sold 1.8 million  shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common  stock in  November,  1995.  The  Company  received  $0.9  million of net
proceeds.  The purchaser is subject to certain resale and transfer  restrictions
with respect to these shares.

   In conjunction  with the foregoing sale of common stock and convertible  term
notes,  the  Company  also  agreed  to file a  registration  statement  with the
Securities and Exchange Commission ("SEC") covering the applicable shares and to
use its best efforts to have such registration  statement  declared effective by
the SEC as soon as practicable.  The relevant agreements provide for significant
monetary  penalties  in the event such  registration  statement  is not declared
effective on or before November 14, 1996, and in the event its  effectiveness is
suspended for other than brief permissible  periods.  However,  the registration
statement was declared effective by the SEC on September 3, 1996.

   On November  19,  1996,  the Company  entered  into an  agreement  to sell an
aggregate  amount  of  $3.0  million  of  non-voting  subordinated   convertible
debentures  (the  "Debentures")  in a private  placement  to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before  November 27,  1996.  The  Debentures,  issued  pursuant to  Regulation S
promulgated  under the Securities  Act of 1933 ("the  November 1996  Financing")
were to be due  December  31,  1999  and earn 8%  interest  per  annum,  payable
quarterly in either cash or the  Company's  common stock at the  Company's  sole
option.  Subject to certain common stock resale restrictions,  the Investor,  at
its  discretion,  would be able to convert the principal and interest due on the
Debentures  into the Company's  common stock at any time on or after January 20,
1997.  In the event of such a  conversion,  the  conversion  price  would be the
lesser of 85% of the  closing  bid price of the  Company's  common  stock on the
closing  date or 70% of the average  closing bid price for the five trading days
immediately preceding the conversion.  To provide for the above noted conversion
and  interest  payment  options,  the Company  would,  at  closing,  reserve and
subsequently cause to be deposited with an escrow agent 15 million shares of the
Company's common stock. Subject to certain conditions,  the Company also had the
right to require the Investor to convert all or part of the Debentures under the
above noted conversion  price conditions after February 15, 1998.  Subsequent to
the closing date of the above financing, the Company was to use its best efforts
to carry out the  necessary  actions to effect at least a 10:1 reverse  split of
the Company's common stock.

      The November  1996  financing was not  completed as described  above.  The
Company increased the aggregate amount of debentures offered to $4.0 million and
obtained  subscriptions  for $3.9 million of such amount,  of which $3.4 million
was completed with five investors that are different than the Investor described
above,  between  January  15,  1997 and March 25,  1997,  which  resulted in net
proceeds  to the  Company  of  $3.2  million.  An  additional  $0.5  million  of
debentures has been  subscribed for by one investor which is to close after that
investor  converts  $0.75  million of its current  holdings  of $1.5  million of
debentures  into common stock of the Company.  The terms of the  debentures  are
similar to those described above,  but the conversion  price, if the average bid
price of the stock for the five days  preceding  conversion is used as the basis
for computing  conversion,  ranges from 75% to 60% of that price and there is no
requirement  that the  Company use its best  efforts to carry out the  necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.

   The  Company  has  incurred  substantial  losses  from  operations  since its
inception,  which  have  been  recurring  and  amounted  to $83.7  million  on a
cumulative  basis through  December 31, 1996.  These  losses,  which include the
costs for development of products for commercial use, have been funded primarily
from the sale of common stock,  including the exercise of warrants or options to
purchase  common  stock,  and  by  technology   licensing  and  engineering  and
development  funds  received  from joint venture and other  strategic  partners.
Agreements with joint venture and other  strategic  partners  generally  require
that a portion of the initial cash flows,  if any,  generated by the ventures or
alliances be paid on a preferential  basis to the Company's  co-venturers  until
the license fees and engineering  and development  funds provided to the venture
or the Company are recovered.

   In January 1997, the Company adopted a plan that  management  believes should
generate  sufficient funds for the Company to continue its operations into 1998.
Under this plan, the Company needs to generate approximately $21 million to fund
its operations in 1997. Included in such amount is approximately $8.9 million in
sales of new products and  approximately  $9.0 million of  technology  licensing
fees and royalties.  The Company  believes that it can generate these funds from
1997 operations and the sale of the debentures referred to above, although there
is no certainty  that the Company will achieve this goal.  While the Company has
exceeded its expectations to date in 1997 regarding  technology  licensing fees,
production  delays  have  slowed  new  product  sales.   Success  in  generating
technology  licensing  fees,  royalties  and product sales are  significant  and
critical  to  the   Company's   ability  to  overcome   its  present   financial
difficulties.  The  Company  cannot  predict  whether it will be  successful  in
obtaining  market  acceptance of its new products or in  completing  its current
negotiations  with  respect to licenses  and royalty  revenues.  If,  during the
course of 1997,  management of the Company  determines that it will be unable to
meet or exceed the plan discussed  above,  the Company will consider  additional
financing  alternatives.  The  Company's  ability  to raise  additional  capital
through  sales of common  stock will be  severely  limited  until the  Company's
stockholders approve an amendment to the Company's  Certificate of Incorporation
authorizing  an increase  in its  authorized  capital  stock.  The Company  will
monitor its  performance  against the plan on a monthly basis and, if necessary,
reduce its level of operations  accordingly.  The Company believes that the plan
discussed above  constitutes a viable plan for the continuation of the Company's
business into 1998.

   There  can be no  assurance  that  additional  funding  will be  provided  by
technology licensing fees, royalties, product sales, engineering and development
revenue or additional  capital. In that event, the Company would have to further
cut back its level of operations  substantially in order to conserve cash. These
reductions  could have an adverse  effect on the  Company's  relations  with its
strategic  partners and customers.  The uncertainty with respect to the adequacy
of current funds to support the Company's  activities  until  positive cash flow
from  operations  can be  achieved,  and with  respect  to the  availability  of
financing from other sources to fund any cash  deficiencies,  raises substantial
doubt  about the  Company's  ability to  continue  as a going  concern.  Further
discussion of these  uncertainties  is presented in Notes 1. and 15. - "Notes to
the Consolidated Financial Statements".

   At December 31, 1996,  cash and short-term  investments  were  $368,000.  The
available resources were invested in interest bearing money market accounts. The
Company's  investment  objective  is  preservation  of capital  while  earning a
moderate rate of return.

   The Company's working capital decreased from $1,734,000 at December 31, 1995,
to  $(1,312,000) as of December 31, 1996. This decrease was due primarily to the
1996 revenue shortfall discussed above.

   During 1996, the net cash used in operating activities was $7.8 million. This
utilization  reflects  the  emphasis  on  the  commercial   development  of  its
technology   into  several  product   applications   which  were  scheduled  for
introduction in 1996 and 1997.

   Net inventory declined during 1995 by $801,000, primarily reflecting sales of
the original NoiseBusterTM product.

   During the year ended December 31, 1996,  accounts  receivable  reserves were
increased by $4,000 as the Company wrote off certain  accounts and added certain
amounts to its reserves.

   The  Company's  available  cash  balances at December 31, 1996 are lower than
projected  at the end of 1995,  primarily  due to the  revenue  shortfall  noted
above.

   The net cash used in  investing  activities  amounted to $186,000  during the
year  primarily  for capital  expenditures.  The net cash  provided by financing
activities  amounted to  $6,481,000  primarily  from the exercise of options and
warrants and the private placements noted above.

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

   The Company believes that the level of financial resources available to it is
an  essential  competitive  factor.  The Company  may elect to raise  additional
capital,  from  time to  time,  through  equity  or debt  financing  in order to
capitalize  on  business   opportunities  and  market  conditions  although  the
Company's ability to raise additional capital through sales of common stock will
be severely limited until the Company's stockholders approve an amendment to the
Company's Certificate of Incorporation authorizing additional capital stock.



<PAGE>


      Capital Expenditures

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

   There were no material  commitments  for capital  expenditures as of December
31, 1996, and no material commitments are anticipated in the near future.


ITEM 8.  FINANCIAL STATEMENTS

The Reports of the Independent Auditors Richard A. Eisner & Company,  L.L.P. and
the financial statements and accompanying notes are attached.

                                      Page
Reports of Independent                                        F-1
Auditors.....................................................
Consolidated Balance Sheets, as of December 31, 1995, and     F-2
1996..................................
Consolidated Statements of Operations, for the years ended
  December 31, 1994, 1995 and                                 F-3
1996..................................................
Consolidated Statements of Stockholders' Equity, for the
years ended
  December 31, 1994, 1995 and                                 F-4
1996..................................................
Consolidated Statements of Cash Flows, for the years ended
  December 31, 1994, 1995 and                                 F-5
1996..................................................
Notes to the Consolidated Financial Statements                F-6
 ...........................................




<PAGE>


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

   There have been no disagreements  with independent  accountants on accounting
and financial disclosure matters.


<PAGE>


                                          PART III

   The information called for by Items 11 and 12 is incorporated by reference to
the Company's 1997 Annual Meeting of  Shareholders - Notice and Proxy  Statement
(to be filed  pursuant to Regulation 14A not later than 120 days after the close
of the fiscal  year),  which  meeting  involves  the election of  directors,  in
accordance with the General Instruction G to the Annual Report on Form 10-K.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The  following  table sets forth the names,  ages,  positions and the offices
held by each of the executive  officers and directors of the Company as of March
31, 1997:


      Name            Age        Positions and Offices
Jay M. Haft           61    Chairman of the Board of Directors
John J. McCloy II     59    Director
Michael J. Parrella   49    President and Director
Stephen J.            47    Senior Vice President, Chief Financial
Fogarty, CPA                Officer
Irene Lebovics        44    Senior Vice President, Marketing and
                            Secretary
Jeffery Zeitlin       48    Senior Vice President, Operations
Cy E. Hammond         42    Vice President, Controller
Michael A. Hayes,     44    Vice President of Research
Ph.D.
John B. Horton        62    Senior Vice President, General Counsel
                            and Secretary
Samuel A. Oolie       60    Director


Jay M. Haft  currently  serves as  Chairman  of the  Board of  Directors  of the
Company.  He served as President of the Company from November 1994 to July 1995.
He is a strategic and financial  consultant  for growth stage  companies.  He is
active in international corporate finance, mergers and acquisitions,  as well as
in the representation of emerging growth companies. He has actively participated
in strategic  planning and fund raising for many  high-tech  companies,  leading
edge medical technology  companies and technical product,  service and marketing
companies. He is a Managing General Partner of Venture Capital Associates,  Ltd.
and of Gen Am "1" Venture Fund, a domestic and an international  venture capital
fund,  respectively.  Mr. Haft is also a Director of numerous  other  public and
private corporations,  including Robotic Vision Systems, Inc. (OTC), Extech Inc.
(OTC),  Healthcare  Acquisition  Corp.  (OTC),  Viragen,  Inc. (OTC), PC Service
Source,  INC. (OTC),  DUSA  Pharmaceuticals,  Inc. (OTC),  Oryx Technology Corp.
(OTC) and Jenna Lane,  Inc. (OTC). He serves as Chairman of the Board of Extech,
Inc.,  Healthcare  Acquisition  Corp.  and Jenna Lane,  Inc. He is  currently of
counsel to Parker Duryee Rosoff & Haft, in New York. He was  previously a senior
corporate partner of such firm (1989-1994), and prior to that a founding partner
of Wolfsey,  Certilman, Haft, et. al. (1966-1988). He is a member of the Florida
Commission for Government Accountability to the People, Co-President of the Dade
Venue of the Miami Ballet and a Director of the Concert  Association of Florida.
He is a graduate of Yale College and Yale Law School.

   John J. McCloy II currently serves as a Director of the Company. He served as
Chief Executive  Officer of the Company from September 1987 to November 1994 and
as its Chairman of the Board from September 1986 to November 1994.  Additionally
he served as Chief Financial  Officer from November 1990 to February 1993 and as
its Secretary-Treasurer  from October 1986 to September 1987. Since 1981, he has
also been a private  investor  concentrating  on venture capital and early stage
investment projects in a variety of industries. Mr. McCloy is also a director of
American  University  in Cairo,  the Sound Shore Fund,  Inc.,  and the  Atlantic
Council.

   Michael  J.  Parrella  currently  serves as  President  and  Director  of the
Company.  He was elected President and Chief Operating Officer of the Company in
February 1988 and served in that capacity  until  November  1994.  From November
1994 to July  1995 Mr.  Parrella  served  as  Executive  Vice  President  of the
Company. He initially became a director in 1986 after evaluating the application
potential of the  Company's  noise  cancellation  technology.  At that time,  he
formed an  investment  group to  acquire  control  of the Board and to raise new
capital to restructure the Company and its research and development  efforts. He
was also Chairman of the Board of Environmental  Research Information,  Inc., an
environmental consulting firm, from December 1987 to March 1991.

   Stephen J. Fogarty,  CPA, currently serves as Senior Vice President and Chief
Financial  Officer of the  Company.  He joined the Company as Vice  President of
Production in May 1990,  was  appointed a Senior Vice  President in January 1993
and subsequently appointed Chief Financial Officer on November 15, 1994. Between
1987  and  1990,   he  worked  for  Relay   Communications,   a   PC-to-PC   and
PC-to-mainframe  communications  software  company,  where  he  served  as  Vice
President and Chief Financial Officer and managed operations and administration.
Following that company's  acquisition by Microcom Software in 1988, he served as
Vice  President of  Operations.  Prior to 1987, he spent over 12 years in public
accounting.

   Irene  Lebovics  currently  serves as Senior Vice  President,  Marketing  and
Communications,  and President of NCT  Headsets.  She joined the Company as Vice
President of NCT and  President of NCT Medical  Systems  (NCTM) in July 1989. In
March 1990 NCTM became part of NCT Personal  Quieting and Ms. Lebovics served as
President.  In January  1993 she was  appointed  Senior  Vice  President  of the
Company.  In November 1994, Ms. Lebovics became President of NCT Headsets.  From
August 1, 1995, to May 1, 1996, she also served as Secretary of the Company. Ms.
Lebovics has held various positions in product marketing with  Bristol-Myers,  a
consumer products company, and in advertising with McCaffrey and McCall.

   Jeffrey C. Zeitlin  currently  serves as Senior Vice President of Operations.
He was  initially  a  consultant  to the  Company in October  1995 and became an
employee in January  1996.  Prior to joining  the Company he was an  independent
consultant for X-Ray Optical Systems,  Inc., a high technology start-up company,
Ambase Corporation,  a financial services holding  organization,  and Integrated
Liner Technologies,  Inc., a start-up  manufacturing  organization.  He has also
served as Vice  President and Chief  Financial  Officer of CBI Holding  Company,
Inc., a drug wholesaler representing all major drug manufacturers.  From 1981 to
1992 Mr. Zeitlin served in several  accounting and treasury positions at Hoechst
Celanese  Corporation,  the most recent of which was Vice  President  of Venture
Funds and Financial Projects. He is a member of the Executive Advisory Committee
of Integrated Liner Technologies, Inc. of Watervliet, New York.

   Cy E. Hammond currently serves as Vice President,  Controller of the Company.
He joined the Company as  Controller  in January  1990 and was  appointed a Vice
President  in February  1994.  During  1989,  he was  Treasurer  and Director of
Finance for Alcolac, Inc., a multinational specialty chemical producer. Prior to
1989 and from 1973, Mr.  Hammond  served in several senior finance  positions at
the Research Division of W.R. Grace & Co., the last of which included management
of the division's worldwide financial operations.

   John B. Horton,  Esq.,  currently  serves as Senior Vice  President,  General
Counsel  and  Secretary.  He joined the  Company as Vice  President  and General
Counsel in September  1991,  assumed the office of Secretary in October 1991 and
was appointed a Senior Vice President in January 1993.  From November 1, 1994 to
May 1 1996,  Mr. Horton  engaged in the private  practice of law and served as a
legal  consultant  to the  Company.  On May 1, 1996,  he rejoined the Company as
Senior Vice President,  General Counsel and Secretary. Between 1988 and 1991, he
was a Vice President/Partner at Korn/Ferry International,  a worldwide executive
search firm.  From 1986 through 1988,  Mr. Horton was Vice President and General
Counsel at Montchanin Management Corporation, a private investment banking firm.
Prior  thereto and from 1963,  he was  engaged in the  private  practice of law,
first as an associate  and then a partner at  Satterlee,  Warfield & Stephens in
New York City and subsequently as a partner at Hall,  McNicol,  Hamilton & Clark
in New York City and Stamford,  Connecticut. At both law firms, Mr. Horton was a
member of the firm's corporate practice group.

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

   Samuel A. Oolie currently serves as a Director of the Company. He is Chairman
and Chief Executive Officer of NoFire Technologies, Inc., a manufacturer of high
performance  fire  retardant  products,  and has held that position since August
1995. He is also Chairman of Oolie Enterprises,  an investment company,  and has
held that position since July 1985. Mr. Oolie currently  serves as a director of
Avesis,  Inc. and Comverse  Technology,  Inc. He has also been a director of CFC
Associates, a venture capital partnership, since January 1984.

