<PAGE>









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

AMENDMENT  NO.  1 TO  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)


<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.

     In our report,  included  in the annual  report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 1997 we referred to the omission
by the Company of  information  required by Statement  of  Financial  Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As
described in Note 7, the Company has now provided  the  information  required by
SFAS No. 123.

     In our opinion,  based on our audits and the reports of the other auditors,
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

With respect to Note 7
April 18, 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:

     The Company  applies APB 25 in  accounting  for its  various  stock  option
incentive plans and warrants and, accordingly,  recognizes  compensation expense
as the difference, if any, between the fair value of the underlying common stock
and the grant  price of the option on the date of grant.  The effect of applying
SFAS  No.  123 on 1995  and  1996 pro  forma  net  loss as  stated  above is not
necessarily  representative  of the  effects  on  reported  net loss for  future
periods due to, among other factors, (i) the vesting period of the stock options
and (ii) the fair value of additional stock option grants in future periods.  If
compensation  expense for the Company's stock option plans and warrants had been
determined  based on the fair value of the options or warrants at the grant date
for awards under the plans in accordance with the methodology  prescribed  under
SFAS No.  123,  The  Company's  net loss would have been $5.8  million and $12.8
million,   or  $(.07)  per  share  and  $(.13)  per  share  in  1995  and  1996,
respectively.  The fair value of the  options and  warrants  granted in 1995 and
1996 are  estimated in the range of $0.44 to $1.25 and $0.48 to $0.58 per share,
respectively,  on the date of grant using the Black-Scholes option-pricing model
utilizing the following assumptions:  dividend yield 0%, volatility of 1.040 and
1.225 in 1995 and 1996,  respectively,  risk free interest rates in the range of
5.63% to 7.84% and 5.05% to 6.50% for 1995 and 1996, respectively,  and expected
life of 3 years.
Stock Options:

     The  Company's  1987 Stock Option Plan (the "1987  Plan")  provides for the
granting of up to 4,000,000  shares of common  stock as eith er incentive  stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options,  are
full-time employees  (including  officers and directors) of the Company;  or, in
the case of nonstatutory stock options, are employees or non-employee  directors
of the Company.  The exercise  price of all  incentive  stock options must be at
lease equal to the fair market value of such shares on the date of the grant and
may be exercisable  over a ten-year  period.  The exercise price and duration of
the nonstatutory stock options are to be determined by the Board of Directors.

<TABLE>

Additional  information  with respect to 1987 Plan  activity is summarized as
follows:
<CAPTION>

                                                        Years Ended December 31,
                                       --------------------------------------------------------------
                                             1994                  1995              1996
                                       -------------------    -----------------    ------------------
                                                 Weighted              Weighted             Weighted
                                                 Average               Average              Average
                                                 Exercise              Exercise             Exercise
                                       Shares    Price        Shares   Price       Shares   Price
<S>                                    <C>       <C>          <C>      <C>         <C>      <C>
Outstanding at beginning of year     2,089,741   $ 0.57     1,790,472  $ 0.58     1,540,000  $ 0.56
Options granted
                                             -        -             -       -             -     -
Options exercised                     (289,269)    0.49      (232,651)   0.66             -     -
Options cancelled, expired
or forfeited                           (10,000)    1.49       (17,821)   1.39       (40,000)   1.31
                                     ==========             ==========            ==========
Outstanding at end of year           1,790,472  $ 0.58      1,540,000  $ 0.56     1,500,000  $ 0.54
                                     ==========             ==========            ==========

Options exercisable at
year-end                             1,790,472  $ 0.58      1,540,000  $ 0.56     1,500,000  $ 0.54
                                     ==========             ==========            ==========


The  following  table  summarizes  information  about 1987 Plan stock options
outstanding at December 31, 1996:
<CAPTION>
                                                                                Options
                                     Options Outstanding                      Exercisable
                             -------------------------------------         ------------------
                                            Weighted
                                            Average
                                            Remaining     Weighted                      Weighted
                                            Contractual   Average                       Average
                             Number         Life          Exercise         Number       Exercise
Range of Exercise Price      Outstanding    (In Years)    Price            Exercisable  Price
                             <C>            <C>           <C>                   <C>          <C>
$0.50 to $0.78               1,500,000          0.17      $ 0.54           1,500,000    $ 0.54

     As of December  31, 1996,  options for the  purchase of 67,821  shares were
available for future grant under the 1987 Plan.

