SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 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, 1998

Commission File Number:                         0-18267

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

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

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

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





<PAGE>


                                                                    
                                     PART II

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

   Forward Looking Statements

   Statements in this filing which are not historical facts are  forward-looking
statements under provisions of the Private  Securities  Litigation Reform Act of
1995.  All  forward-looking  statements  involve  risks and  uncertainties.  The
Company wishes to caution readers that the following  important  factors,  among
others,  in some  cases  have  affected,  and in the future  could  affect,  the
Company's  actual  results and could cause its actual results in fiscal 1999 and
beyond  to  differ  materially  from  those  expressed  in  any  forward-looking
statements made by, or on behalf of, the Company.

   Important  factors  that could  cause  actual  results  to differ  materially
include but are not limited to the Company's ability to: achieve  profitability;
achieve a competitive position in design, development, licensing, production and
distribution of electronic  systems for Active Wave  Management;  produce a cost
effective  product  that will gain  acceptance  in relevant  consumer  and other
product  markets;   increase  revenues  from  products;   realize  funding  from
technology  licensing  fees,  royalties,  product  sales,  and  engineering  and
development revenues to sustain the Company's current level of operation; timely
introduce new products;  continue its current level of operations to support the
fees  associated  with the Company's  patent  portfolio;  maintain  satisfactory
relations  with  its  customers;  attract  and  retain  key  personnel;  prevent
invalidation,  abandonment  or  expiration  of patents  owned or licensed by the
Company and expand its patent  holdings to  diminish  reliance on core  patents;
have its products  utilized beyond noise  attenuation and control;  maintain and
expand its strategic  alliances;  and protect Company  know-how,  inventions and
other secret or unprotected intellectual property.

   Overview

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

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



<PAGE>


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

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

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

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

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

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

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



<PAGE>


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

   The Company continues to sell NoiseBuster  Extreme!(TM) consumer headsets and
began shipping Gekko(TM) flat speakers in the third quarter of 1998. The Company
is  presently  selling  products  through  six  of  its  alliances:   Walker  is
manufacturing  and  selling   industrial   silencers;   Siemens  is  buying  and
contracting  with the Company to install  quieting  headsets  for patient use in
Siemens'  MRI  machines;  in the fourth  quarter of 1994 Ultra began  installing
production  model  aircraft  cabin  quieting  systems in the SAAB 340  turboprop
aircraft;  OKI  is  integrating   ClearSpeech(R)   algorithm  into  large  scale
integrated circuits for communications  applications;  and BE Aerospace and Long
Prosper  are  providing   NoiseBuster(R)   components   into  United   Airlines'
comprehensive  in-flight  entertainment  and  information  systems.   Management
believes these developments and those previously  disclosed help demonstrate the
range of commercial  potential for the Company's  technology and will contribute
to the Company's  transition  from  engineering  and  development  to technology
licensing fees, royalties and product sales.

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

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

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

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

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

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

   NCT Audio has an exclusive right, as extended,  to purchase the assets of TSA
through May 28, 1999. Under the terms of the original  agreement,  NCT Audio was
required to pay TST $6.5  million on or before  March 31,  1999 to complete  the
acquisition  of  TSA's  assets.  As  consideration  for  the  extension  of such
exclusive right from March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST
a fee of  $350,000,  consisting  of $20,685  in cash,  $125,000  of NCT  Audio's
minority  interest in TSA earnings and a $204,315  note  payable,  due April 16,
1999.  If NCT Audio fails to pay the note by April 16,  1999,  (a) the note will
begin to accrue interest on April 17, 1999 at the lower of the rate of two times
prime  rate or the  highest  rate  allowable  by law;  and (b) the  $20,685  and
$125,000 portion of the extension fee will no longer be credited toward the $6.5
million purchase consideration due at closing. NCT Audio did not pay the note by
April 16,  1999.  If NCT  Audio  fails to pay the note by April  30,  1999,  the
$204,315  portion of the  extension  fee shall no longer be credited  toward the
$6.5  million  closing  amount  due.  Further,  if NCT Audio  fails to close the
contemplated  transaction  by May 28, 1999,  NCT Audio will forfeit its minority
earnings in TSA for the period June 1, 1999 through May 30,  2000.  In addition,
due to NCT Audio's  inability to close the  transaction  by March 31, 1999,  TST
received  $100,000  of NCT Audio's  Series A  Convertible  Preferred  Stock as a
penalty premium.