   Section  16(a) of the  Securities  Exchange  Act of  1934,  as  amended  (the
"Exchange Act"), requires the Company's officers and directors,  and persons who
own more than 10% of a registered class of the Company's equity  securities,  to
file  reports of  ownership  and changes in ownership  with the  Securities  and
Exchange Commission.  Officers,  directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company  with  copies of all such  reports.  Based  solely on its  review of the
copies of such reports received by it, or written  representations  from certain
reporting  persons that no reports were required for those persons,  the Company
believes that, during the period from January 1, 1995, to December 31, 1996, all
filing requirements applicable to its officers,  directors, and greater than 10%
stockholders were complied with.


ITEM 11.        EXECUTIVE COMPENSATION

    The  information  required by this Item is  incorporated by reference to the
Company's 1997 Annual Meeting of  Shareholders - Notice and Proxy  Statement (to
be filed pursuant to Regulation  14-A not later than 120 days after the close of
the 1996 fiscal year).


ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                        AND MANAGEMENT

    The  information  required by this Item is  incorporated by reference to the
Company's 1997 Annual Meeting of  Shareholders - Notice and Proxy  Statement (to
be filed pursuant to Regulation  14-A not later than 120 days after the close of
the 1996 fiscal year).


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   In October 1990, the Company's Board of Directors  authorized the issuance of
warrants to acquire  420,000  shares of common stock to each of Messrs.  McCloy,
Parrella and Oolie and Ms. Lebovics,  exercisable through September 30, 1994, at
$.375 per share,  being the market  price of the  Company's  common stock on the
date of such  authorization,  based upon each such person's commitment to extend
his or her personal  guarantee  on a joint and several  basis with the others in
support  of  the  Company's  attempt  to  secure  bank  or  other  institutional
financing,  the amount of which to be covered by the guarantee  would not exceed
$350,000.  No firm  commitment  for any such  financing  has been secured by the
Company and at present no such financing is being sought.  However, each of such
persons'  commitment  to  furnish  said  guarantee  continues  in full force and
effect.

   In 1989, the Company established a joint venture with Environmental  Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended  for  use  solely  in  the  process  of  electric   power   generation,
transmission and distribution and which reduce noise and/or vibration  resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively,  "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things,  during the period ending  February  1996, to make payments to ERI
equal to (i) 4.5% of the  Company's  sales of Power  and Fan  Products  and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology,  subject to an overall  maximum of $4,500,000.  Michael J. Parrella,
President  of  the  Company,  was  Chairman  of  ERI at the  time  of  both  the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and Chief
Executive Officer of the Company,  shares investment  control over an additional
24% of the outstanding  capital of ERI. The Company believes that the respective
terms  of  both  the  establishment  of the  joint  venture  with  ERI  and  its
termination  were comparable to those that could have been negotiated with other
persons or entities. During the fiscal year ended December 31, 1996, the Company
was not required to make any such payments to ERI under these agreements.

   In 1993, the Company entered into three Marketing  Agreements with QuietPower
Systems,  Inc.  ("QSI")  (until  March 2, 1994,  "Active  Acoustical  Solutions,
Inc."),  a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing  Agreements,  QSI has undertaken to use its best
efforts to seek research and  development  funding for the Company from electric
and natural gas utilities for applications of the Company's  technology to their
industries.  In exchange for this undertaking,  the Company has issued a warrant
to QSI to purchase  750,000 shares of Common Stock at $3.00 per share.  The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993,  the date of the  Marketing  Agreement,  was $2.9375.  The warrant
becomes  exercisable  as to  specific  portions of the total  750,000  shares of
Common Stock upon the occurrence of defined events  relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will  record a charge  for the  amount by which the  market  price of the Common
Stock on such  date  exceeds  $3.00  per  share,  if any.  The  warrant  remains
exercisable  as to each such portion from the  occurrence  of the defined  event
through  October 13,  1998.  As of December  31,  1994,  contingencies  had been
removed  against  525,000  warrants  resulting  in a  1993  non-cash  charge  of
$120,250.  This Marketing  Agreement also grants to QSI a non-exclusive right to
market the  Company's  products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America.  QSI is entitled to receive a sales commission on
any sales to a customer of such  products for which QSI is a procuring  cause in
obtaining  the first order from such  customer.  In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross  revenue NCT  receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
 .5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license  fees it obtains for the Company  from the license of the  Company's
technology.  The  initial  term of  this  Agreement  is  three  years  renewable
automatically  thereafter on a  year-to-year  basis unless a party elects not to
renew.

   Under the  terms of the  second of the  three  Marketing  Agreements,  QSI is
granted a non-exclusive  right to market the Company's products that are or will
be  designed  and sold for use in or with  feeder  bowls  throughout  the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to  receive  commissions  similar  to those  payable  to end  user and  original
equipment  manufacturer  customers  described  above.  QSI is also  entitled  to
receive  the same 5%  commission  described  above on research  and  development
funding and  technology  licenses which it obtains for the Company in the feeder
bowl area.  The initial  term of this  Marketing  Agreement  is three years with
subsequent automatic one-year renewals unless a party elects not to renew.

   Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with  equipment  used by electric  and/or  natural gas  utilities  for
retrofit  applications  in North  America.  QSI is  entitled  to receive a sales
commission  on any sales to a customer of such  products  equal to 129% of QSI's
marketing  expenses  attributable  to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues  received by the Company from the sale of such products.  QSI is
also  entitled to receive a 5% commission  on research and  development  funding
similar  to  that  described  above.  QSI's  exclusive  rights  continue  for an
indefinite  term  provided it meets  certain  performance  criteria  relating to
marketing efforts during the first two years following  product  availability in
commercial  quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights  become  non-exclusive,  depending  on the  circumstances
causing  such change,  the initial term then becomes  either three or five years
from the date of this Marketing  Agreement,  with subsequent  one-year automatic
renewals in each instance  unless  either party elects not to renew.  During the
fiscal year ended  December  31,  1996,  the Company was not required to pay any
commissions to QSI under any of these Marketing Agreements.

   The Company has also  entered into a Teaming  Agreement  with QSI under which
each  party  agrees  to  be  responsible  for  certain  activities  relating  to
transformer  quieting system development  projects to be undertaken with utility
companies.  Under this Teaming Agreement,  QSI is entitled to receive 19% of the
amounts to be received from participating  utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, the Company made
no payments to QSI for project management services.

   In March 1995,  the Company  entered into a Master  Agreement  with QSI under
which QSI was granted an exclusive  worldwide  license under certain NCT patents
and technical  information to market, sell and distribute  transformer  quieting
products,  turbine  quieting  products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products.  However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's  failure to develop the products or the failure of the parties to agree on
certain  development  matters.  In consideration of the rights granted under the
Master  Agreement,  QSI is to pay  the  Company  a  royalty  of 6% of the  gross
revenues  received  from the sale of the products and 50% of the gross  revenues
received from  sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs  incurred by QSI in the  development of
the products in question.  The Company is obligated to pay similar  royalties to
QSI on its sale of the products and the  licensing of rights  covered  under the
Master  Agreement  outside the  utility  industry  and from sales and  licensing
within the  utility  industry  in the Far East.  In  addition  to the  foregoing
royalties, QSI is to pay an exclusivity fee to the Company of $750,000; $250,000
of which QSI paid to the  Company in June 1994.  The balance is payable in equal
monthly  installments of $16,667 beginning in April 1995. QSI's exclusive rights
become  non-exclusive  with  respect  to all  products  if it  fails  to pay any
installment  of the  exclusivity  fee when due and QSI loses  such  rights  with
respect  to any  given  product  in the  event it fails to make any  development
funding payment applicable to that product.  The Master Agreement supersedes all
other agreements  relating to the products  covered under the Master  Agreement,
including those agreements between the Company and QSI described above.

   Immediately following the execution to the Master Agreement,  the Company and
QSI entered into a letter agreement  providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.

   In April 1995,  the Company and QSI entered  into  another  letter  agreement
under  which QSI  agreed to  forfeit  and  surrender  the five year  warrant  to
purchase  750,000  shares of the Company's  common stock issued to QSI under the
first Marketing Agreement described above. In addition,  the $500,000 balance of
the  exclusivity  fee  provided  for under the Master  Agreement  was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the  indebtedness  to be  paid  under  the  letter  agreement  described  in the
preceding  paragraph  was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million,  whichever
first occurs.  Such  indebtedness  is to be evidenced by a promissory  note, non
payment  of which is to  constitute  an event of  termination  under the  Master
Agreement.

   On May 21, 1996,  the Company and QSI entered into another  letter  agreement
extending the time by which the payments from QSI to the Company under the April
1995  letter  agreement  described  above were to be made.  Under the letter the
payment of certain  arrearages in the payment of the  exclusivity  fee was to be
made not later than June 15, 1996, with the balance  continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement.  In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment  of $25,000 at the time QSI  obtained  certain  anticipated
financing with the balance paid by monthly payments of $15,000 each.  Default in
QSI's timely payment of any of the amounts  specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.

   On April 9, 1997, the Company and QSI entered into another  letter  agreement
revising  the payment  schedule  set forth in the May 21, 1996 letter  agreement
applicable to the payment of the  indebtedness  owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule,  the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997,  and a second  payment of $200,000 upon the closing
of a proposed  financing  in June 1997 or on January  1, 1998,  whichever  first
occurs.  The  Company is also  entitled  to receive  15% of any other  financing
obtained  by QSI in the interim as well as interest at the rate of 10% per annum
on the  unpaid  amount  of such  indebtedness  from  July 1,  1997.  The  letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance  with the earlier letter  agreements as well as the payment of
$11,108 by April 21, 1997,  for headset  products  sold by the Company to QSI in
1996.  In the event of a default in QSI's  timely  payment of any of the amounts
specified  in the April 9, 1997 letter  agreement,  the Company has the right to
cause the  termination  of the Master  Agreement  and all rights  granted by QSI
thereunder upon 10 days notice of termination to QSI.

    As of April 10, 1997, QSI has paid all  installments due and payable for the
exclusivity fee and, other than as described above, owes no other amounts to the
Company.

   The Company believes that the terms of its agreements with QSI are comparable
to those that it could have negotiated with other persons or entities.



<PAGE>


                                          PART IV

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

(a)  The following documents are filed as part of this Report:

(1)  Financial Statements.

Reports of Independent Auditors.

Consolidated Balance Sheets, as of December 31, 1995, and 1996.

Consolidated  Statements of  Operations,  for the years ended December 31, 1994,
1995 and 1996.

Consolidated  Statements of Stockholders'  Equity,  for the years ended December
31, 1994, 1995 and 1996.

Consolidated  Statements of Cash Flows,  for the years ended  December 31, 1994,
1995 and 1996.

Notes to the Consolidated Financial Statements.

(2)   Financial Statement Schedules.

Report of Independent Auditors with Respect to Schedule.

Schedule:

II.      Valuation and Qualifying Accounts.

Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.

(3)   Exhibits.

Exhibit
Number      Description of Exhibit

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

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

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

4(b)        Warrant  #BW-1-R to purchase  862,500  shares of Common Stock of the
            Company at a purchase price of $.75 per share issued to John J.
            McCloy II.

4(c)        Warrant  #BW-2-R to purchase  862,500  shares of Common Stock of the
            Company at a purchase price of $.75 per share issued to Michael J.
            Parrella.

4(d)        Warrant  #BW-4-R to purchase  201,250  shares of Common Stock of the
            Company  at a  purchase  price of $.75  per  share  issued  to Irene
            Lebovics.

4(e)        Warrant  #BW-9-R and #BW-46-R to purchase  218,500 shares of Common
            Stock of the Company at a purchase price of $.75 per share issued
            to Jay M. Haft.

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

*10(a)      1987 Incentive  Stock Option Plan,  incorporated  herein by
            reference to Exhibit 10(b) to Amendment No. 1 on Form S-1 to the
            Company's  Registration Statement on Form S-18 (Registration
            No. 33-19926).

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

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

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

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

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

10(g)       Lease,  dated  December 20, 1991,  between West Nursery Land Holding
            Limited  Partnership ("West Nursery") and the Company, as amended by
            a letter  amendment,  dated December 20, 1991,  between West Nursery
            and the Company,  incorporated  herein by reference to Exhibit 10(u)
            to Amendment No. 1 to the  Company's  Annual Report on Form 10-K for
            the fiscal year ended December 31, 1991.

10(h)       Lease,  dated  February  26,  1991,  between  West  Nursery  and the
            Company, as amended by a letter amendment,  dated February 26, 1991,
            between  West  Nursery  and  the  Company,  incorporated  herein  by
            reference  to  Exhibit  10(v) to  Amendment  No. 1 to the  Company's
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            1991.

10(i)       Lease (undated), between West Nursery and the Company, as amended by
            a letter amendment,  dated April 23, 1990,  between West Nursery and
            the Company,  incorporated  herein by reference to Exhibit  10(w) to
            Amendment No. 1 to the Company's  Annual Report on Form 10-K for the
            fiscal year ended December 31, 1991;

10(j)       Agreement, dated March 4, 1991, between West Nursery and the Company
            as amended by the First  Amendment of Agreement,  dated December 20,
            1991, between West Nursery and the Company,  incorporated  herein by
            reference  to  Exhibit  10(x) to  Amendment  No. 1 to the  Company's
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            1991.

10(k)       Patent  Assignment  Agreement,  dated as of June 21, 1989,  among
            George B.B.  Chaplin,  Sound  Alternators  Limited,  the Company,
            Active Noise and Vibration Technologies, Inc. and Chaplin Patents
            Holding Co.,  Inc.,  incorporated  herein by reference to Exhibit
            10(aa) to Amendment No. 2 on Form S-1 to the Company's
            Registration Statement on Form S-18 (Registration No. 33-19926).

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

10(q)       Master Agreement between Noise Cancellation  Technologies,  Inc.
            and QuietPower Systems, Inc. dated March 27, 1995,  incorporated
            herein by reference to Exhibit 10(a) of the Company's  Current
            Report on Form 8-K filed with the Securities and Exchange
            Commission on August 4, 1995.

<PAGE>

10(q)(1)    Letter Agreement between Noise  Cancellation  Technologies,  Inc.
            and QuietPower Systems, Inc. dated April 21, 1995,  incorporated
            herein by reference to Exhibit 10(b) of the Company's Current
            Report on Form 8-K filed August 4, 1995.

10(q)(2)    Letter Agreement between Noise  Cancellation  Technologies,  Inc.
            and QuietPower Systems, Inc. dated May 21, 1996.

10(q)(3)    Letter Agreement between Noise  Cancellation  Technologies,  Inc.
            and QuietPower Systems, Inc. dated April 9, 1997.

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

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

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

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

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

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

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

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

10(v)       Securities  Purchase Agreement dated April 8, 1996, by and among the
            Company and Kingdon Associates,  L.P., Kingdon Partners, L.P. and M.
            Kingdon  Offshore NV,  together  with  Exhibit A-1 thereto,  Form of
            Secured  Convertible  Note and  Exhibit  A-2  thereto,  Registration
            Rights Agreement,  incorporated herein by reference to Exhibit 10(a)
            of the Company's Quarterly Report on Form 10-Q for the quarter ended
            June 30, 1996.

10(v)(1)    Security  Agreement  dated April 10,  1996,  between the Company and
            Kingdon  Associates,  L.P.,  Kingdon  Partners,  L.P. and M. Kingdon
            Offshore NV, dated August 13, 1996, incorporated herein by reference
            to Exhibit 10(b) of the Company's  Quarterly Report on Form 10-Q for
            the quarter ended June 30, 1996.

10(v)(2)    Notices of Exercise of Options to Purchase  Common  Stock by Kingdon
            Associates,   L.P.,   Kingdon   Partners,   L.P.,   and  M.  Kingdon
            Offshore,NV,  dated  August 13, 1996,  incorporated  by reference to
            Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1996.

10(v)(3)    Notices  of  Conversion  of  Secured  Convertible  Notes by  Kingdon
            Associates, L.P., Kingdon Partners, L.P. and M. Kingdon Offshore NV,
            dated August 13, 1996,  incorporated  herein by reference to Exhibit
            10(d) to the Company's Quarterly Report on Form 10-Q for the quarter
            ended June 30, 1996.

<PAGE>

11          Computation of net (loss) per share.

21          Subsidiaries.

23(a)       Consent of Richard A. Eisner & Company, L.L.P.

27          Financial Data Schedule.

99          Letter  from  Peters  Elworthy & Moore,  Chartered  Accountants,  to
            Richard A. Eisner & Company regarding  audited financial  statements
            of the Company's U.K.  subsidiaries and reports of Peters Elworthy &
            Moore,  Chartered  Accountants,  on their  audits of such  financial
            statements.

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

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

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

(b) No  reports on Form 8-K were  filed  during  the last  quarter of the period
covered by this Report.