</TABLE>
<PAGE>


(C)
<TABLE>


Additional  information  with respect to non-plan  stock  option  activity is
summarized as follows:
<CAPTION>
                                                                                                         
                                                        Years Ended December 31,                                                  
                                    --------------------------------------------------------------                                
                                             1994                 1995               1996                                         
                                    -------------------    -----------------    ------------------                                
                                               Weighted             Weighted             Weighted                                 
                                               Average              Average              Average                                  
                                               Exercise             Exercise             Exercise                                 
                                      Shares   Price       Shares   Price       Shares   Price                                    
<S>                                   <C>      <C>         <C>      <C>         <C>      <C>
Outstanding at beginning of year    1,948,791  $ 2.05    1,641,995  $ 1.98      403,116  $ 1.04
Options granted                             -       -            -       -            -       -
Options exercised                    (113,000)   0.55     (328,667)   0.51      (26,667)   0.50
Options cancelled, expired
or forfeited                         (193,796)   3.55     (910,212)   2.92       (4,000)   1.33
                                    ---------            ---------            ---------
Outstanding at end of year          1,641,995  $ 1.98      403,116  $ 1.04      372,449  $ 1.08
                                    =========            =========            =========
Options exercisable at              1,458,495  $ 1.82      399,116  $ 1.02      370,449  $ 1.07
year-end                            =========            =========            =========


The following  table  summarizes  information  about  non-plan  stock options
outstanding at December 31, 1996:

<CAPTION>
                                                                                Options
                                  Options Outstanding                         Exercisable
                             -----------------------------------        ----------------------
                                           Weighted
                                           Average
                                           Remaining    Weighted                      Weighted
                                           Contractual  Average                       Average
                             Number        Life         Exercise         Number       Exercise
Range of Exercise Price      Outstanding   (In Years)   Price            Exercisable  Price
                                   
<S>                          <C>           <C>          <C>              <C>          <C>  
$0.50 to $5.36                 372,449         3.17     $ 1.08             370,449    $ 1.07



</TABLE>

     On October 6, 1992,  the  Company  adopted a stock  option  plan (the "1992
Plan") for the granting of options to purchase up to 1,639,865  shares of common
stock to  officers,  employees  and certain  directors  and on that date granted
options on 1,357,989  shares at a price of $2.375 under the 1992 Plan.  On April
14,  1993,  the Company  amended  the 1992 Plan to provide  for the  granting of
options and  restricted  stock  awards  covering up to an  additional  4,360,135
shares of common stock to officers,  employees and non-employee  directors.  The
exercise  price of all options  granted under the 1992 Plan may not be less than
the  market  value of a share of common  stock on the date of grant.  On May 27,
1993,  the 1992 Plan and the grants  received  stockholder  approval at the 1993
Annual  Meeting of  Stockholders.  On November 8, 1995, in  connection  with the
Company's  action  undertaken  to make  shares  of the  Company's  common  stock
available for issuance in private placements to raise additional working capital
for the  Company,  the  Company  again  amended the 1992 Plan to provide for the
granting of options and  restricted  stock  awards to  officers,  employees  and
non-employee directors covering a total of 10,000,000 shares of common stock. On
July 17, 1996, the amendment to the 1992 Plan received  stockholder  approval at
the 1996 Annual  Meeting of  Stockholders.  At December  31,  1996,  options for
6,022,765 shares are outstanding,  of which 5,835,265 are exercisable under this
plan at prices ranging from $.656 to $4.00.