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

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

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

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

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

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

   On July 27, 1998,  the Company  entered  into  subscription  agreements  (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Convertible  Preferred Stock ("Series D Preferred  Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the  Securities  Act of 1933, as amended  (respectively,  "Regulation D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred Stock Private Placement").  The sale of 6,000 shares of
Series D Preferred  Stock  having an  aggregate  $6.0  million  stated value was
completed  on August 6, 1998.  $5.2 million net  proceeds  were  received by the
Company from the 1998 Series D Preferred Stock Private Placement.  Each share of
the  Series D  Preferred  Stock  has a par  value of $.10 per share and a stated
value of one thousand  dollars  ($1,000) with an accretion  rate of four percent
(4%) per annum on the stated  value.  Each share of Series D Preferred  Stock is
convertible  into fully paid and  nonassessable  shares of the Company's  common
stock  subject  to  certain  limitations.  Under  the  terms  of  the  Series  D
Subscription  Agreements,  the  Company  is  required  to  file  a  registration
statement  ("the Series D  Registration  Statement")  covering the resale of all
shares of common stock of the Company  issuable upon  conversion of the Series D
Preferred Stock then outstanding  within sixty (60) days after the completion of
the 1998 Series D Preferred Stock Private Placement (respectively, the "Series D
Filing Date" and the "Series D Closing Date").  The shares of Series D Preferred
Stock  become  convertible  into shares of common  stock at any time  commencing
after the earlier of (i) ninety (90) days after the Series D Closing Date;  (ii)
five (5) days after the Company  receives a "no  review"  status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D  Registration  Statement.  The Series D  Registration  Statement
became  effective  on October 30, 1998,  and shares of Series D Preferred  Stock
became  convertible  on that  date.  Each share of Series D  Preferred  Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the following formula (the "Series D Conversion Formula"):

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

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

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

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

   On July 27, 1998, NCT Audio entered into  subscription  agreements  (the "NCT
Audio  Subscription  Agreements")  to sell 60  shares  of NCT  Audio's  Series A
Convertible  Preferred  Stock ("NCT Audio Series A Preferred  Stock")  having an
aggregate  stated  value of $6.0  million in a private  placement,  pursuant  to
Regulation  D of the  Securities  Act,  to six  unrelated  accredited  investors
through  one  dealer  (the  "1998 NCT Audio  Series A  Preferred  Stock  Private
Placement").  The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate  $6.0 million  stated value was  completed on August 17, 1998.  NCT
Audio  received  net  proceeds of $5.2  million from the 1998 NCT Audio Series A
Preferred  Stock  Private  Placement.  Each  share  of the NCT  Audio  Series  A
Preferred  Stock has a par  value of $.10 per  share  and a stated  value of one
hundred thousand dollars  ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value.  Each share of NCT Audio Series A Preferred Stock
is convertible  into fully paid and  nonassessable  shares of NCT Audio's common
stock  subject  to  certain  limitations.  Under  the  terms  of the  NCT  Audio
Subscription Agreements,  NCT Audio is required to file a registration statement
("NCT Audio Registration Statement") covering the resale of all shares of common
stock of NCT Audio issuable upon  conversion of the NCT Audio Series A Preferred
Stock then  outstanding by a date (the "Series A Filing  Deadline") which is not
later than  thirty  (30) days after the company  becomes a  "reporting  company"
under the the Exchange  Act.  The shares of NCT Audio  Series A Preferred  Stock
become  convertible  into shares of NCT Audio common stock at any time after the
date the company  becomes a "reporting  company"  under the Exchange  Act.  Each
share of NCT Audio  Series A  Preferred  Stock is  convertible  into a number of
shares  of  common  stock of NCT  Audio as  determined  in  accordance  with the
following formula (the "NCT Audio Conversion Formula"):