<PAGE>


Exhibit 10(q)(2)
                                      (NCT Letterhead)
May 21, 1996

Dr. Jonathan Charry
QuietPower Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019

Dear Jonathan:

This letter,  when  countersigned by you on behalf of QuietPower  Systems,  Inc.
("QuietPower"),  will  constitute a further  amendment  to the Master  Agreement
dated  March 27,  1995 as amended by the  memorandum  signed by you on behalf of
QuietPower  on March  29,  1995,  and  Stephen  J.  Fogarty  on  behalf of Noise
Cancellation  Technologies,  Inc.  ("NCT")  on March 28,  1995,  and the  Letter
Agreement dated April 21, 1995 (collectively the "Master Agreement").

1.    The exclusivity fee payable to NCT pursuant to Section 3.1 of the Master
Agreement shall be paid as follows:

(a)   $25,000.00 shall be paid at the closing of the first  $200,000.00  tranche
      of financing to be provided by Sundance Venture  Partners  ("Sundance") to
      QuietPower, and

(b)   all  outstanding  arrearages  under the payment  schedule set forth in the
      April 21, 1995 Letter Agreement shall be paid at the closing of the second
      $300,000.00 tranche of the Sundance financing.

In no event  shall such  $25,000.00  payment be made any later than June 1, 1996
and in no event  shall  payment of the full  amount of such  arrearages  be made
later than June 15,  1996.  In the event either of such  payments  have not been
made on or before the  applicable  date set forth in the  immediately  preceding
sentence,  the Master  Agreement  and all rights  granted  to  QuietPower  shall
immediately  terminate and no longer be of any force or effect,  and all amounts
to be paid to NCT by QuietPower  under the Master  Agreement,  the Note provided
for therein and this letter which remain  unpaid  shall be  immediately  due and
payable in full without further notice or demand.

2. The "Debt" owed to NCT  described in paragraph 3 of the April 21, 1995 Letter
Agreement shall be paid as follows:

(a)   $25,000.00 shall be paid at the closing of the second tranche of the
      Sundance financing described in paragraph 1 above, and

(b)   the balance of such Debt and all other indebtedness not hereinbefore
      specifically provided for shall be paid in monthly installments of
      $15,000.00 each on the first day of each month commencing with the first
      day of the month following the month in which the closing of the second
      tranche of Sundance financing occurs.  In addition, one half of the total
      amount of such indebtedness which remains unpaid at the closing
      of the contemplated $1,000,000.00 private placement to be managed by
      Ringhorne, Horn, Konsult AB shall be paid to NCT at such closing and the
      full amount thereof shall be paid no later than thirty (30) days
      following the closing of QuietPower's contemplated public offering of
      securities.

Any  default in the  timely  payment  of any of the  payments  set forth in this
paragraph 2 shall cause the immediate  termination  of the Master  Agreement and
any and all rights and licenses granted to QuietPower thereunder and all amounts
remaining due and payable to NCT by QuietPower under the Master  Agreement,  the
Note  provided  for  therein  and  this  letter  which  remain  unpaid  shall be
immediately  due and  payable in full  without  further  notice or demand.  With
respect to any  $15,000.00  monthly  installment  described in clause (b) above,
payment  shall be deemed to have been  timely made if received by NCT within ten
(10) days of NCT's  notice to  QuietPower  that  such  installment  has not been
received.

3. Clause (a) of Section 2.1 of the Master Agreement is hereby amended to remove
the  qualifications  to QuietPower's  exclusive rights in the Far East provided,
however, that in the event QuietPower's  activities in the Far East give rise to
any claims by third parties for a sales commissions,  fees or other compensation
or  consideration  related  to  such  activities  whether  sought  from  NCT  or
QuietPower,  QuietPower shall be solely responsible for the full payment of such
claims.

4.  Sections  4.1 and 4.2 of the Master  Agreement  are amended to provide  that
QuietPower  is free to fund product  development  work itself or through a third
party  without  the  precondition  of  first  negotiating  with  NCT a  mutually
acceptable  "Development  Schedule" as therein defined provided,  however,  that
nothing  in  this  amendment  shall  reduce  in  any  way  QuietPower's  royalty
obligations to NCT.

5. Clause (a)(iv) of Section 5.2 is amended to eliminate QuietPower's obligation
to pay NCT "a royalty  of six (6%)  percent  of the  alternatively  manufactured
cost"  provided  for  therein  and Clause  (a)(i) of  Section  3.2 is amended to
increase the royalty on the Gross Revenues provided for therein from six percent
(6%) of all such Gross  Revenues  received by QuietPower to nine percent (9%) of
the first  $6,000,000.00  of such Gross Revenues  received by QuietPower and six
percent  (6%) of all such Gross  Revenues  received by  QuietPower  in excess of
$6,000,000.00.

6. It is understood that QuietPower  intends to purchase piezo ceramic actuators
for transformer  quieting  applications from NCT provided NCT can meet the cost,
quality and deliverability requirements of QuietPower.

Kindly  signify   QuietPower's   agreement  to  the  foregoing  by  executing  a
counterpart  of this  letter in the space  provided  below and  returning  it by
facsimile  transmission  confirmed  by delivery  of an executed  copy by regular
mail.

Sincerely,

/s/ MICHAEL J. PARRELLA
-----------------------
    Michael J. Parrella
    President

Agreed
and
Accepted:

QuietPower Systems, Inc.


By:   /s/ JONATHAN M. CHARRY
      ----------------------
          Jonathan M. Charry, President



<PAGE>


Exhibit 10(q)(3)

                                      (NCT Letterhead)
April 8, 1997

Dr. Jonathan Charry
QuietPower Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019

Dear Jonathan:

This letter,  when  countersigned by you on behalf of QuietPower  Systems,  Inc.
("QuietPower"),  will  constitute a further  amendment  to the Master  Agreement
dated  March 27,  1995 as amended by the  memorandum  signed by you on behalf of
QuietPower  on March  29,  1995,  and  Stephen  J.  Fogarty  on  behalf of Noise
Cancellation Technologies,  Inc. ("NCT") on March 28, 1995, the Letter Agreement
dated April 21, 1995 and the Letter  Agreement dated May 21, 1996  (collectively
the "Master Agreement").

1. As of the date hereof there is an outstanding  balance  payable by QuietPower
to NCT with respect to the  exclusivity fee as provided under Section 3.1 of the
Master Agreement,  as amended. This amount shall continue to be paid at the rate
of  $8,333.00  per month,  payable on the  twenty-first  day of each month until
payment in full has been received.  With respect to any such  $8,333.00  monthly
payment,  payments  shall be deemed to have been  timely made if received by NCT
within 5 days of the due date.  No notice of  payment  or of default in any such
payment shall be required.

2. As of the date hereof there is an outstanding  balance  payable by QuietPower
to NCT with  respect to the "Debt" owed to NCT  described  in Paragraph 3 of the
April 21, 1995 Letter  Agreement.  QuietPower  is in arrears with respect to the
payments of the Debt which were to be made under the terms of the April 21, 1995
Letter Agreement. Accordingly, this amount shall be paid to NCT by QuietPower as
follows:

(a)   $125,000 shall be paid on or before April 21, 1997.

(b)   $200,000  shall be paid upon the earlier  of: (i) the closing  date of the
      contemplated   initial  public  offering  of  QuietPower's   common  stock
      scheduled to occur in June, 1997, or (ii) January 1, 1998.

(c)   Until both of the  payments  described  in clauses  (a) and (b) above have
      been received by NCT, QuietPower will pay NCT 15% of all funds received by
      QuietPower  from all financing  activities  other than the public offering
      referred to in clause (b)(i) and NCT shall credit all amounts  received by
      it under  this  clause (c)  against  the amount  owed by  QuietPower  with
      respect to the Debt.

(d)   After July 1, 1997,  QuietPower  shall pay  interest to NCT at the rate of
      10% per annum on the unpaid balance of the Debt,  such interest to be paid
      quarterly on the first day of each calendar quarter.

The foregoing  amounts do not include the amount of $11,107.55  which QuietPower
owes to NCT for headset  products  delivered to or for the account of QuietPower
during  1996.  This  amount  (the  "Headset  Amount")  shall  be  paid to NCT by
QuietPower by April 15, 1997.

3.  All  payments  to be made to NCT  hereunder  shall  be by wire  transfer  in
accordance  with  NCT's  instructions  or  by  delivery  of  QuietPower's  good,
collectible check, drawn on immediately available New York, New York funds.

4. In the event any payment  provided  for herein is not  received by NCT on the
applicable  date and in the form set forth in Paragraph 3 above,  NCT shall have
the right to terminate the Master Agreement and all rights granted thereunder to
QuietPower  forthwith.  Such  termination  shall be effective  immediately  upon
QuietPower's  receipt of NCT's notice of termination  and all amounts to be paid
to NCT by QuietPower  under the Master Agreement with respect to the exclusivity
fee, the Debt (in the full amount outstanding on the date hereof irrespective of
the amounts set forth in Paragraph 2 above) and the Headset  Amount which remain
unpaid shall be  immediately  due and payable in full without  further notice or
demand.

<PAGE>

Kindly  signify   QuietPower's   agreement  to  the  foregoing  by  executing  a
counterpart  of this  letter in the space  provided  below and  returning  it by
facsimile  transmission  confirmed  by delivery  of an executed  copy by regular
mail.

Sincerely,

/s/ MICHAEL J. PARRELLA
-----------------------
    Michael J. Parrella
    President

Agreed
and
Accepted:

QuietPower Systems, Inc.


By:   /s/ JONATHAN M. CHARRY
      ----------------------
          Jonathan M. Charry, President



<PAGE>


Exhibit 21


                           NOISE CANCELLATION TECHNOLOGIES, INC.


                                        SUBSIDIARIES


                                      Jurisdiction
Name                                of Incorporation
Ownership                            or Organization       Equity
NCT Muffler, Inc.                       Delaware             100%
NCT Far East, Inc.                      Delaware             100%
NCT Medical Systems, Inc.               Delaware              90%
Noise Cancellation Technologies,              UK             100%
(UK)
    Limited
2020 Science Limited                          UK             100%
Analog/NCT Supply Ltd.                  Delaware              50%
Chaplin Patents Holding Co., Inc.       Delaware             100%
Harris NCT Supply L.L.C.                Delaware              50%
OnActive Technologies, L.L.C.           Delaware            42.5%





<PAGE>



Exhibit 23(a)
                      (Richard A. Eisner & Company, L.L.P. Letterhead)

                              CONSENT OF INDEPENDENT AUDITORS

     We consent to the incorporation by reference in the registration statements
of Noise  Cancellation  Technologies,  Inc.  on Form S-3  (File  Nos.  33-47611,
33-51468,  33-74442,  33-84694 and 333-10545),  on Form S-1 (File Nos. 33-19926,
33-38584  and  33-44790)  and on Form S-8  (File  No.  33-64792,  333-11209  and
333-11213)  of our report,  which  contains  an  exception  for the  omission of
information  required under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", dated February 28, 1997 (with respect
to Note 15, March 28, 1997,  and Note 8, April 10, 1997,  respectively),  on our
audits of the consolidated  financial statements and schedules of the Company as
of December  31, 1996,  December  31, 1995 and for the years ended  December 31.
1996,  December  31, 1995 and December 31, 1994 which report is included in this
Annual Report on Form 10-K.


/s/ RICHARD A. EISNER & COMPANY, L.L.P.


New York, New York
April 10, 1997


<PAGE>


Exhibit 99

                            [PETERS ELWORTHY & MOORE LETTERHEAD]
                               Salisbury House, Station Road
                                 Cambridge CB1 2LA England

Date:      13 March 1997
Our Ref:   PRC/J/5799

Mr. R. Soreff
Richard A. Eisner & Company
575 Madison Avenue
New York, NY  10022-2597  USA

Dear Sirs:

We enclose the audited financial statements for Noise Cancellation  Technologies
(UK) Limited for the year ended 31 December 1996.

These  statements have been prepared in accordance  with  applicable  Accounting
Standards  in the  United  Kingdom  and  audited  in  accordance  with  Auditing
Standards issued by the Auditing Practices Board.

As a result of our review of the  financial  statements  we are not aware of any
significant   deviations  from  United  States  generally  accepted   accounting
principles.

Yours faithfully

/s/  PETERS ELWORTHY & MOORE



<PAGE>


Noise Cancellation Technologies (UK) Ltd

Auditors' Report to the Shareholders
on the Financial Statements for the year ended 31 December 1996

We have  audited  the  financial  statements  on pages 6 to 15,  which have been
prepared under the historical  cost  convention and the accounting  policies set
out on page 10.

Respective Responsibilities of the Directors and Auditors

As  described  on  page  4 the  Company's  directors  are  responsible  for  the
preparation of the financial  statements.  It is our  responsibility  to form an
independent  opinion,  based on our audit, on those statements and to report out
opinion to you.

Basis of Opinion

We conducted  our audit in  accordance  with  Auditing  Standards  issued by the
Auditing  Practices  Board. An audit includes  examination,  on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant  estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the Company's circumstances, consistently
applied and adequately disclosed.

We  planned  and  performed  our  audit  so as to  obtain  all  information  and
explanations  which we consider necessary in order to provide us with sufficient
evidence to give  reasonable  assurance  that the financial  statements are free
from material misstatement, whether caused by fraud other irregularity or error.
In  forming  our  opinion  we  also  evaluated  the  overall   adequacy  of  the
presentation of the information in the financial statements.

Going Concern

In forming our opinion,  we have considered the adequacy of the disclosures made
in note 1 of the  financial  statements  concerning  the  Company's  operational
results  and  financial  position.  In view of the  significance  of the Company
continuing to generate  adequate working capital,  and its reliance on continued
financial support from the parent company we consider that it should be drawn to
your attention but our opinion is not qualified in this respect.

Opinion

In our opinion the financial  statements  give a true and fare view of the state
of the  Company's  affairs as at 31  December  1996 and of its loss for the year
then ended and have been properly  prepared in accordance with the provisions of
the Companies Act 1985 applicable to small companies.


/s/  PETERS ELWORTHY & MOORE
Chartered Accountants and
Registered Auditor

Cambridge
7 March 1997



<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.


NOISE CANCELLATION TECHNOLOGIES, INC.

By: /s/ MICHAEL J. PARRELLA                           Date: April 15, 1997
        President

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


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


  /s/ MICHAEL J. PARRELLA    President and Director      April 15, 1997
  ------------------------   (Principal Executive
      Michael J.Parrella     Officer)



  /s/ STEPHEN J. FOGARTY     Senior Vice President and   April 15, 1997
  ------------------------   Chief Financial Officer
      Stephen J. Fogarty     (Principal Financial and
                             Accounting Officer)



  /s/ JAY M. HAFT            Chairman of the Board       April 15, 1997
  ------------------------   of Directors and Director
      Jay M. Haft


  /s/ JOHN J. McCLOY II      Director                    April 15, 1997
  ------------------------
      John J. McCloy II


  /s/ SAMUEL A. OOLIE        Director                    April 15, 1997
  ------------------------
      Samuel A. Oolie




<PAGE>


F-3


                      (Richard A. Eisner & Company, L.L.P. Letterhead)
                               REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders of
  Noise Cancellation Technologies, Inc.

      We have  audited the  accompanying  consolidated  balance  sheets of Noise
Cancellation  Technologies,  Inc. and  subsidiaries  as at December 31, 1995 and
December  31,  1996,  and the related  consolidated  statements  of  operations,
stockholders'  equity  and cash  flows for each of the  years in the  three-year
period  ended   December  31,  1996.   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 did not audit the
1994,  1995  and  1996  financial   statements  of  the  Company's  two  foreign
subsidiaries.   These  subsidiaries  accounted  for  revenues  of  approximately
$1,800,000,  $1,200,000  and  $407,000  for the years ended  December  31, 1994,
December  31,  1995  and  December  31,  1996,   respectively,   and  assets  of
approximately  $1,900,000,  $586,000 and $515,000 at December 31, 1994, December
31, 1995 and December 31, 1996,  respectively.  These statements were audited by
other auditors whose reports have been furnished to us, one of which contained a
reference to the uncertainty  relating to the Company's ability to continue as a
going concern.  Our opinion,  insofar as it relates to the amounts  included for
these entities, is based solely on the reports of the other auditors.

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

     As  indicated  in Note 7, the  Company  has not  provided  the  information
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based  Compensation"  (SFAS  No.  123")  which it  contemplates  filing by
amendment.

     In our opinion,  based on our audits and the reports of the other auditors,
except for the omission of information  required under SFAS No. 123 as discussed
in the preceding paragraph,  the financial  statements  enumerated above present
fairly, in all material respects,  the consolidated  financial position of Noise
Cancellation  Technologies,  Inc. and  subsidiaries  as at December 31, 1995 and
December 31, 1996 and the results of their operations and cash flows for each of
the years in the three-year  period ended  December 31, 1996 in conformity  with
generally accepted accounting principles.

      The  accompanying  consolidated  financial  statements  have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the  financial  statements,  the Company has incurred  recurring  operating
losses,  has a working capital  deficiency at December 31, 1996 and will require
additional financing. These factors raise substantial doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

/S/ RICHARD A. EISNER & COMPANY, L.L.P.