<PAGE>



<TABLE>

(D)

Additional  information  with respect to 1992 Plan  activity is summarized as
follows:
<CAPTION>

                                                       Years Ended December 31,
                                  ---------------------------------------------------------------
                                         1994                  1995                 1996
                                  ------------------- ----------------- -------------------------
                                               Weighted              Weighted            Weighted
                                               Average               Average             Average
                                               Exercise              Exercise            Exercise
                                   Shares      Price     Shares      Price    Shares     Price
<S>                                <C>         <C>       <C>         <C>      <C>        <C>
Outstanding at beginning of year 2,664,927     $ 3.07  4,058,542     $ 2.75  4,004,248   $ 1.00 
Options granted                  1,718,004       2.24  5,386,422       1.04  2,156,500     0.67
Options exercised                   (6,210)      2.38   (161,423)      0.85    (33,533)    0.75
Options cancelled, expired
or forfeited                      (318,179)      2.74 (5,279,293)      2.29   (104,450)    1.37
                                 ---------             ---------             ---------
Outstanding at end of year       4,058,542     $ 2.75  4,004,248       1.00  6,022,765   $ 0.86
                                 =========             =========             =========

Options exercisable at
year-end                         3,851,042     $ 2.84  1,534,335     $ 1.31  5,835,265   $ 0.86
                                 =========             =========             =========




The  following  table  summarizes  information  about 1992 Plan stock options
outstanding at December 31, 1996:
<CAPTION>

                                                                          Options
                                      Options Outstanding                   Exercisable
                             ------------------------------------       --------------------
                                           Weighted
                                           Average
                                           Remaining      Weighted                     Weighted
                                           Contractual    Average                      Average
                              Number       Life           Exercise          Number     Exercise
Range of Exercise Price       Outstanding  (In Years)     Price          Exercisable   Price

<S>                           <C>          <C>            <C>            <C>           <C>  
$0.66 to $4.00               6,022,765        4.20       $ 0.86         5,835,265     $ 0.86

</TABLE>

   On November  15, 1994 the Board of Directors  adopted the Noise  Cancellation
Technologies,  Inc. Option Plan for Certain Directors (the "Directors Plan"), as
amended. Under the Directors Plan 821,000 shares have been approved by the Board
of Directors for  issuance.  The options  granted under the Directors  Plan have
exercise  prices equal to the fair market value of the Common Stock on the grant
dates,  and expire  five  years  from date of grant.  On  November  8, 1995,  in
connection with the Company's action  undertaken to make shares of the Company's
common stock  available for issuance in private  placements to raise  additional
working  capital for the Company,  the Company  amended the Directors Plan. This
amendment  included an  increase in the number of shares of common  stock of the
Company  covered by the  Directors'  Plan from  725,000 to 821,000.  On July 17,
1996, the amendment to the Directors Plan received  stockholder  approval at the
1996 Annual Meeting of Stockholders.                                            

   As of December 31, 1996,  2,457,311  shares were  available for future 
grants of restricted  stock awards and for options to purchase common stock 
under the 1992 Plan.

<PAGE>

<TABLE>
(E)

Additional information with respect to Director's Plan activity is summarized
as follows:
<CAPTION>

                                                    Years Ended December 31,
                                  ------------------------------------------------------------------
                                         1994                1995                1996
                                  -------------------- --------------------- -----------------------
                                             Weighted             Weighted              Weighted
                                             Average              Average               Average
                                             Exercise             Exercise              Exercise
                                   Shares    Price      Shares    Price       Shares    Price
<S>                                <C>       <C>        <C>       <C>         <C>       <C>
Outstanding at beginning of year        -    $    -     240,000   $ 0.97      821,000   $ 0.73
Options granted                    240,000     0.97   1,076,000     0.77           -         -
Options exercised                       -         -          -         -           -         -
Options cancelled, expired
or forfeited                            -         -    (495,000)    0.92      (75,000)    0.75
                                 ---------            ---------             ---------
Outstanding at end of year         240,000   $ 0.97     821,000   $ 0.73      746,000   $ 0.73
                                 =========            =========             =========

Options exercisable at
year-end                                -         -     305,000   $ 0.70      746,000   $ 0.73
                                 =========            =========             =========
<CAPTION>

The  following  table  summarizes  information  about  Director's  Plan stock
options outstanding at December 31, 1996:

                                                                                   Options
                                      Options Outstanding                        Exercisable
                             -------------------------------------         -----------------------
                                            Weighted
                                            Average
                                            Remaining     Weighted                        Weighted
                                            Contractual   Average                         Average
                              Number        Life          Exercise          Number        Exercise
Range of Exercise Price       Outstanding   (In Years)    Price             Exercisable   Price
<S>                           <C>           <C>           <C>               <C>           <C>  
$0.66 to $0.75                  746,000         2.88      $ 0.73              746,000     $ 0.73
</TABLE>

   As of December 31, 1996, options for the purchase of 75,000 shares were
available for future grants under the Director's Plan.
<PAGE>


Warrants:                                                               
                                                                      
The  Company had shares of its common  stock  reserved  at  December  31,  1994,
December 31, 1995, and December 31, 1996, for warrants outstanding, all of which
are exercisable.