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

where

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

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

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

     On December 30,  1998,  the Company  entered into a series of  subscription
agreements (the " Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2 million of Series E Convertible Preferred Stock (the "Series
E Preferred  Stock") in consideration of $4.0 million,  in a private  placement,
pursuant to  Regulation D of the  Securities  Act, to six  unrelated  accredited
investors  through  one  dealer  (the "1998  Series E  Preferred  Stock  Private
Placement").  The sale of 8,145  shares of Series E  Preferred  Stock  having an
aggregate of $8.1 million stated value was completed on March 12, 1999. In 1999,
the  Company  received  net  proceeds  of $1.8  million  from the 1998  Series E
Preferred  Stock  Private  Placement.  In addition  to the above noted  Series E
Subscription Agreements, the Company issued and sold an aggregate amount of $1.7
million of Series E Preferred Stock to three  accredited  investors  through the
above noted dealer, in exchange for an aggregate stated value of $1.7 million of
the Company's Series C Preferred Stock held by the three  accredited  investors.
The Company also issued and sold an aggregate amount of $0.7 million of Series E
Preferred Stock to four accredited  investors through the above noted dealer, in
exchange  and  consideration  for an  aggregate  of 2.1  million  shares  of the
Company's common stock held by the four accredited investors.  Each share of the
Series E Preferred Stock has a par value of $.10 per share and a stated value of
one thousand  dollars  ($1,000) with an accretion  rate of four percent (4%) per
annum on the stated value. Each share of Series E Preferred Stock is convertible
into fully paid and  nonassessable  shares of the Company's common stock subject
to certain limitations. Under the terms of the Series E Subscription Agreements,
the  Company  is  required  to file a  registration  statement  ("the  Series  E
Registration  Statement")  on (i) Form S-3 (currently not eligible to use) on or
prior to the date  which is no more than  sixty (60) days from the date that the
Company has issued a total of 7,438 shares of Series E Preferred  Stock if filed
or (ii) Form S-1 on or prior to a date  which is no more than  ninety  (90) days
from the date that the  Company  has issued a total of 7,438  shares of Series E
Preferred Stock,  covering the resale of all of the Registrable  Securities (the
"Series  E  Closing  Date").  The  shares of  Series E  Preferred  Stock  become
convertible into shares of common stock at any time commencing after the earlier
of (i)  ninety  (90) days after the  Series E Closing  Date;  (ii) five (5) days
after the Company  receives a "no review" status from the SEC in connection with
the  Registration  Statement;  or  (iii)  the  effective  date of the  Series  E
Registration  Statement.  Each share of Series E Preferred  Stock is convertible
into a number  of  shares  of  common  stock of the  Company  as  determined  in
accordance with the following formula (the "Series E Conversion Formula"):

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

      where

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


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

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

   In connection with the Series E Preferred Stock, the Company may be obligated
to redeem  the  excess of the  stated  value  over the  amount  permitted  to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.

   Cash and cash  equivalents  amounted to $0.5  million at December  31,  1998.
Management  believes that  currently  available  funds will not be sufficient to
sustain the Company for the next 12 months. Such funds consist of available cash
and cash from the  exercise of warrants and  options,  the funding  derived from
technology   licensing  fees,   royalties  and  product  sales  and  engineering
development revenue.  Reducing operating expenses and capital expenditures alone
may not be sufficient, and continuation as a going concern is dependent upon the
level of realization of funding from technology licensing fees and royalties and
product  sales  and  engineering  and  development  revenue,  all of  which  are
presently  uncertain.  In the event that technology  licensing fees,  royalties,
product  sales and  engineering  and  development  revenue  are not  realized as
planned,  then management  believes additional working capital financing must be
obtained. There is no assurance any such financing is or would become available.

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

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

   The  accompanying   consolidated  Financial  Statements  have  been  prepared
assuming that the Company will continue as a going concern,  which  contemplates
continuity of operations,  realization of assets and satisfaction of liabilities
in the ordinary  course of business.  The  propriety of using the going  concern
basis  is  dependent  upon,  among  other  things,  the  achievement  of  future
profitable   operations  and  the  ability  to  generate  sufficient  cash  from
operations,  public and private financings and other funding sources to meet its
obligations.  The  uncertainties  described in the  preceding  paragraphs  raise
substantial  doubt at December 31, 1998 about the Company's  ability to continue
as a going concern.  The accompanying  consolidated  Financial Statements do not
include any adjustments relating to the recoverability of the carrying amount of
recorded assets or the amount of liabilities  that might result from the outcome
of these uncertainties.

   Results of Operations

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

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

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

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

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

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

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

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

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

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

   Other  income in 1998 was $3.3  million  compared  to zero in 1997.  The 1998
other income  consists of the gain the Company  realized  upon the exercise of a
stock option and the subsequent sale of NXT plc ordinary shares.  The option had
been acquired by the Company in connection with a cross license  agreement among
the Company, NXT plc and NXT.

   In 1998,  interest income increased to $0.4 million from $0.1 million in 1997
principally from funds on hand at the end of 1997.