New York, New York
February 28, 1997

With respect to Note 15
March 28, 1997

With respect to Note 8
April 10, 1997

<PAGE>
<TABLE>

NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                   (In thousands of dollars)

                                                                          December 31,
                                                              ---------------------------------
                     ASSETS                                           1995           1996
                                                              ---------------------------------
Current assets:
<S>                                                                   <C>            <C>
     Cash and cash equivalents (Notes 1 and 2)                     $  1,831      $    368
     Accounts receivable (Notes 2 and 3):
         Trade :
                Technology licensing fees                                --           150
                Joint ventures and affiliates                           241             2
                Other                                                   189           392
         Unbilled                                                       260            63
         Allowance for doubtful accounts                               (119)         (123)
                                                                   --------      --------
                     Total accounts receivable                     $    571           484

     Inventories, net of reserves (Notes 2 and 4)                     1,701           900
     Other current assets                                               225           207
                                                                   --------      --------
                     Total current assets                          $  4,328      $  1,959

Property and equipment, net (Notes 2 and 5)                           2,897         2,053
Patent rights and other intangibles, net (Notes 2 and 14)             2,194         1,823
Other assets                                                            164            46
                                                                   --------      --------
                                                                   $  9,583      $  5,881
                                                                   ========      ========

                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                              $  1,836      $  1,465
     Accrued expenses                                                   571         1,187
     Accrued payroll, taxes and related expenses                        144           618
     Customers' advances                                                 43             1
                                                                   --------      --------
                     Total current liabilities                     $  2,594      $  3,271
                                                                   --------      --------

Long term obligations                                              $    105            --
                                                                   --------      --------
                     Total other liabilities                       $    105            --
                                                                   --------      --------

Commitments and contingencies (Notes 3, 10 and 11)

                     STOCKHOLDERS' EQUITY (Notes 6 and 7)
Preferred  stock,  $.10 par value,  10,000,000  shares  authorized,  none issued
Common  stock,  $.01  par  value,  140,000,000  shares  authorized;  issued  and
outstanding 92,828,407 and 111,614,405
shares, respectively                                               $    928      $  1,116
Additional paid-in-capital                                           78,667        85,025
Accumulated deficit                                                 (72,848)      (83,673)
Cumulative translation adjustment                                       150           142
Common stock subscriptions receivable                                   (13)           --
                                                                   --------      --------
                     Total stockholders' equity                    $  6,884      $  2,610
                                                                   --------      --------

                                                                   $  9,583      $  5,881
                                                                   ========      ========


Attention  is  directed  to  the  foregoing  accountant's  reports  and  to  the
accompanying notes to the consolidated financial statements.
</TABLE>



<PAGE>
<TABLE>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                                    (In thousands, except per share amounts)

                                                            Years Ended December 31,
                                                    ------------------------------------------
                                                        1994          1995          1996
                                                    ------------------------------------------
REVENUES:
<S>               <C>                                    <C>           <C>           <C>
   Technology licensing fees (Notes 2 and 3)        $         452  $      6,580   $      1,238
   Product sales, net                                       2,337         1,589          1,379
   Engineering and development services                     4,335         2,297            547
                                                    -------------  ------------   ------------
          Total revenues                            $       7,124  $     10,466   $      3,164
                                                    -------------  ------------   ------------
COSTS AND EXPENSES:
   Costs of sales                                   $       4,073  $      1,579   $      1,586
   Costs of engineering and development services            4,193         2,340            250
   Selling, general and administrative                      9,281         5,416          4,890
   Research and development (including $500,000
   of purchased research and development in 1994)           9,522         4,776          6,974
   Equity in net loss (income) of unconsolidated
   affiliates                                               1,824           (80)            80
   Provision for doubtful accounts                            718           552            192
   Interest expense                                             7             4             45
   Interest income                                           (587)          (53)           (28)
                                                    -------------  ------------   ------------
        Total costs and expenses                    $      29,031  $     14,534   $     13,989
                                                    -------------  ------------   ------------

NET (LOSS)                                          $     (21,907) $    (4,068)   $    (10,825)
                                                    =============  ============   ============
Weighted average number of common
   shares outstanding                                      82,906        87,921        101,191
                                                    =============  ============   ============
NET LOSS PER COMMON SHARE                           $        (.26) $       (.05)  $       (.11)
                                                    =============  ============   ============

Attention  is  directed  to  the  foregoing  accountant's  reports  and  to  the
accompanying notes to the consolidated financial statements.

</TABLE>







<PAGE>


------------------------------------------------------------------------------
                                       F-4
------------------------------------------------------------------------------
<TABLE>
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
(In thousands of dollars and shares)

                                                                                                          Expenses
                                    Common Stock       Additional               Cumulative   Stock         to be
                                 --------------------  Paid-In     Accumulated  Translation  Subscription  Paid With
                                 Shares     Amount     Capital      eficit      Adjustment   Receivable    Common Stock    Total
                                 ---------  ---------  ---------   ---------    ---------    ---------     ---------     ---------
<S>                              <C>        <C>        <C>         <C>          <C>          <C>           <C>            <C>
Balance at December 31, 1993        81,251  $    813   $  71,244   $ (46,873)   $      94    $  (1,993)    $     (46)     $ 23,239
Shares issued for acquisition
 of certain assets                   2,025        20       2,206           -            -            -             -         2,226
Consulting expense attributable
 to warrants                             -         -          10           -            -            -             -            10
Shares issued upon exercise of
warrants & options                   2,208        22         944           -            -            -             -           966
Receipt of services in payment
of stock subscription                    -         -           -           -            -          797             -           797
Settlement of obligations              560         6         694           -            -            -          (700)            -
Net loss                                 -         -           -     (21,907)           -            -             -       (21,907)
Translation adjustment                   -         -           -           -           58            -             -            58
Restricted shares issued for
Director's compensation                 45         -          99           -            -            -             -            99
Expenses related to prior sale
of common stock                          -         -         (20)          -            -            -             -           (20)
                                ----------  ---------  ---------   ---------    ---------    ---------    ----------     ---------
Balance at December 31, 1994        86,089  $    861   $  75,177   $ (68,780)   $     152   $   (1,196)   $     (746)    $   5,468


Sale of common stock, less
expenses of $271                     6,800        68       3,921           -            -            -             -         3,989
Consulting expense attributable
 to warrants                             -         -           8           -            -            -             -             8
Shares issued upon exercise of
warrants & options                   1,050        10         692           -            -          (13)            -           689
Receipt of services in payment
of stock subscription                    -         -           -           -            -        1,196             -         1,196
Settlement of obligations                -         -        (344)          -            -            -           746           402
Net loss                                 -         -           -      (4,068)           -            -             -        (4,068)
Translation adjustment                   -         -           -           -           (2)           -             -            (2)
Retirement of shares attributable
to license revenue (Note 3)         (1,110)      (11)       (787)          -            -            -             -          (798)
                                 ---------  ---------  ---------    ---------   ---------    ---------     ---------    ----------
Balance at December 31, 1995        92,829  $    928   $  78,667    $ (72,848)        150    $     (13)            -    $    6,884


Sale of common stock, less
expenses of $245                   18,595        186       6,178            -           -           13             -         6,377
Shares issued upon exercise
of warrants & options                 204          2         102            -           -             -            -           104
Net loss                                -          -           -      (10,825)          -             -            -       (10,825)
Translation adjustment                  -          -           -            -          (8)            -            -            (8)
Restricted shares issued for
Director's compensation                20          -          13            -           -             -            -            13
Consulting expense attributable
to options                              -          -          96            -           -             -            -            96
Retirement of shares related
to patent acquisition                 (25)         -         (26)           -           -             -            -           (26)
Retirement of shares in
settlement of employee
receivable                             (8)         -          (5)           -           -             -            -            (5)
                                ---------   ---------   ---------   ---------   ---------     ---------    ---------     ---------
                                =========   =========   =========   =========   =========     =========    =========     =========
Balance at December 31, 1996      111,615   $  1,116    $  85,025   $ (83,673)  $     142     $       -    $       -     $   2,610
                                =========   =========   =========   =========   =========     =========    ========      =========

Attention  is  directed  to  the  foregoing  accountant's  reports  and  to  the
accompanying notes to the consolidated financial statements.
</TABLE>






<PAGE>
<TABLE>
<CAPTION>

NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                  (In thousands of dollars)
                                                                                             Years
                                                                                       Ended December 31,
                                                                --------------------------------------------------------------
                                                                        1994                 1995                 1996
                                                                -------------------  -------------------- --------------------
Cash flows from operating activities:
<S>                                                             <C>                  <C>                  <C>
 Net loss                                                       $       (21,907)     $         (4,068)     $       (10,825)
 Adjustments to reconcile net loss to net cash (used in) operating activities:
   Depreciation and amortization                                            994                 1,127                1,000
   Common stock  and warrants issued as consideration for:
     Compensation                                                           109                     8                  109
     Rent and marketing expenses                                              -                   355                    -
     Research and development                                               500                     -                    -
   Common stock retired in settlement of employee account
   receivable                                                                 -                     -                   (5)
   Receipt of license fee in exchange for inventory and
   release of obligation                                                          -            (3,266)                   -
   Receipt of services in payment of stock subscription                     165                     -                    -
   Provision for slow moving and obsolete inventory                       2,032                     -                    -
   Provision for tooling costs and write-off                                100                    94                  371
   Provision for doubtful accounts                                          718                   552                  192
   Realized loss on sale of short-term investments                          375                     -                    -
   Equity in net loss (income) of unconsolidated affiliates               1,824                   (80)                  80
   Unrealized foreign currency (gain) loss                                   16                    32                  (45)
   Loss on disposition of fixed assets                                        -                   107                   83
   Disposition of short-term investments                                 18,527                     -                    -
   Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable                            (921)                  302                   61
     (Increase) decrease in license fees receivable                         180                     -                 (150)
     (Increase) decrease in inventories                                  (1,518)                  212                  813
     (Increase) decrease in other assets                                   (283)                  299                   67
     Increase (decrease) in accounts payable and
     accrued expenses                                                       283                  (190)                  55
     Increase (decrease) in other liabilities                            (1,324)                 (482)                 436
                                                                -------------------  -------------------- --------------------
         Net cash used in operating activities                  $          (130)     $         (4,998)    $         (7,758)
                                                                -------------------  -------------------- --------------------
Cash flows from investing activities:
  Capital expenditures                                          $        (1,286)     $            (80)    $           (186)
  Acquisition of patent rights                                              (70)                 (210)                   -
  Investment in joint ventures                                             (191)                    -                    -
  Sales of short term investments                                             -                    18                    -
                                                                -------------------  -------------------- --------------------
         Net cash used in investing activities                  $        (1,547)     $           (272)    $           (186)
                                                                -------------------  -------------------- --------------------
Cash flows from financing activities:
  Proceeds from:
    Sale of common stock                                        $             -      $          3,989     $          6,377
    Expenses related to prior sale of common stock                          (20)                    -                    -
    Exercise of stock purchase warrants and options                         966                   689                  104
                                                                  -------------------  -------------------- --------------------
         Net cash provided by financing activities              $           946      $          4,678     $          6,481
                                                                -------------------  -------------------- --------------------
Net decrease in cash and cash equivalents                       $          (731)     $           (592)    $         (1,463)
Cash and cash equivalents - beginning of period                           3,154                 2,423                1,831
                                                                -------------------  -------------------- --------------------
Cash and cash equivalents - end of period                       $         2,423      $          1,831     $            368
                                                                ===================  ==================== ====================
Cash paid for interest                                          $             7      $              4     $              4
                                                                ===================  ==================== ====================
Non-cash investing and financing activity:
  Issuance of common stock in exchange
  for certain assets of ANVT                                    $         2,200      $              -      $             -
                                                                ===================  ==================== ====================

See Notes 6, 8 and 11 with  respect  to  settlement  of certain  obligations  by
issuance of  securities  and see Note 3 with respect to issuance of common stock
in exchange for notes receivable.

Attention  is  directed  to  the  foregoing  accountant's  reports  and  to  the
acompanying notes to the consolidated financial statements.


                                      F-38
</TABLE>



[GRAPHIC OMITTED]



<PAGE>



                      NOISE CANCELLATION TECHNOLOGIES, INC.
                        NOTES TO THE FINANCIAL STATEMENTS

1. Background:

   Noise Cancellation Technologies,  Inc. ("NCT" or the "Company") is engaged in
the design,  development,  licensing,  production and distribution of electronic
systems for Active  Wave  ManagementTM  including  systems  that  electronically
reduce noise and vibration,  principally  through joint ventures and other forms
of strategic alliances.  The Company's systems are designed for integration into
a wide range of products serving markets in the  transportation,  manufacturing,
commercial,  consumer  products and  communications  industries.  The  Company's
activities to date have  principally  involved the  developing of its electronic
systems for commercial use and providing  engineering and  development  services
under contracts with strategic partners and third parties.

   The  technology  supporting  the Company's  electronic  systems was developed
using technology  maintained under various patents (the "Chaplin  Patents") held
by  Chaplin-Patents  Holding Co.,  Inc.  ("CPH") as well as patented  technology
acquired or developed by the Company.  CPH, formerly a joint venture with Active
Noise  Vibration  Technologies,  Inc.  ("ANVT") was  established to maintain and
defend these patent rights.  The former joint venture agreement  relating to the
Chaplin  Patents  required  that the Company  only  license or share the related
technology  with entities who are  affiliates of the Company.  As a result,  the
Company  established various joint ventures and formed other strategic alliances
(see Note 3.) to further  develop  the  technology  and  electronic  systems and
components  based on the  Chaplin  Patents,  to  develop  such  technology  into
commercial  applications,  to integrate  the  electronic  systems into  existing
products and to distribute  such systems and products  into various  industrial,
commercial and consumer markets.

   The Company has  incurred  substantial  losses  from  operations  since its
inception,  which  have  been  recurring  and  amounted  to $83.7  million  on a
cumulative basis through December 31, 1996 and has a working capital  deficiency
of $1.3 million at December 31, 1996. These losses,  which include the costs for
development of products for commercial use, have been funded  primarily from the
sale of common stock,  including the exercise of warrants or options to purchase
common stock,  and by technology  licensing fees and engineering and development
funds received from joint venture and other strategic partners.  As discussed in
Note 3.,  agreements with joint venture and other strategic  partners  generally
require  that a portion of the initial  cash  flows,  if any,  generated  by the
ventures  or the  alliances  be paid on a  preferential  basis to the  Company's
co-venturers until the technology licensing fees and engineering and development
funds provided to the venture or the Company are recovered.

   Cash and cash  equivalents  amount to $0.4  million  at  December  31,  1996,
decreasing  from $1.8 million at December 31, 1995.  Management does not believe
that available  funds at December 31, 1996 are sufficient to sustain the Company
for the  next  twelve  months.  Management  believes  that  cash  and  the  cash
anticipated from the exercise of warrants and options,  the funding derived from
forecasted   technology  license  fees,   royalties,   and  product  sales,  and
engineering  and  development  revenue,  the  operating  cost  savings  from the
reduction  in  employees,  reduced  capital  expenditures,  and the  sale of the
debentures  referred  to below  (see Notes 6. And 7.)  should be  sufficient  to
sustain the Company's anticipated future level of operations into 1998. However,
the period during 1998 through  which it can be sustained is dependent  upon the
level of  realization  of funding from  technology  license fees,  royalties and
product sales,  and engineering  and development  revenue and the achievement of
the operating  cost savings from the events  described  above,  all of which are
presently uncertain.

   There  can be no  assurance  that  additional  funding  will be  provided  by
technology  license  fees,  royalties  and  product  sales and  engineering  and
development  revenue.  In that  event,  the  Company  would have to further  and
substantially  cut back its level of operations in order to conserve cash. These
reductions  could have an adverse  effect on the  Company's  relations  with its
strategic  partners  and  customers.  Uncertainty  exists  with  respect  to the
adequacy of current funds to support the  Company's  activities  until  positive
cash flow from operations can be achieved,  and with respect to the availability
of financing from other sources to fund any cash deficiencies (see Note 15. with
respect to recent financing).

   The accompanying  financial  statements have been prepared  assuming that the
Company will  continue as a going  concern,  which  contemplates  continuity  of
operations,  realization  of  assets  and  satisfaction  of  liabilities  in the
ordinary  course of business.  The propriety of using the going concern basis is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  public
and private  financings and other funding sources to meet its  obligations.  The
uncertainties  described in the preceding  paragraphs raise substantial doubt at
December 31, 1996,  about the Company's  ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the  recoverability  of the carrying  amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.

<PAGE>

2. Summary of Significant Accounting Policies:

Consolidation:

   The financial  statements  include the accounts of the Company and its wholly
owned subsidiaries. All material inter-company transactions and account balances
have been eliminated in consolidation.

   Unconsolidated  affiliates  include  joint  ventures  and other  entities not
controlled  by the  Company,  but over which the Company  maintains  significant
influence  and in which the  Company's  ownership  interest is 50% or less.  The
Company's  investments in these entities are accounted for on the equity method.
When the Company's  equity in cumulative  losses  exceeds its investment and the
Company has no  obligation  or intention  to fund such  additional  losses,  the
Company suspends  applying the equity method (see Note 3.). The Company will not
be able to record any equity in income with respect to an entity until its share
of future profits is sufficient to recover any  cumulative  losses that have not
previously been recorded.