<TABLE>
(F)

Additional  information  with respect to warrant  activity is  summarized  as
follows:
<CAPTION>
                                                     Years Ended December 31,
                                 ------------------------------------------------------------------
                                        1994                   1995                   1996
                                 ---------------------  ---------------------  ---  ---------------
                                              Weighted               Weighted              Weighted
                                              Average                Average               Average
                                              Exercise               Exercise              Exercise
                                   Shares     Price      Shares      Price      Shares     Price
<S>                                <C>        <C>        <C>         <C>        <C>        <C>
Outstanding at beginning of year 6,540,388    $ 0.99    4,829,896    $ 1.20    4,032,541   $ 0.71
Options granted                     89,000      1.03    2,418,750      0.76            -        -
Options exercised               (1,799,492)     0.42     (327,105)     0.76     (144,002)    0.45
Options cancelled, expired
or forfeited                             -         -   (2,889,000)     1.57            -        -
                                 ---------              ---------              ---------
Outstanding at end of year       4,829,896    $ 1.20    4,032,541    $ 0.71    3,888,539   $ 0.72
                                 =========              =========              =========

Options exercisable at
year-end                         4,829,896    $ 1.20    4,032,541    $ 0.71    3,888,539   $ 0.72
                                 =========              =========              =========
<CAPTION>

The following  table  summarizes  information  about warrants  outstanding at
December 31, 1996:

                                                                                Options
                                       Options Outstanding                    Exercisable
                             -------------------------------------       ----------------------
                                           Weighted
                                           Average
                                           Remaining      Weighted                     Weighted
                                           Contractual    Average                      Average
                             Number        Life           Exercise       Number        Exercise
Range of Exercise Price      Outstanding   (In Years)     Price          Exercisable   Price

<S>                          <C>           <C>            <C>            <C>           <C> 
$0.20 to $4.00               3,888,539         1.48       $ 0.72         3,888,539     $ 0.72
</TABLE>

<PAGE>
    
   In 1995,  the  Company  issued  2,144,750  at  market  value  then  currently
unexercisable   warrants  to  certain   directors   and   officers.   These  new
unexercisable  warrants  were equal to 115% of 1,865,000  warrants  forfeited to
enable the Company to assemble sufficient shares of common stock to complete the
1995  private  placements  (see  Note 6).  The 15%  increase  in the  number  of
replacement vs. forfeited warrants was in consideration for the unexercisability
of the at-the-money  replacement warrants until such time there are a sufficient
quantity of shares available to cover the exercise of the subject warrants. Also
in 1995,  the Company  similarly  issued  274,000 at market value then currently
unexercisable  warrants to purchase shares of the Company's  common stock to two
outside  consultants  who  forfeited an equivalent  number of  out-of-the  money
warrants for the purpose noted above. At the Annual Meeting of Stockholders held
on July 17,  1996,  the  stockholders  approved an  amendment  to the  Company's
Certificate  of  Incorporation  to increase  the number  shares of Common  Stock
authorized  thereunder  from  100,000,000  shares to 140,000,000  shares thereby
providing a sufficient  quantity of shares of common stock to cover the exercise
of the above noted warrants.                                                    
 

                                                                               





<PAGE>

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, 1994 and December 31, 1995.  There were no accounts payable related
to  manufacturing  joint venture  entities at December 31, 1995 and 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.  


<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, 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

With respect to Note 7
April 18, 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>
<PAGE>

                                   SIGNATURES

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

                              NOISE CANCELLATION TECHNOLOGIES, INC.


                              By:  /s/ STEPHEN J. FOGARTY
                                   --------------------------------
                                   Stephen J. Fogarty
                                   Senior Vice President and
                                   Chief Financial Officer

April 21, 1997

<PAGE>