   The  Company  has net  operating  loss  carryforwards  of $85.8  million  and
research and development credit carryforwards of $1.6 million for federal income
tax purposes at December 31, 1998. No tax benefit for these operating losses has
been recorded in the Company's  financial  statements.  The Company's ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

Year ended December 31, 1997 compared with year ended December 31, 1996.

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

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

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

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

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

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

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

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

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

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

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


<PAGE>

   The  Company  has net  operating  loss  carryforwards  of $76.9  million  and
research and development credit carryforwards of $1.3 million for federal income
tax purposes at December 31, 1997. No tax benefit for these operating losses has
been recorded in the Company's  financial  statements.  The Company's ability to
utilize  its net  operating  loss  carryforwards  may be  subject  to an  annual
limitation.

   Liquidity and Capital Resources

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

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

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

   On July 15, 1998 the Company  transferred  $5,000 and all of the business and
assets of its Hearing Products  Division as then conducted by the Company and as
reflected  on  the  business  books  and  records  of  the  Company  to a  newly
incorporated  subsidiary company,  NCT Hearing in consideration for 6,400 shares
of NCT  Hearing  common  stock  whereupon  NCT  Hearing  became  a  wholly-owned
subsidiary  of the  Company.  The Company  also granted NCT Hearing an exclusive
worldwide  license with respect to all of the  Company's  relevant  patented and
unpatented  technology  relating to Hearing Products in consideration  for (1) a
license fee of $3,000,000  to be paid when proceeds are available  from the sale
of NCT Hearing common stock, and (2) running  royalties  payable with respect to
NCT Hearing's sales of products  incorporating  the licensed  technology and its
sublicensing of such  technology.  It is anticipated that NCT Hearing will issue
additional  shares of its common stock in transactions  exempt from registration
in order to raise additional working capital.

   On July 27, 1998, the Company  entered into  subscription  agreements to sell
6,000  shares of the  Company's  Series D Preferred  Stock  having an  aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act, to six unrelated  accredited  investors  through one dealer.
The sale of 6,000 shares of Series D Preferred  Stock  having an aggregate  $6.0
million stated value was completed on August 6, 1998.  $5.2 million net proceeds
were  received by the Company  from the 1998  Series D Preferred  Stock  Private
Placement.  Each share of the Series D  Preferred  Stock has a par value of $.10
per share and a stated value of one thousand  dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value.  Each share of Series D
Preferred Stock is convertible into fully paid and  nonassessable  shares of the
Company's  common stock subject to certain  limitations.  Under the terms of the
Series D Subscription Agreements, the Company is required to file a registration
statement  covering  the  resale of all  shares of common  stock of the  Company
issuable upon conversion of the Series D Preferred Stock then outstanding within
sixty  (60) days  after the  completion  of the 1998  Series D  Preferred  Stock
Private  Placement.  The shares of Series D Preferred  Stock become  convertible
into  shares of common  stock at any time  commencing  after the  earlier of (i)
ninety (90) days after the Series D Closing  Date;  (ii) five (5) days after the
Company receives a "no review" status from the SEC in connection with the Series
D  Registration  Statement;  or  (iii)  the  effective  date  of  the  Series  D
Registration Statement.  The Series D Registration Statement became effective on
October 30, 1998, and shares of Series D Preferred  Stock became  convertible on
that date. Each share of Series D Preferred  Stock is convertible  into a number
of shares of Common Stock of the Company as determined  in  accordance  with the
Conversion Formula described above under "Overview".

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


<PAGE>

   On July 27, 1998, NCT Audio  distributed  subscription  agreements to sell 60
shares of NCT Audio's Series A Preferred Stock having an aggregate  stated value
of  $6.0  million  in a  private  placement,  pursuant  to  Regulation  D of the
Securities Act, to six unrelated  accredited  investors through one dealer.  The
sale of 60 shares of NCT Audio Series A Preferred Stock having an aggregate $6.0
million  stated value was completed on August 17, 1998.  NCT Audio  received net
proceeds  of $5.2  million  from  the  1998  Series A  Preferred  Stock  Private
Placement.  Each share of the NCT Audio Series A Preferred Stock has a par value
of $.10 per share and a stated value of one hundred thousand dollars  ($100,000)
with an accretion rate of four percent (4%) per annum on the stated value.  Each
share of NCT Audio Series A Preferred  Stock is convertible  into fully paid and
nonassessable shares of NCT Audio's common stock subject to certain limitations.
Under the terms of the NCT Audio Subscription Agreements,  NCT Audio is required
to file a  registration  statement  covering  the resale of all shares of common
stock of NCT Audio issuable upon  conversion of the NCT Audio Series A Preferred
Stock then  outstanding by a date which is not later than thirty (30) days after
the company becomes a "reporting  company" under the Exchange Act. The shares of
NCT Audio Series A Preferred Stock become  convertible  into shares of NCT Audio
common  stock  at any time  after  the date the  company  becomes  a  "reporting
company"  under the  Exchange  Act.  Each share of Series A  Preferred  Stock is
convertible  into a number of shares of Series D Preferred  Stock of the Company
as determined in accordance  with the Conversion  Formula  described above under
"Overview".