Revenue Recognition:

Products Sales:

    Revenue is recognized as the product is shipped.

Engineering and development services:

   Revenue from  engineering and development  contracts is recognized and billed
as the services are performed.  However,  revenue from certain  engineering  and
development  contracts  are  recognized  as  services  are  performed  under the
percentage of completion method after 10% of the total estimated costs have been
incurred.  Under the percentage of completion method,  revenues and gross profit
are  recognized as work is performed  based on the  relationship  between actual
costs incurred and total  estimated  costs at completion.  Estimated  losses are
recorded when identified.

   Revenues  recorded  under the  percentage  of completion  method  amounted to
$249,700,  $249,000 and $9,000 for the years ended  December 31, 1994,  1995 and
1996,  respectively.  Retainage  balances  were $8,200 at December  31, 1996 and
1995. The 1996 balance is expected to be collected within one year.

Technology Licensing Fees:

   Technology  licensing fees paid by joint venturers,  co-venturers,  strategic
partners or other  licensees which are  nonrefundable,  are recognized in income
upon execution of the license  agreement or upon  completion of any  performance
criteria specified within the agreement. See Note 3, with respect to the license
fee recorded by the Company in  connection  with the Walker  Noise  Cancellation
Technologies and Ultra Electronics, Ltd. Transactions in 1995.

Cash equivalents and short-term investments:

   The Company considers all money market accounts and investments with original
maturities  of  three  months  or  less  at the  time  of  purchase  to be  cash
equivalents.

   Short-term  investments  principally  comprise  high quality  investments  in
fixed-income securities funds and mid-term, high quality bond funds.


Inventories:

   Inventories are stated at the lower of cost (first in, first out) or market.

   With regard to the Company's  assessment of the  realizability  of inventory,
the Company periodically conducts a complete physical inventory;  currently this
is done on a quarterly basis. At the same time, the Company reviews the movement
of inventory on an item by item basis to determine  the value of items which are
either slow  moving or have become  obsolete  since the last  quarterly  review.
After applying the above noted measurement  criteria, as well as looking forward
to  assess  the  potential  for near term  product  engineering  changes  and/or
technological  obsolescence,   the  Company  determines  the  current  need  for
inventory  reserves.  After  applying  the above noted  measurement  criteria at
December 31, 1996, and December 31, 1995, the Company  determined that a reserve
of $262,000 and $355,000, respectively, was adequate.

Property and Equipment:

   Property and equipment are stated at cost and depreciation is recorded on the
straight-line  method over the estimated useful lives of the respective  assets.
Leasehold  improvements  are amortized over the shorter of their useful lives or
the related lease term.

<PAGE>

Patent Rights:

   Patent  rights are stated at cost and are  amortized on a straight line basis
over the  remaining  average life of the patents  (ranging  from 1 to 15 years).
Amortization  expense was  $166,700,  $398,100 and  $403,500 for 1994,  1995 and
1996,  respectively.  Accumulated  amortization was $1,074,800 and $1,478,300 at
December 31, 1995 and 1996, respectively.

   It is the  Company's  policy to review  its  individual  patents on a regular
basis to  determine  whether  any event has  occurred  which  could  impair  the
valuation of any such patent.

Foreign currency translation:

   The financial  statements  for the United  Kingdom  operations are translated
into U.S.  dollars at year-end  exchange  rates for assets and  liabilities  and
weighted  average  exchange  rates for  revenues  and  expenses.  The effects of
foreign  currency  translation  adjustments  are  included  as  a  component  of
stockholders'  equity  and gains and  losses  resulting  from  foreign  currency
transactions are included in income.




<PAGE>


Loss per common share:

The net loss per common share has been  determined  on the basis of the weighted
average number of shares of common stock outstanding  during the period.  Common
stock  equivalents   (including  stock  options  and  warrants)  have  not  been
considered since their effect would be antidilutive.

Concentrations of Credit Risk:

   Financial  instruments which potentially subject the Company to concentration
of credit risk  consist  principally  of cash and cash  equivalents,  short-term
investments and trade receivables. The Company primarily holds its cash and cash
equivalents  in two banks.  Deposits in excess of federally  insured limits were
$0.2 million at December 31, 1996. The Company had no short-term  investments at
December  31,  1996.  The Company  sells its  products  and services to original
equipment  manufacturers,  distributors  and end  users  in  various  industries
worldwide.  As shown below, the Company's five largest  customers  accounted for
approximately  58% of revenues during 1996 and 45% of gross accounts  receivable
at December 31, 1996. The Company does not require  collateral or other security
to support customer receivables.

                                       As of December 31, 1996,
                                     and for the Year then Ended
                                  ---------------------------------

                                     Accounts
        Customer                    Receivable       Revenue
        --------                    ----------     ----------
  Johnson Controls, Inc.            $   4,500      $  712,500
  Rockwell International              150,000         500,000
  Telex Communications, Inc.           73,600         168,800
  Siemens Medical Systems, Inc.         3,500         319,100
  Brookstone                           42,600         145,600
  All Other                           209,600       1,317,600
                                    ----------     ----------
       Total                        $ 483,800      $3,163,600
                                    =========      ==========

   The Company regularly  assesses the realizability of its accounts  receivable
and performs a detailed analysis of its aged accounts receivable on no less than
a quarterly basis.  When quantifying the  realizability of accounts  receivable,
the Company takes into  consideration  the value of  receivables  in the 90+ day
category,  the nature of disputes,  if any, and the progression of conversations
and/or correspondence between the Company and customers regarding the underlying
cause  for  the  age  of  such  receivables.  After  applying  the  above  noted
measurement  criteria as of December 31, 1996 and December 31, 1995, the Company
determined that a reserve of $123,000 and $119,000, respectively, was adequate.



<PAGE>


Reclassifications:

     Certain  reclassifications  have been made to the 1994 financial statements
     to conform with the 1995 and 1996 presentation.

Use of Estimates:

   The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Stock-Based Compensation:

   During 1996, the Company adopted Statement of Financial  Accounting Standards
No.  123,  "Accounting  for  Stock-Based   Compensation"  (SFAS  No.  123).  The
provisions  of SFAS No. 123 allow the Company to either  expense  the  estimated
fair value of stock  options and warrants or to continue to follow the intrinsic
value  method  set forth in APB  Opinion  25,  "Accounting  for Stock  Issued to
Employees"  (APB 25) but disclose the pro forma effects on net income (loss) had
the fair value of the options or warrants been expensed. The Company has elected
to  continue  to apply APB 25 in  accounting  for its stock  option and  warrant
incentive plans. Please refer to Note 7. for further information.

3. Joint Ventures and Other Strategic Alliances:

   The  following  is a  summary  of the  Company's  joint  ventures  and  other
strategic alliances as of December 31, 1996.

   The Company and certain of its  wholly-owned  subsidiaries  have entered into
agreements to establish joint ventures and other strategic  alliances related to
the  design,  development,   manufacture,  marketing  and  distribution  of  its
electronic  systems and  products  containing  such  systems.  These  agreements
generally  provide that the Company license  technology and contribute a nominal
amount of initial capital and that the other parties provide  substantially  all
of the  funding to  support  the  venture  or  alliance.  This  support  funding
generally  includes  amounts  paid or  services  rendered  for  engineering  and
development.  In exchange for this funding, the other party generally receives a
preference in the distribution of cash and/or profits from the joint ventures or
royalties from these alliances until such time that the support funding (plus an
"interest"  factor in some instances) is recovered.  At December 31, 1996, there
were no  preferred  distributions  due to joint  venture  partners  from  future
profits of the joint ventures.

   Technology  licensing fees and engineering and development fees paid by joint
ventures to the Company are recorded as income since there is no recourse to the
Company  for  these  amounts  or any  commitment  by the  Company  to  fund  the
obligations of the venture.

   When the Company's  share of cumulative  losses equals its investment and the
Company has no  obligation  or intention  to fund such  additional  losses,  the
Company  suspends  applying  the  equity  method.  The  aggregate  amount of the
Company's  share of losses in these joint  ventures  in excess of the  Company's
investments  which has not been  recorded  was zero at December  31,  1996.  The
Company  will not be able to record  any  equity in income  with  respect  to an
entity until its share of future profits is sufficient to recover any cumulative
losses that have not previously been recorded.
   Certain of the joint  ventures  will be suppliers to the Company and to other
of the joint ventures and will transfer  products to the related  entities based
upon pricing  formulas  established in the agreements.  The formula is generally
based upon fully  burdened  cost, as defined in the  agreements,  plus a nominal
profit.

   Total  revenues  recorded by the Company  relating to the joint  ventures and
alliances,  or their principals,  for technology licensing fees, engineering and
development services and product sales were as follows:

                                       Years Ended December  31,
 Joint Venture/Alliance             1994         1995          1996
Walker Noise Cancellation        $1,701,700    $3,993,500       $90,100
Technologies
Ultra Electronics, Ltd.           1,072,400     3,153,400        61,700
ELESA                                   ---       424,000        28,300
Siemens Medical Systems, Inc.       533,000       259,900       319,100
Foster/NCT Supply, Ltd.             144,700       133,200         9,700
AB Electrolux                       162,500       129,000        12,000
Interkeller AG                      105,600           ---           ---
Johnson Controls, Inc.                  ---           ---       712,500
                                 ----------    ----------    ----------

      Total                      $3,719,900    $8,093,000    $1,233,400
                                 ==========    ==========    ==========
<PAGE>

   Outlined  below is a summary  of the nature  and terms of these  ventures  or
alliances:

Joint Ventures

Chaplin  Patents  Holding  Company  ("CPH") was co-owned on a 50/50 basis by the
Company and ANVT,  a former  competitor.  On  September  16,  1994,  the Company
acquired  the  patents,  technology,  other  intellectual  property  and certain
related  tangible  assets of ANVT.  The Company  also  acquired all rights under
certain  joint  venture and  customer  agreements  subject to the consent of the
other parties to those  agreements.  Included in the  acquisition was ANVT's 50%
interest in CPH at which time the Company  became the sole  shareholder  of CPH.
CPH acquired  certain patent rights relating to the reduction and elimination of
noise and vibration  from the Company,  ANVT and a third party.  The Company and
ANVT had licensed co-exclusive rights to the Chaplin Patents from CPH. The joint
venture  agreement  related to the Chaplin Patents required that the Company may
only license or share the related technology with entities who are affiliates of
the Company. As a result, the Company has established several joint ventures and
formed  other  strategic   alliances  to  further  develop  the  technology  and
electronic systems and components based on the Chaplin Patents,  to develop such
technology into  commercial  applications,  to integrate the electronic  systems
into existing  products and to distribute such systems and products into various
industrial,  commercial and consumer markets.  Initial capital  contributions by
the Company and ANVT of $150,000 each to CPH were used to acquire certain rights
owned by the third party.  Pursuant to the patent license  agreement,  and until
September 16, 1994 the Company and ANVT  contributed cash equally to CPH to fund
administrative  costs and provide for  maintenance and protection of the related
patents.  After September 16, 1994, the Company, as sole shareholder of CPH, was
responsible for 100% of CPH's funding requirements.

      Walker  Noise  Cancellation  Technologies  ("WNCT")  was a  50/50  general
partnership between NCT Muffler, Inc., a wholly-owned  subsidiary of the Company
and Walker  Electronic  Mufflers,  Inc.  ("WEM"),  a wholly-owned  subsidiary of
Tennessee  Gas Pipeline  Company.  On November 15, 1995,  the Company and Walker
executed a series of related  agreements (the  "Restructuring  Agreements")  and
concluded  previously  noted  negotiations  with Tenneco  Automotive  and Walker
regarding  the  Company's  commitment  to help fund $4.0  million of product and
technology  development  work and the transfer of the  Company's 50% interest in
WNCT to Walker.  The Restructuring  Agreements  provided for the transfer of the
Company's  interest  in  WNCT  to  Walker,  the  elimination  of  the  Company's
previously expensed obligation to fund the remaining $2.4 million of product and
technology  development  work noted  above,  the  transfer  to Walker of certain
Company owned tangible  assets related to the business of WNCT, the expansion of
certain existing  technology  licenses and the Company's  performance of certain
research and development  activities for Walker at Walker's expense as to future
activities.  In  consideration  for the  above,  Walker  paid the  Company  $0.3
million, delivered to the Company 1,110,083 shares of the Company's common stock
which Tenneco Automotive had purchased from the Company in December 1993 and has
undertaken to pay the Company  certain  royalties from the  exploitation  of the
intellectual  property  rights granted to Walker under the expansion of existing
technology  licenses.  The  shares  delivered  to the  Company  were  retired on
November  16,  1995.  Accordingly,  the  Company  recorded  $3.6  million  as  a
technology  licensing  fee  relating  to  the  net  effect  of the  above  noted
Restructuring Agreements in the fourth quarter of 1995.

   WNCT was established in 1989 to develop,  manufacture  and distribute  active
mufflers  for  use in  automobiles  and  other  vehicles  and  other  industrial
applications.  The agreement between NCT and Walker was expanded and extended in
1991.

   Initial capital  contributions by the Company and WEM were $750,000 each, and
such  amounts  were paid by WNCT to the  Company as a license  fee in 1989.  The
joint venture agreement  provided that WEM will make preferred  contributions to
WNCT for the purpose of funding  engineering  and  development  performed by the
Company and engineering performed by WEM. Aggregate preferred contributions made
by WEM to WNCT (net of return of capital  advances to WEM) through  December 31,
1994,  amounted to $7.6  million,  of which $4.2 million was paid to the Company
and $3.4 million was credited by WNCT to WEM's  capital  account for the cost of
engineering   services   performed.   Interest  on  the  engineering   preferred
contributions   and  certain   portions  of  the   engineering  and  development
contributions  was compounded  monthly at 1% less than the bank prime rate until
repaid through preferred distributions. WEM's obligation to fund engineering and
development expired at the end of the first quarter of 1994.

   The Company  recorded  income of $750,000  from the license fee in 1989.  The
Company has also recorded as income its  engineering  and  development  payments
from WNCT, amounting to $1.1 million,  $1.1 million and $0.7 million for each of
the years in the three year period ended  December 31, 1995,  respectively.  The
Company recorded no such payments from WNCT in 1996. There is no recourse to the
Company for these payments. Other than certain future Walker funded research and
development activities noted above, the Company has no current plans, obligation
or intention to provide additional funding to WNCT.

<PAGE>

  In December,  1993, Tenneco  Automotive,  a division of Tennessee Gas Pipeline
Company,  purchased  shares of common  stock of the Company for $3.0  million in
cash, at a price per share of approximately $2.70, which was equal to 94% of the
price to the public of the shares of the  Company's  common stock then  offered.
Immediately  thereafter,  the Company contributed $1.0 million to the capital of
WNCT,  following which WNCT repaid $1.0 million of the capital  advances made to
WNCT by WEM and  representatives of WEM. The Company agreed to restructure WNCT.
Such   restructuring   would  include  giving  WNCT  worldwide  rights  for  the
manufacture and sale of all muffler products except those  manufactured and sold
in the consumer  and defense  markets.  WNCT also would be expanded to have,  in
addition to rights it has with respect to vehicular  mufflers,  worldwide rights
to all silencing and vibration  applications  (e.g.,  mufflers,  cabin quieting,
engine mounts,  fan quieting and engine block  quieting) for all vehicles except
trains, aircraft and watercraft. In addition, the Company committed to help fund
$4.0  million  of  product  and  technology  development  work  of  the  Company
attributable  to WNCT.  Also pursuant to the agreement with Tenneco  Automotive,
Walker's right to acquire the Company's  interest in WNCT upon the occurrence of
certain  events was  eliminated  and Tenneco  Automotive had the right to have a
representative  serve on the Company's  Board of Directors.  The agreement  with
Tenneco Automotive and the Company's related funding commitment resulted in 1993
recognition  of  $3.6  million  of  previously   unrecognized  losses  and  1994
recognition  of $1.4  million of current  year losses with  respect to the joint
venture with WEM. Such losses  exceeding the Company's  remaining  investment in
WNCT amounted to $2.9 million at December 31, 1994.  Of the $2.9  million,  $1.5
million  recorded  as a current  liability.  The  balance  of $1.4  million  was
classified  as a  long  term  liability.  The  above  noted  November  15,  1995
Restructuring  Agreements  significantly  altered  the  foregoing  terms  of the
December 1993 agreement.

   Prior to December 31, 1994, the Company's share of cumulative  losses equaled
its investment  and commitment to the joint venture.  The Company had no further
obligation or intention to fund any  additional  losses  therefore,  the Company
suspended applying the equity method.

   Foster/NCT  Headsets  International,  Ltd.  ("FNH") was a 50/50 joint venture
between  Foster  Electric  Company,  Ltd.  ("Foster")  and the Company.  FNH was
established  as a limited  liability  company in Japan in March 1991 to develop,
design,  manufacture and sell active noise cancellation headset systems. FNH had
exclusive   manufacturing   rights  for  the   headsets  in  the  Far  East  and
non-exclusive  marketing rights worldwide.  Additionally,  another joint venture
with  Foster/NCT  Supply,  Ltd.,  ("FNS" as described  below) served as a supply
joint venture for FNH.

   On July 28, 1995, Foster Electric Co., Ltd.  ("Foster"),  Foster NCT Headsets
International  ("FNH") and the Company executed a letter agreement  amending the
1991 agreement covering the headset joint venture company, FNH. Pursuant to that
agreement  Foster  acquired the  Company's  50% interest in FNH and a license to
manufacture  headsets  for FNH and NCT with  tooling  currently  owned by NCT in
consideration  for  Foster's  assumption  of FNH's  outstanding  liabilities  of
$303,000. The agreement also grants FNH the right to sell certain headsets on an
exclusive  basis in Japan and a non-exclusive  basis  throughout the rest of the
Far East, in consideration for a royalty on the sale of such headsets.

   Initial  capital  contributions  made by the Company and Foster under the FNH
joint venture  agreement were 6.5 million yen (historical  cost of approximately
$47,000)  each.  In March,  1994 the  Company  and Foster  agreed to jointly and
equally  increase  the  capitalization  of  FNH to a  total  of 52  million  yen
resulting in the Company's  additional  investment of $191,000.  The increase in
capitalization  enabled  FNH to  launch  an  expanded  marketing  effort  in the
Company's products in the Far East.

   Under  related  agreements,  Foster  paid a license  fee to the Company of $1
million, which was recognized as income in 1991, and agreed to pay an additional
$700,000 to the Company at a rate of two percent of sales after cumulative sales
by FNH reach $50 million and the accumulated  deficit in FNH is reduced to zero.
The license  fees paid to date in the amount of $1.0  million are not subject to
repayment.

   As part of the February 10, 1995 agreement to dissolve the FNS joint venture,
(see FNS Note below) NCT has repurchased the exclusive  manufacturing rights for
headsets in the Far East from Foster.  The Company recorded a charge of $780,000
in 1994 relating to these transactions.

   In return for technical and management assistance provided by Foster, FNH has
agreed to pay Foster up to an aggregate  amount of $1.4  million  based on three
percent of sales; the first $700,000 of which are to be paid without restriction
based upon sales amount,  the remaining $700,000 begin to be paid to Foster when
the FNH accumulated  deficit is reduced to zero.  Through December 31, 1994, the
accumulated deficit of FNH was $543,000.

   The Company's above noted incremental  investment resulted in the recognition
of $42,000 of previously unrecognized losses and $149,000 of current losses with
respect to the FNH joint venture in 1994.

   The  Company  has  purchased  certain  tooling  for use by FNH  which  it has
recorded on its books.  The tooling will be amortized  against  products sold by
NCT.

<PAGE>

   Analog/NCT  Supply Ltd.  ("ADI/NCT") is a 50/50 joint venture  between Analog
Devices,  Inc.  ("ADI")  and the  Company  which was  established  in June 1992.
ADI/NCT  was formed to design,  develop  and  manufacture  computer  chips to be
incorporated   into  the   Company's   electronic   systems.   Initial   capital
contributions by the Company and ADI were nominal. The joint venture and related
agreements provide that each party will bear their respective cost of design and
development of the computer  chips.  ADI will  manufacture and sell the computer
chips to ADI/NCT,  based on orders provided to ADI/NCT by the Company, at prices
to be agreed upon by the Company and ADI.  Administrative  services  required by
ADI/NCT  will be provided by ADI, the costs of which will be funded by the joint
venture.  No such services have been charged to or incurred by the joint venture
as of December 31, 1996.

     Harris/NCT Supply,  L.L.C.  ("HARNCT") is a 50/50 limited liability company
owned equally by Harris  Corporation  ("Harris") and the Company under a Limited
Liability Company Agreement concluded in September,  1993 (the "LLC Agreement").
HARNCT will develop and manufacture  silicon chips to be  incorporated  into the
Company's electronic systems.  Initial capital  contributions by the Company and
Harris were nominal.  The LLC Agreement provides that each party will bear their
respective  cost of design and  development  of the silicon  chips.  Harris will
manufacture  and sell the silicon chips to HARNCT,  based on orders  provided to
HARNCT by the  Company,  at prices to be agreed  upon by the Company and Harris.
Administrative services required by HARNCT will be provided by Harris, the costs
of which  will be funded by HARNCT.  No such  services  have been  charged to or
incurred by HARNCT as of December 31, 1996.

   OnActive  Technologies,  L.L.C.  ("OAT")  is a  limited  liability  company
currently owned 42.5% by Applied Acoustic Research, L.L.C. ("AAR"), 42.5% by the
Company  and 15.0% by Hoover  Universal,  Inc.,  a wholly  owned  subsidiary  of
Johnson Controls,  Inc.("JCI") (collectively,  the "Members") under an Operating
Agreement concluded in December, 1995 and amended in May, 1996. OAT will design,
develop,  manufacture,  market,  distribute and sell Flat Panel  Transducers(TM)
("FPT(TM)")  and  related  components  for use in audio  applications  and audio
systems installed in ground based vehicles. Initial capital contributions by the
Company and AAR were  nominal  and no Member is required to make any  additional
contribution  to OAT. In May,  1996,  JCI  acquired a $1.5  million,  15% equity
interest in OAT and acquired  exclusive  rights in the  automotive OEM market to
certain of the Company's and AAR's related  patents for a total of $1.5 million,
which was paid  50/50 to the  Company  and AAR.  In  connection  therewith,  the
Company  recorded a license fee of $750,000 during the year ended  December 31,
1996. The Operating  Agreement provides that services and subcontracts  provided
to OAT by the Members are to be  compensated by OAT at 115% of the Members fully
burdened cost.  However,  during 1996,  administrative  services required by OAT
were provided by the Company and not charged to OAT. As of December 31, 1995 the
Company  recognized  $80,000 of income  relating  to its share of 1995 profit in
OAT. As of December  31, 1996 the Company  reversed  the $80,000 of income which
related to its share of the 1996 loss in OAT.

   Foster/NCT  Supply,  Ltd.,  ("FNS")  was a 30/70  joint  venture  between the
Company and Foster which was established in June 1991 to serve as a supply joint
venture for the Company's worldwide activities.

   In late 1994,  Foster and the Company agreed that the  acquisition of certain
assets of ANVT by NCT (see Note 14.)  removed the  necessity  for the  continued
existence of FNS. An orderly liquidation of FNS was completed in April 1995. The
agreement provided for the Company's  repurchase from Foster for $0.6 million of
the exclusive headset  manufacturing rights in the Far East (see FNH note above)
and an immediate  minimum 5%  reduction  in the price of headset  products to be
produced by Foster for the Company. The Company accrued a $0.8 million charge in
1994  relating  to this  agreement,  of which $0.2  million was  reflected  as a
current liability at December 31, 1994.

   Capital  contributions  required  under the joint  venture  agreement  were 3
million  yen from the  Company  and 7  million  yen from  Foster  (approximately
$22,000  and  $51,000,  respectively).  Foster  was  also  required  to  provide
assistance to FNS for research and development  activities  amounting to $50,000
per month up to an aggregate of $1.2  million,  which FNS was to repay to Foster
at the rate of one  percent of the amount of each  month's  sales.  There was no
recourse to the  Company  should FNS not record  sufficient  sales for Foster to
recover such research and development costs.

   Boet  Systeme  Actif S.A.  ("BSA")  was a 49/51  joint  venture  between  NCT
Muffler,  Inc., a  wholly-owned  subsidiary of the Company,  and S.A. Andre Boet
("Boet"),  respectively.  BSA was established in 1991 to develop, manufacture in
France,  and sell worldwide NCT electronic  silencers for use on  non-automotive
internal  combustion  engines.   BSA  was  responsible  for  the  customization,
marketing and sales of the silencers. The Company was to assist BSA with product
development and employee training. All supplies were to be purchased by BSA from
either Boet or NCT Muffler.  Initial  capital  contributions  by NCT Muffler and
Boet were not significant.

   As a result of the April,  1994  transfer to WNCT of the rights to market the
Company's  industrial  silencer  products  and  anticipation  of  the  Company's
November 15, 1995  agreement  with Tenneco  Automotive and Walker (see WNCT Note
above),  in October,  1995 Boet assumed all  liabilities of BSA and the Board of
Directors of BSA approved the dissolution of the joint venture.

<PAGE>

   BSA funded the Company's cost of research and engineering, at a predetermined
rate, and reimbursed  materials,  equipment,  tools,  supplies and out-of-pocket
expenses to Boet and the Company. The joint venture agreement provided that Boet
would advance funding for the  development,  operation and working capital needs
of BSA. BSA was to repay Boet through preferential distributions from its excess
cash in  amounts  not to exceed  20% of BSA's  net  income  in each  year.  Boet
contributed an aggregate of  approximately  $496,000 to BSA through December 31,
1994, none of which was repaid.

   Payments  from BSA to the Company for  research  and  engineering  aggregated
approximately  $120,000 through December 31, 1994.  License fees from BSA to NCT
Muffler  aggregated  $240,000  through December 31, 1994. The above amounts were
recognized  as income by the Company  since there was no commitment or intention
for NCT Muffler to fund any  obligations  of BSA,  nor was there any recourse to
NCT Muffler for these payments.

Other Strategic Alliances:

   Foster and the Company  entered into an agreement in December 1993,  pursuant
to which Foster purchased shares of common stock at a value of $2.0 million (the
"Foster  Shares"),  at a price per share of approximately  $2.70 equal to 94% of
the price to the  public of the  shares of  common  stock in the  December  1993
offering.  Foster paid the purchase price by means of a cash payment of one cent
($.01)  per share  (the par value of the common  stock)  and the  delivery  of a
series of promissory notes (the "Foster Notes") in an aggregate principal amount
equal to the balance of the purchase price.  The Foster Notes were full recourse
notes of Foster  bearing  interest at one percent  above the rate of  three-year
United States  Treasury  Notes and were to mature on April 17, 1997.  The Foster
Notes were secured by the Foster  Shares until paid or "earned out" as described
in the next  paragraph.  The  Foster  Notes  were  recorded  as a  Common  Stock
subscription receivable by the Company.

   Foster and the Company  entered into an agreement under which Foster provided
and the Company purchased $2.0 million of various product and market development
services deemed  necessary by the Company for  commercialization  of several new
headset and other products and the further development of the Company's Japanese
markets.  Upon  completion  of each such project or phase,  the agreed  budgeted
amount therefore was billed to the Company and paid, at the Company's  election,
either in cash or by discharge of an equivalent  amount of the Foster Notes,  in
which  an  appropriate  number  of the  Foster  Shares  were  released  from the
collateralization  restrictions and the Common Stock subscription receivable was
reduced. During 1995, $1.3 million of such services and assets were purchased by
the Company and, at the Company's  election was satisfied  through the discharge
of an equivalent amount of the Foster Notes. As of December 31, 1995, the Foster
Notes have been paid-in-full.

   Foster and the  Company's  wholly owned  subsidiary,  NCT Far East  ("NCTFE")
entered into a marketing agreement in November 1991 under which Foster agreed to
fund up to $500,000 for the  establishment of a marketing office in Tokyo.  This
funding was reimbursed through the issuance of 150,000 shares of common stock of
the  Company to Foster in 1992 and future  payments  to Foster by NCTFE equal to
25% of NCTFE pretax  profits,  as defined,  until Foster has  recovered  100% of
funding in excess of $300,000.  The market value of the  Company's  common stock
issued to Foster ($300,000) was charged to operations in 1992.  Through December
31,  1995,  $185,200 has been funded by Foster  under the  marketing  agreement.
Further,  commissions  payable by NCTFE to Foster under this agreement are based
upon sales by customer  and 5% of any  engineering  and  development  or working
capital funding acquired through Foster's efforts.

   Interkeller AG ("Interkeller"),  a member of Rieter Holding Limited,  and the
Company  entered  into a  strategic  alliance  in June 1992 to improve the noise
reduction in vehicles  through the  combination  of NCT's active cabin  quieting
system ("ACQS") and  Interkeller  technology.  Under the agreement,  Interkeller
performed  acoustic  studies  in the  field  of  electronic  cabin  quieting  in
vehicles,  and the  Company  sold  Interkeller  a  prototype  ACQS and  licensed
Interkeller  the right to use  related  software  in  connection  with  acoustic
studies under the agreement,  for which  Interkeller  has paid a license fee and
contributed $240,000 to the Company over a two year period, ending June 1994. As
of December 31, 1994, the Company has recognized  cumulative  license fee income
of $180,000 and $97,000 for  consultation  and  development  under the June 1992
agreement. The contract has not been renewed.

   AB Electrolux ("Electrolux") and the Company entered into a Joint Development
Cooperation  Agreement  in June 1991 which  provides  for the Company to design,
develop and supply  active  systems for quieting  certain  Electrolux  products.
Electrolux agreed to pay the Company $65,000 per month for two years,  which the
Company has recorded as engineering and development  income.  These  development
costs may be recovered  by  Electrolux  through  royalties on net sales to other
manufacturers  of  competing   products  up  to  250%  of  the  engineering  and
development costs funded by Electrolux. Electrolux agreed to purchase components
for the  manufacture  of related  systems for its products from the Company.  If
Electrolux  purchases such components from other sources, a royalty of 6% of the
net invoice price will be due to the Company.

   Further, the Company granted Electrolux a worldwide  non-exclusive license to
utilize related proprietary technology for the life of such patents for a fee of
$500,000  payable in monthly  installments  of $20,000,  and agreed to limit the
Company's  licensing of such technology to five white goods  manufacturers for a
period  of five  years.  In  January  1994  such  limitations  on the  Company's
technology  licensing were terminated by an amendment to the original agreement.
The $500,000 license fee was recognized as income in 1991, all of which was paid
as of December 31, 1993.

<PAGE>

   Ultra Electronics Ltd.  (formerly Dowty Maritime  Limited)  ("Ultra") and the
Company  entered  into a teaming  agreement  in May 1993 to  collaborate  on the
design,  manufacture and  installation of products to reduce noise in the cabins
of various types of aircraft.  In  accordance  with the  agreement,  the Company
provided  informational  and  technical  assistance  relating  to  the  aircraft
quieting  system and Ultra  reimbursed  the  Company  for  expenses  incurred in
connection  with such  assistance.  Ultra was  responsible for the marketing and
sales  of  the  products.  The  Company  was to  supply  Ultra  with  electronic
components  required for the aircraft  quieting system, at a defined cost, to be
paid by Ultra.

   In March  1995,  the Company and Ultra  amended  the  teaming  agreement  and
concluded  a  licensing  and  royalty  agreement  for $2.6  million and a future
royalty of 1-1/2 % of sales commencing in 1998.  Under the agreement,  Ultra has
also  acquired  the  Company's  active  aircraft   quieting  business  based  in
Cambridge,  England, leased a portion of the Cambridge facility and has employed
certain of the Company's employees.

   Accordingly,  the Company recorded $2.6 million as a technology licensing fee
relating to the net amount received from above noted amended  teaming  agreement
and the licensing and royalty agreement in the first quarter of 1995.

   Siemens  Medical  Systems,  Inc.  ("Siemens") and NCT Medical  Systems,  Inc.
("NCTM"),  a 90%-owned  subsidiary of the Company,  entered into an agreement in
March 1992 to supply Siemens with NCTM/MRI  systems,  a noise  cancellation  and
audio system for Magnetic  Resonance  Imaging systems  ("MRI"),  on an exclusive
basis at  specified  quantities  over two years.  In return,  Siemens  agreed to
utilize only NCTM/MRI systems in their MRI's during the two year period.  During
1994, 1995 and 1996 NCTM has sold 48, 26 and 35 units, respectively, to Siemens.
In  late  November  1993,  the  Company  and  Siemens  signed  a new  agreement,
superseding the 1992 agreement,  which provides for the purchase by Siemens from
the Company of European and U.S. versions of the Company's MRI headsets suitable
for use with Siemens' MRI machines.




<PAGE>


4. Inventories:

     Inventories comprise the following:

                                                      December 31,
                                                   1995           1996
      Components                                 $716,200       $542,700
      Finished goods                            1,339,900        619,600
                                             -------------  -------------
      Gross inventory                          $2,056,100     $1,162,300
      Reserve for obsolete & slow moving         (355,000)      (262,100)
      inventory
                                             -------------  -------------
      Inventory, net of reserves               $1,701,100       $900,200
                                             =============  =============


5. Property and Equipment:

     Property and equipment comprise the following:

                                Estimated
                               Useful Life            December 31,
                                 (Years)           1995         1996
  Machinery and equipment            5          $1,852,800  $1,763,000
  Furniture and fixtures             5             777,600     749,200
  Leasehold improvements          7-10           1,155,600   1,185,400
  Tooling                          1-3           1,430,300   1,061,900
  Other                           5-10             118,400     166,600
                                               ----------- -----------          
       Gross                                    $5,334,700  $4,926,100
  Less, accumulated depreciation                (2,437,600) (2,873,600)
                                               ----------- -----------
       Net                                      $2,897,100  $2,052,500
                                               =========== ===========

  Depreciation  expense for the years ended December 31, 1994,  1995 and 1996
  was $531,000, $588,000 and $518,000, respectively.


6. Common Stock:

Private Placements:

   On November 8, 1995 the Company  entered into a stock purchase  agreement for
the sale of 4.8 million  shares of its common stock in a private  placement to a
foreign  investor  in  consideration  for $3.3  million in net  proceeds  to the
Company.  The closing of the  transaction  occurred on November  14,  1995.  The
purchaser  of the  common  stock was  subject to  certain  resale  and  transfer
restrictions  including those under Regulation S of the United States Securities
Act of 1933, as amended.

   The Company completed a private placement of 2.0 million shares of its common
stock on August 4, 1995  receiving  approximately  $0.7 million in net proceeds.
The  purchaser  of the common  stock was subject to certain  resale and transfer
restrictions  including those under  Regulation D of the Securities Act of 1933,
as amended. As provided for in the Stock Purchase Agreement,  within nine months
of the closing date, the Company was obligated to file a registration  statement
with the Securities and Exchange  Commission  covering the  registration  of the
shares for resale by the purchaser.

   On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a second private placement with the investor in the private placement  described
in the  preceding  paragraph  that  provided net proceeds to the Company of $0.7
million  under  terms  and  conditions  substantially  the  same as those of the
earlier private  placement.  A registration  statement  covering the 4.0 million
shares of the  Company's  common  stock issued in  connection  with this private
placement  and  the  one  described  in the  preceding  paragraph  was  declared
effective by the Commission on September 3, 1996.

   On April 10, 1996, the Company sold an additional  1,000,000  shares,  in the
aggregate,  of its common stock in a private placement with three  institutional
investors   that   provided  net  proceeds  to  the  Company  of  $0.3  million.
Contemporaneously,  the  Company  sold  secured  convertible  term  notes in the
aggregate principal amount of $1.2 million to those institutional  investors and
granted  them  each an option to  purchase  an  aggregate  of $3.45  million  of
additional  shares of the Company's common stock. The per share conversion price
under the notes and the exercise  price under the options are equal to the price
received by the Company for the sale of such 1,000,000 shares subject to certain
adjustments.

   On July 17, 1996,  the Company's  stockholders  authorized an increase in the
Company's authorized capital to 140,000,000 shares.

   On  August  13,  1996,  the three  institutional  investors  converted  their
secured,  convertible  term notes and  exercised  their  options  in full.  As a
result,  the Company issued 13,403,130  shares, in the aggregate,  of its common
stock to such  investors,  received  $3.45  million  in cash,  and  effected  by
conversion  to its  common  stock the  payment  of the notes  together  with the
accrued interest thereon.

   On August 29, 1996,  the Company sold 1.8 million  shares of its common stock
to the same foreign investor which purchased 4.8 million shares of the Company's
common  stock in  November,  1995.  The  Company  received  $0.9  million of net
proceeds.  The purchaser is subject to certain resale and transfer  restrictions
with respect to these shares.

     See Note 15. "Subsequent  Events" with respect to private placements of the
Company's common stock subsequent to December 31, 1996.

Expenses paid with common stock:

   During 1994, the Company  entered into agreements with third parties to issue
common stock in satisfaction of certain obligations which amounted to $700,000.


Stock subscription receivable:

   The $13,000 stock subscription receivable at December 31, 1995 was due from a
former director and was paid in 1996.

   In December 1993, Foster and the Company entered into a definitive  agreement
pursuant to which Foster  purchased shares of common stock for a cash payment of
one cent ($.01) per share (the par value of the common  stock) and the  delivery
of a series of promissory  notes (the "Foster Notes") in an aggregate  principal
amount  equal to the balance of the purchase  price.  The Foster Notes were full
recourse  notes of Foster  bearing  interest  at one  percent  above the rate of
three-year  United States  Treasury  Notes and were to mature on April 17, 1997.
The Foster Notes were  collateralized by the Foster Shares until paid or "earned
out"  (see  Note 3).  No shares  could be sold by  Foster,  irrespective  of the
payment of any of the Foster Notes, until June 23, 1994. As of December 31, 1995
the Foster Notes have been paid-in-full.


Shares reserved for common stock options and warrants:

   At December 31, 1996,  aggregate  shares  reserved for issuance  under common
stock option plans and warrants  amounted to 15.7 million shares of which common
stock options and warrants for 12.5 million shares are outstanding (see Note 7.)
and 12.3 million shares are exercisable.


<PAGE>

7. Common Stock Options and Warrants:

   To be filed by amendment.


8. Related Parties:

   In 1989, the Company established a joint venture with Environmental  Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended  for  use  solely  in  the  process  of  electric   power   generation,
transmission and distribution and which reduce noise and/or vibration  resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively,  "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things,  during the period ending  February  1996, to make payments to ERI
equal to (i) 4.5% of the  Company's  sales of Power  and Fan  Products  and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology,  subject to an overall  maximum of $4,500,000.  Michael J. Parrella,
President  of  the  Company,  was  Chairman  of  ERI at the  time  of  both  the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition,  Jay M. Haft, Chairman of the Board
of Directors of the Company, shares investment control over an additional 24% of
the outstanding  capital of ERI. During the fiscal year ended December 31, 1996,
the  Company  was not  required  to make any such  payments  to ERI under  these
agreements.

   In 1993, the Company entered into three Marketing  Agreements with QuietPower
Systems,  Inc.  ("QSI")  (until  March 2, 1994,  "Active  Acoustical  Solutions,
Inc."),  a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing  Agreements,  QSI has undertaken to use its best
efforts to seek research and  development  funding for the Company from electric
and natural gas utilities for applications of the Company's  technology to their
industries.  In exchange for this undertaking,  the Company has issued a warrant
to QSI to purchase  750,000 shares of Common Stock at $3.00 per share.  The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993,  the date of the  Marketing  Agreement,  was $2.9375.  The warrant
becomes  exercisable  as to  specific  portions of the total  750,000  shares of
Common Stock upon the occurrence of defined events  relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will  record a charge  for the  amount by which the  market  price of the Common
Stock on such  date  exceeds  $3.00  per  share,  if any.  The  warrant  remains
exercisable  as to each such portion from the  occurrence  of the defined  event
through  October 13,  1998.  As of December  31,  1993,  contingencies  had been
removed  against  525,000  warrants  resulting  in a  1993  non-cash  charge  of
$120,250.  This Marketing  Agreement also grants to QSI a non-exclusive right to
market the  Company's  products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America.  QSI is entitled to receive a sales commission on
any sales to a customer of such  products for which QSI is a procuring  cause in
obtaining  the first order from such  customer.  In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross  revenue NCT  receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year and 1% in the fourth year, and
 .5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license  fees it obtains for the Company  from the license of the  Company's
technology.  The  initial  term of  this  Agreement  is  three  years  renewable
automatically  thereafter on a  year-to-year  basis unless a party elects not to
renew.

   Under the  terms of the  second of the  three  Marketing  Agreements,  QSI is
granted a non-exclusive  right to market the Company's products that are or will
be  designed  and sold for use in or with  feeder  bowls  throughout  the world,
excluding Scandinavia and Italy. Under this Marketing Agreement, QSI is entitled
to  receive  commissions  similar  to those  payable  to end  user and  original
equipment  manufacturer  customers  described  above.  QSI is also  entitled  to
receive  the same 5%  commission  described  above on research  and  development
funding and  technology  licenses which it obtains for the Company in the feeder
bowl area.  The initial  term of this  Marketing  Agreement  is three years with
subsequent automatic one-year renewals unless a party elects not to renew.

   Under the terms of the third Marketing Agreement, QSI is granted an exclusive
right to market the Company's products that are or will be designed and sold for
use in or with  equipment  used by electric  and/or  natural gas  utilities  for
retrofit  applications  in North  America.  QSI is  entitled  to receive a sales
commission  on any sales to a customer of such  products  equal to 129% of QSI's
marketing  expenses  attributable  to the marketing of the products in question,
which expenses are to be deemed to be the lesser of QSI's actual expenses or 35%
of the revenues  received by the Company from the sale of such products.  QSI is
also  entitled to receive a 5% commission  on research and  development  funding
similar  to  that  described  above.  QSI's  exclusive  rights  continue  for an
indefinite  term  provided it meets  certain  performance  criteria  relating to
marketing efforts during the first two years following  product  availability in
commercial  quantity and minimum levels of product sales in subsequent years. In
the event QSI's rights  become  non-exclusive,  depending  on the  circumstances
causing  such change,  the initial term then becomes  either three or five years
from the date of this Marketing  Agreement,  with subsequent  one-year automatic
renewals in each instance  unless  either party elects not to renew.  During the
fiscal year ended  December  31,  1996,  the Company was not required to pay any
commissions to QSI under any of these Marketing Agreements.

   The Company has also  entered into a Teaming  Agreement  with QSI under which
each  party  agrees  to  be  responsible  for  certain  activities  relating  to
transformer  quieting system development  projects to be undertaken with utility
companies.  Under this Teaming Agreement,  QSI is entitled to receive 19% of the
amounts to be received from participating  utilities and the Company is entitled
to receive 81%. During the fiscal year ended December 31, 1996, the Company made
no payments to QSI.

   In March 1995,  the Company  entered into a Master  Agreement  with QSI under
which QSI was granted an exclusive  worldwide  license under certain NCT patents
and technical  information to market, sell and distribute  transformer  quieting
products,  turbine  quieting  products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products.  However, QSI may
obtain the right to manufacture the products under certain circumstances include
NCT's  failure to develop the products or the failure of the parties to agree on
certain  development  matters.  In consideration of the rights granted under the
Master  Agreement,  QSI is to pay  the  Company  a  royalty  of 6% of the  gross
revenues  received  from the sale of the products and 50% of the gross  revenues
received from  sublicensing the rights granted to QSI under the Master Agreement
after QSI has recouped 150% of the costs  incurred by QSI in the  development of
the products in question.  The Company is obligated to pay similar  royalties to
QSI on its sale of the products and the  licensing of rights  covered  under the
Master  Agreement  outside the  utility  industry  and from sales and  licensing
within the  utility  industry  in the Far East.  In  addition  to the  foregoing
royalties, QSI is to pay an exclusivity fee to the Company of $750,000; $250,000
of which QSI paid to the  Company in June 1994.  The balance is payable in equal
monthly  installments of $16,667 beginning in April 1995. QSI's exclusive rights
become  non-exclusive  with  respect  to all  products  if it  fails  to pay any
installment  of the  exclusivity  fee when due and QSI loses  such  rights  with
respect  to any  given  product  in the  event it fails to make any  development
funding payment applicable to that product.  The Master Agreement supersedes all
other agreements  relating to the products  covered under the Master  Agreement,
including those agreements between the Company and QSI described above.

   Immediately following the execution to the Master Agreement,  the Company and
QSI entered into a letter agreement  providing for the termination of the Master
Agreement at the Company's election if QSI did not pay approximately $500,000 in
payables then owed to the Company by May 15, 1995.

   In April 1995,  the Company and QSI entered  into  another  letter  agreement
under  which QSI  agreed to  forfeit  and  surrender  the five year  warrant  to
purchase  750,000  shares of the Company's  common stock issued to QSI under the
first Marketing Agreement described above. In addition,  the $500,000 balance of
the  exclusivity  fee  provided  for under the Master  Agreement  was reduced to
$250,000 to be paid in 30 monthly installments of $8,333 each and the payment of
the  indebtedness  to be  paid  under  the  letter  agreement  described  in the
preceding  paragraph  was revised to be the earlier of May 15, 1996, or the date
of closing of a financing of QSI in an amount exceeding $1.5 million,  whichever
first occurs.  Such  indebtedness  is to be evidenced by a promissory  note, non
payment  of which is to  constitute  an event of  termination  under the  Master
Agreement.

   On May 21, 1996,  the Company and QSI entered into another  letter  agreement
extending the time by which the payments from QSI to the Company under the April
1995  letter  agreement  described  above were to be made.  Under the letter the
payment of certain  arrearages in the payment of the  exclusivity  fee was to be
made not later than June 15, 1996, with the balance  continuing to be payable by
monthly payments of $8,333 and as provided in the May 1995 letter agreement.  In
addition the payment of the other indebtedness owed by QSI to the Company was to
be paid by a payment  of $25,000 at the time QSI  obtained  certain  anticipated
financing with the balance paid by monthly payments of $15,000 each.  Default in
QSI's timely payment of any of the amounts  specified in the May 21, 1996 letter
agreement was to cause the immediate termination of the Master Agreement and all
rights granted to QSI thereunder.

   On April 9, 1997, the Company and QSI entered into another  letter  agreement
revising  the payment  schedule  set forth in the May 21, 1996 letter  agreement
applicable to the payment of the  indebtedness  owed to the Company by QSI other
than the unpaid portion of the exclusivity fee. Under the revised schedule,  the
full amount of such indebtedness is to be paid by an initial payment of $125,000
on or before April 21, 1997,  and a second  payment of $200,000 upon the closing
of a proposed  financing  in June 1997 or on January  1, 1998,  whichever  first
occurs.  The  Company is also  entitled  to receive  15% of any other  financing
obtained  by QSI in the interim as well as interest at the rate of 10% per annum
on the  unpaid  amount  of such  indebtedness  from  July 1,  1997.  The  letter
agreement also provides for the continuation of QSI's payment of the exclusivity
fee in accordance  with the earlier letter  agreements as well as the payment of
$11,108 by April 21, 1997,  for headset  products  sold by the Company to QSI in
1996.  In the event of a default in QSI's  timely  payment of any of the amounts
specified  in the April 9, 1997 letter  agreement,  the Company has the right to
cause the  termination  of the Master  Agreement  and all rights  granted by QSI
thereunder upon 10 days notice of termination to QSI.

   As of April 10, 1997, QSI has paid all  installments  due and payable for the
exclusivity fee and, other than as described above, owes no other amounts to the
Company.

   During 1994, 1995 and 1996 the Company  purchased $2.2 million,  $0.5 million
and $0.6 million respectively,  of products from its various manufacturing joint
venture  entities  of which $0.3  million was  included  in accounts  payable at
December 31, 1995. There were no accounts payable related to manufacturing joint
venture  entities at December 31, 1996 reflecting the termination or transfer of
ownership of the subject ventures in 1995 (see Note 3.).

   As discussed in Note 6., the Company had stock subscription  receivables from
a joint venture partner in 1994 and a former  director in 1995,  which were paid
in 1996.



<PAGE>


9. Income Taxes:

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

   At  December  31,  1996,   the  Company  had  available  net  operating  loss
carryforwards of approximately $67.4 million and research and development credit
carryforwards  of $1.2 million for federal  income tax purposes  which expire as
follows:


                                                 Research and
                               Net Operating     Development
                Year              Losses           Credits
                          --------------------  ----------------
                1999               $151,500                 --
                2000                129,300                 --
                2001                787,200                 --
                2002              2,119,000                 --
                2003              1,974,000                 --
                2004              1,620,500                 --
                2005              3,869,900           $141,000
                2006              1,822,500            191,900
                2007              6,865,800            117,800
                2008             13,455,500            320,500
                2009             16,292,500            413,200
                2010              9,385,900             61,400
                2011              8,887,400                 --
                          -------------------   ----------------
                    Total       $67,361,000         $1,245,800
                          ===================   ================

   The Company's ability to utilize its net operating loss  carryforwards may be
subject to an annual  limitation.  The difference between the statutory tax rate
of 34% and the Company's  effective tax rate of 0% is due to the increase in the
valuation  allowance of $5,883,600,  $1,395,000 and $3,251,100 in 1994, 1995 and
1996, respectively.

   The types of temporary  differences that give rise to significant portions of
the  deferred  tax  assets  and the  federal  and  state  tax  effect  of  those
differences as well as federal net operating  loss and research and  development
credit at December 31, 1995, and 1996 were as follows:


                                                1995              1996
                                        ---------------      ------------
    Accounts receivable                       $280,900          $280,700
    Inventory                                  155,700           107,800
    Property and equipment                     102,000           187,300
    Accrued expenses                            36,600           243,300
    Stock compensation                       2,651,400         2,684,000
    Other                                      349,100           324,100
                                        ---------------      ------------
       Total temporary differences          $3,575,700         3,827,100
    Federal net operating losses            19,964,500        22,902,800
    Federal research and development
    credits                                  1,184,400         1,245,800
                                        ---------------      ------------
                                           $24,724,600       $27,975,700
    Less: Valuation allowance              (24,724,600)      (27,975,700
       Deferred taxes                            $ ---             $ ---
                                        ================     ============


10. Litigation:

   On or about June 15, 1995,  Guido  Valerio  filed suit against the Company in
the  Tribunal  of Milan,  Milan,  Italy.  The suit  requests  the Court to award
judgment in favor of Mr.  Valerio as follows:  (i)  establish and declare that a
proposed independent sales representation  agreement submitted to Mr. Valerio by
the Company and signed by Mr.  Valerio but not  executed by the Company was made
and entered  into  between Mr.  Valerio and the Company on June 30,  1992;  (ii)
declare that the Company is guilty of breach of contract and that the  purported
agreement  was  terminated  by  unilateral  and  illegitimate  withdrawal by the
company;  (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions  to which Mr.  Valerio  would have been  entitled if the Company had
followed up on certain alleged  contacts made by Mr. Valerio for an amount to be
assessed by technicians and  accountants  from the Court Advisory  Service;  (v)
order the  Company  to pay  damages  for the harm and  losses  sustained  by Mr.
Valerio in terms of loss of  earnings  and  failure to receive due payment in an
amount such as shall be determined following preliminary  investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira ($18.9 million); and (vi) order the
Company to pay  damages for the harm done to Mr.  Valerio's  image for an amount
such as the judge shall deem  equitable and in case for no less than 500 million
Lira  ($3.1  million).  The  Company  retained  an  Italian  law firm as special
litigation counsel to the Company in its defense of this suit. On March 6, 1996,
the  Company,  through  its  Italian  counsel,  filed a brief of reply  with the
Tribunal of Milan  setting  forth the  Company's  position  that:  (i) the Civil
Tribunal of Milan is not the proper venue for the suit, (ii) Mr. Valerio's claim
is  groundless  since the parties  never  entered into an  agreement,  and (iii)
because Mr.  Valerio is not enrolled in the official  Register of Agents,  under
applicable  Italian law Mr. Valerio is not entitled to any  compensation for his
alleged  activities.  A preliminary  hearing before the Tribunal was held on May
30, 1996,  certain pretrial  discovery has been completed and a hearing before a
Discovery  Judge was held on October 17, 1996.  Submissions of the parties final
pleadings  were to be  made in  connection  with  the  next  hearing  which  was
scheduled for April 3, 1997. On April 3, 1997,  the  Discovery  Judge  postponed
this hearing to May 19, 1998, due to a reorganization of all proceedings  before
the Tribunal of Milan.  Management is of the opinion that the lawsuit is without
merit and will  contest  it  vigorously.  In the  opinion of  management,  after
consultation  with outside  counsel,  resolution  of this suit should not have a
material  adverse  effect on the  Company's  financial  position or  operations.
However,  in the event  that the  lawsuit  does  result in a  substantial  final
judgment against the Company,  said judgment could have a severe material effect
on quarterly or annual operating results.


11. Commitments and Contingencies:

   The Company is obligated for minimum annual rentals (net of sublease  income)
under  operating  leases for  offices and  laboratory  space,  expiring  through
December 2001 with various renewal options, as follows:


          Year Ending
          December 31,          Amount

             1997             $440,000
             1998              443,000
             1999              383,000
             2000              221,000
             2001               13,000
                            ==========
                 Total      $1,500,000
                            ==========

   Rent expense was $760,400,  $794,200 and $573,000 for each of the three years
ended December 31, 1994, 1995 and 1996, respectively.  During 1995, rent expense
was paid, in part, through the issuance of common stock (see Note 6.).

      In April, 1996, the Company  established the Noise  Cancellation  Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage,  certain
health care benefits to employees  and directors of the Company's  United States
operations.  The Company  administers  this modified  self insured  Benefit Plan
through a  commercial  third  party  administrative  health care  provider.  The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance  provider to which the Company pays a nominal
premium for the subject stop loss coverage.  The Company  records  benefit claim
expense in the period in which the benefit  claim is  incurred.  As of March 25,
1997, the Company was not aware of any material benefit claim liability.


<PAGE>

   12. Information on Business Segments:

   The Company operates in only one business  segment,  specifically  engaged in
the design, development,  production and distribution of electronic systems that
actively reduce noise and vibration.  The Company's worldwide activities consist
of operations in the United States, Europe and Japan. Revenue, (income) loss and
identifiable assets by geographic area are as follows:

                           ---------------------------------------
                               Twelve Months Ended December 31,
                               1994         1995           1996
                           -----------   -----------   -----------
    Revenues
       United States        $4,610,600    $6,095,300    $2,673,500
       Europe                2,130,900     4,065,200       480,400
       Far East                382,400       305,800         9,700
                           -----------   -----------   -----------
            Total           $7,123,900   $10,466,300    $3,163,600
                           ===========   ===========   ===========
    Net (Income) Loss
       United States       $21,446,600    $3,761,100    $9,752,000
       Europe                  (12,100)      (36,000)      911,500
       Far East                472,200       343,400       160,800
                           -----------   -----------   -----------
            Total          $21,906,700    $4,068,500   $10,824,300
                           ===========   ===========   ===========
    Identifiable Assets
        United States      $10,493,900    $8,997,400    $5,366,000
        Europe               1,877,500       586,000       515,200
                           -----------   -----------   -----------
            Total          $12,371,400    $9,583,400    $5,881,200
                           ===========   ===========   ===========


<PAGE>

13.  Accounting for Certain Investments in Debt and Equity Securities:

   On January 1, 1994,  the Company  adopted  Statement of Financial  Accounting
Standards No. 115, (SFAS No. 115)  "Accounting  for Certain  Investments in Debt
and Equity Securities." SFAS No. 115 prescribes the accounting and reporting for
investments in equity securities that have readily  determinable fair values and
for  all  investments  in  debt  securities.  The  Company  has  classified  its
investments,  consisting  of a portfolio of short term U.S.  Treasury  Bills and
related  investments,  as trading  securities  which are reported at fair market
value.  The  cumulative  effect of adoption of the new standard as of January 1,
1994, is not material.  During the twelve month period ended  December 31, 1994,
the  Company  recorded  charges  totaling  $375,200  relating  to  realized  and
unrealized  losses in its  investments.  No such charge was  incurred in 1995 or
1996. Interest income from investments was $587,000, $53,000 and $28,000 for the
twelve months ended December 31, 1994, 1995 and 1996 respectively.



14.  Acquisition of Certain ANVT Assets:

   On September 16, 1994, the Company  acquired the patents,  technology,  other
intellectual  property and certain related  tangible assets of ANVT. The Company
also acquired all rights under  certain  joint  venture and customer  agreements
subject to the consent of the other parties to those agreements.

   Under the  acquisition  agreement,  the Company paid $200,000 plus  2,000,000
shares of its common stock resulting in a total purchase price of $2,400,000. In
addition,  ANVT is entitled to a future  contingent  earn-out  based on revenues
generated by the ANVT contracts assigned to the Company as well as certain types
of agreements to be entered into by the Company with parties previously having a
business  relationship with ANVT. Future  contingent  payments,  if any, will be
charged  against  the  associated  revenues.  Companies  that  were  parties  to
agreements   with  ANVT  on  the  closing  date  include  Fiat  CIEI  S.p.A.  (a
Fiat/Gilardini affiliate), Alpine Electronics,  Inc., Applied Acoustic Research,
Inc.,  GEC-Marconi Avionics Limited and Arvin Industries,  Inc. As of the period
ended December 31, 1996, no such contingent earn-out or payments were due ANVT.

   The shares of common  stock  issued to ANVT were valued at the average of the
published  price (less a discount to reflect the time  required to register  the
subject shares) of the Company's common stock during the period  commencing with
the  announcement  of the  transaction  and ending on September  16,  1994.  The
purchase  price has been allocated to the following  assets,  under the purchase
method of  accounting,  based  upon  their  estimated  fair value at the date of
acquisition as follows:


        Patents and Other Intangibles            $1,700,000
        Research and Development                    500,000
        In-Process
        Property and Equipment                      200,000
             Total                               $2,400,000

   The  Company  allocated  $500,000  to  in-process  research  and  development
projects,  resulting in a  corresponding  charge to the Company's  operations in
1994.

   The patents are being amortized over their respective  remaining lives, which
at the time of acquisition ranged from one to seventeen years.

<PAGE>

15.  Subsequent Events:

   On November  19,  1996,  the Company  entered  into an  agreement  to sell an
aggregate  amount  of  $3.0  million  of  non-voting  subordinated   convertible
debentures  (the  "Debentures")  in a private  placement  to a group of Canadian
investors (the "Investor") through a sole dealer. The closing was to occur on or
before November 27, 1996. The Debentures, issued pursuant to Regulation S of the
Securities Act of 1933 ("the November 1996  Financing")  were to be due December
31, 1999 and earn 8% interest per annum, payable quarterly in either cash or the
Company's  common stock at the Company's sole option.  Subject to certain common
stock resale restrictions, the Investor, at its discretion, would have been able
to convert the principal and interest due on the  Debentures  into the Company's
common stock at any time on or after  January 20,  1997.  In the event of such a
conversion,  the conversion  price would be the lessor of 85% of the closing bid
price of the  Company's  common  stock on the closing date or 70% of the average
closing  bid  price  for  the  five  trading  days  immediately   preceding  the
conversion.  To provide  for the above noted  conversion  and  interest  payment
options,  the Company would, at closing,  reserve and  subsequently  cause to be
deposited with an escrow agent 15 million shares of the Company's  common stock.
Subject to certain  conditions,  the  Company  also had the right to require the
Investor  to  convert  all or part  of the  Debentures  under  the  above  noted
conversion price  conditions after February 15, 1998.  Subsequent to the closing
date of the above  financing,  the Company was to use its best  efforts to carry
out the  necessary  actions  to  effect  at  least a 10:1  reverse  split of the
Company's common stock.

   The November 1996 financing was not completed as described above. The Company
increased  the  aggregate  amount of  debentures  offered  to $4.0  million  and
obtained  subscriptions  for $3.9 million of such amount,  of which $3.4 million
was completed with five investors that are different than the Investor described
above,  between  January  15,  1997 and March 25,  1997,  which  resulted in net
proceeds  to the  Company  of  $3.2  million.  An  additional  $0.5  million  of
debentures has been  subscribed for by one investor which is to close after that
investor  converts  $0.75  million of its current  holdings  of $1.5  million of
debentures  into common stock of the Company.  The terms of the  debentures  are
similar to those described above,  but the conversion  price, if the average bid
price of the stock for the five days  preceding  conversion is used as the basis
for computing conversion,  ranges from 75% to 60%% of that price and there is no
requirement  that the  Company use its best  efforts to carry out the  necessary
actions to effect at least a 10:1 reverse split of the Company's common stock.

   On March 28, 1997, the Company and New Transducers Ltd.  ("NXT"),  a wholly
owned  subsidiary  of Verity  Group PLC  ("Verity")  executed a cross  licensing
agreement.  Under terms of the agreement,  the Company will license  patents and
patents pending which relate to FPT(TM)  technology to NXT, and NXT will license
patents and patents pending which relate to parallel  technology to the Company.
In  consideration  of the  license,  NCT  recorded a $3.0  million  license  fee
receivable  from  NXT as well as  royalties  on  future  licensing  and  product
revenue. Concurrently with the cross licensing agreement, the Company and Verity
executed agreements granting each an option for a four year period commencing on
March 28, 1998,  to acquire a specified  amount of the common stock of the other
subject to certain  conditions and  restrictions.  With respect to the Company's
option to Verity, 3.8 million shares of common stock  (approximately 3.4% of the
then  issued and  outstanding  common  stock) of the Company are covered by such
option, and 5.0 million ordinary shares  (approximately  2.0% of the then issued
and outstanding  ordinary shares) of Verity are covered by the option granted by
Verity to the Company. The exercise price under each option is the fair value of
a share of the  applicable  stock on March 28, 1997,  the date of grant.  If the
Company does not obtain stockholder  approval of an amendment to its Certificate
of Incorporation  increasing its common stock capital by an amount sufficient to
provide shares of the Company's  common stock issuable upon the full exercise of
the option granted to Verity by September 30, 1997, both options expire.


<PAGE>


==============================================================================

==============================================================================
                (Richard A. Eisner & Company, L.L.P. Letterhead)

                   REPORT OF INDEPENDENT AUDITORS ON SCHEDULE

Board of Directors and Stockholders
Noise Cancellation Technologies, Inc.

     The  audits  referred  to in our  report,  which  except  for  omission  of
information  required under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", dated February 28, 1997 (with respect
to Note 15, March 28, 1997 and Note 8, April 10, 1997), included Schedule II for
the years ended  December 31, 1996,  December 31, 1995 and December 31, 1994. In
our opinion,  such schedule presents fairly the information set forth therein in
compliance  with the  applicable  accounting  regulation of the  Securities  and
Exchange Commission.

 /s/ RICHARD A. EISNER & COMPANY, L.L.P.

New York, New York
February 28, 1997

With respect to Note 15
March 28, 1997

With respect to Note 8
April 10, 1997


<PAGE>


<TABLE>


NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS                        SCHEDULE II
<CAPTION>
(In thousands of dollars)


-------------------------------------------------------------------------------------------------------------------------------
               Column A                     Column B                        Column C           Column D            Column E
-------------------------------------------------------------------------------------------------------------------------------

                                                                            Additions
                                                         ---------------------------------
                                                              (1)              (2)
                                                         ---------------------------------
                                           Balance at      Charged to       Charged to
                                          beginning of     costs and     other accounts -     Deductions          Balance at
              Description                    Period         expenses         describe          describe          end of period
-------------------------------------------------------------------------------------------------------------------------------

Year ended December 31, 1994:
<S>                                         <C>             <C>                <C>             <C>                  <C>
  Allowance for doubtful accounts            $   184         $   871            $   -           $   154             $    901
                                         =============== =============== ================= ==================    ==============

Year ended December 31, 1995:
  Allowance for doubtful accounts            $   901         $   552            $   -           $ 1,334      (2)    $    119
                                         =============== =============== ================= ==================    ==============

Year ended December 31, 1996:
  Allowance for doubtful accounts            $   119         $   192            $    -          $   188      (2)    $    123
                                         =============== =============== ================= ==================    ==============

Year ended December 31, 1994:
  Allowance for inventory obsolence          $   170         $ 1,855            $    -          $     -             $  2,025
                                         =============== =============== ================= ==================    ==============

Year ended December 31, 1995:
  Allowance for inventory obsolence          $ 2,025         $   452            $    -           $ 2,122     (1)    $    355
                                         =============== =============== ================= ==================    ==============

Year ended December 31, 1996:
  Allowance for inventory obsolence          $   355         $     -            $    -           $    93     (1)    $    262
                                         =============== =============== ================= ==================    ==============

Attention  is  directed  to  the  foregoing  accountant's  report's  and  to the
accompanying notes to the consolidated  financial  statements.  (1) To write off
reserves applied to December 31, 1994 inventory. (2) To write off fully reserved
accounts receivable deemed uncollectible at December 31, 1995 and 1996.

</TABLE>


<PAGE>

<TABLE>

NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES           EXHIBIT 11
Computation of Net (Loss) Per Share
<CAPTION>
                                                          (In thousands, except per share amounts)
                                                                  Year Ended December 31,
                                                              ---------    ---------    ---------
                   PRIMARY                                       1994         1995         1996
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
Net (loss)                                                    ($ 21,907)   ($  4,068)   ($ 10,825)
   Less: reduction of interest expense or interest
   earned attributable  to utilization of assumed
   proceeds from exercise of options and warrants
   in excess of amounts required to repurchase
   20% of the outstanding common stock at average
   market price
                                                              =========    =========    =========
   ADJUSTED NET (LOSS)                                        ($ 21,907)   ($  4,068)   ($ 10,825)
                                                              =========    =========    =========

Weighted average number of shares outstanding                    82,906       87,921      101,191
   Add: common equivalent shares (determined using
   the "Treasury Stock" method) representing shares
   issuable  upon assumed exercise of options and
   warrants in excess of average market price                     5,488        4,428        3,904

Shares issuable upon conversion of Series B
   preferred shares                                                --           --           --
                                                              =========    =========    =========
   SHARES USED FOR COMPUTATION                                   88,394       92,349      105,095
                                                              =========    =========    =========

   PRIMARY NET (LOSS) PER SHARE                               ($   0.25)   ($   0.04)   ($   0.10)
                                                              =========    =========    =========

                FULLY DILUTED
Net (loss)                                                    ($ 21,907)   ($  4,068)   ($ 10,825)
   Less:  reduction  of interest  expense or  interest  earned  attributable  to
   utilization  of assumed  proceeds  from  exercise of options and  warrants in
   excess of amounts required to repurchase 20% of the outstanding  common stock
   at year-end market price if greater than average market price
                                                              =========    =========    =========
   ADJUSTED NET (LOSS)                                        ($ 21,907)   ($  4,068)   ($ 10,825)
                                                              =========    =========    =========

Weighted average number of shares outstanding                    82,906       87,921      101,191
   Add: common equivalent shares (determined using
   the "Treasury Stock" method) representing shares
   issuable  upon assumed exercise of options and
   warrants in excess of year-end market price
   if greater than average market price                           5,488        4,428        3,904

Shares issuable upon conversion of Series B
   preferred shares                                                --           --           --
                                                              =========    =========    =========
   SHARES USED FOR COMPUTATION                                   88,394       92,349      105,095
                                                              =========    =========    =========

FULLY DILUTED NET (LOSS) PER SHARE                            ($   0.25)   ($   0.04)   ($   0.10)
                                                              =========    =========    =========

The above per share data are not reported on the statement of operations
because such data is anti-dilutive



</TABLE>