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

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

   On September 4, 1998, the Company acquired the issued and outstanding  common
stock of Advancel, a Silicon Valley-based developer of microprocessor cores that
execute Sun Microsystems' Java(TM) code. The acquisition was pursuant to a stock
purchase  agreement dated as of August 21, 1998 among the Company,  Advancel and
certain  shareholders of Advancel.  The consideration for the acquisition of the
Advancel common stock consisted of an initial payment of $1.0 million payable by
the delivery of 1,786,991  shares of the Company's  treasury stock together with
future  payments,  payable  in cash or in  common  stock of the  Company  at the
election  of the  Advancel  Shareholders  based on  Advancel's  earnings  before
interest, taxes, depreciation and amortization (as defined in the Stock Purchase
Agreement) for each of the calendar years 1999,  2000, 2001 and 2002. While each
earnout  payment may not be less than $250,000 in any earnout year,  there is no
maximum  earnout  payment for any earnout  year or for all earnout  years in the
aggregate.  To  determine  the number of shares of the  Company's  common  stock
issuable in connection  with an earnout  payment,  each earnout payment is to be
calculated using the average of the closing prices of the Company's common stock
for each of the  twenty  (20)  business  days  following  the 21st day after the
release of Advancel's  audited year-end  financials for an earnout year. At that
time,  Advancel  Shareholders  will elect to  receive  payment in cash or common
stock of the  Company.  In the event that the Company is unable to maintain  the
registration  statement covering the resale of 1,786,991 shares effective for at
least thirty (30) days, each Advancel  Shareholder  shall have the right,  until
April 15,  1999,  to have the  Company  redeem up to  one-third  of the  initial
payment shares acquired by such Advancel  Shareholder by paying in cash therefor
a sum  calculated by using the formula used to determine the number of shares of
the Company's  common stock to be delivered in payment of the initial payment of
$1.0  million.  The cost of the  acquisition  has been  allocated  to the assets
acquired and liabilities assumed based on their fair values as follows:


<PAGE>

   Asset acquired and liabilities assumed:

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

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

   On  November  24,  1998,  the  Company  paid  $1,000 in  consideration  for a
wholly-owned subsidiary,  DistributedMedia.com,  Inc. ("DMC"). DMC was formed to
develop,   install,  and  provide  an  audio/visual  advertising  medium  within
commercial/professional settings.

   On December  30,  1998,  the Company  entered  into a series of  subscription
agreements  to sell an aggregate  stated value of up to $8.2 million of Series E
Preferred  Stock in  consideration  of $4.0  million,  in a  private  placement,
pursuant to  Regulation D of the  Securities  Act, to six  unrelated  accredited
investors  through  one dealer.  The sale of 8,145  shares of Series E Preferred
Stock having an aggregate  of $8.1 million  stated value was  completed on March
12, 1999.  In 1999,  the Company  received net proceeds of $1.8 million from the
1998 Series E Preferred Stock Private Placement.  In addition to the above noted
Series E  Subscription  Agreements,  the  Company  issued and sold an  aggregate
amount of $1.7 million of Series E Preferred Stock to three accredited investors
through the above noted  dealer,  in exchange for an  aggregate  stated value of
$1.7  million  of the  Company's  Series C  Preferred  Stock  held by the  three
accredited  investors.  The Company also issued and sold an aggregate  amount of
$0.7 million of Series E Preferred  Stock to four accredited  investors  through
the above noted dealer,  in exchange and  consideration  for an aggregate of 2.1
million  shares  of the  Company's  common  stock  held by the  four  accredited
investors.  Each share of the Series E  Preferred  Stock has a par value of $.10
per share and a stated value of one thousand  dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value.  Each share of Series E
Preferred Stock is convertible into fully paid and  nonassessable  shares of the
Company's  common stock subject to certain  limitations.  Under the terms of the
Series E Subscription Agreements, the Company is required to file a registration
statement  covering  the  resale of all  shares of common  stock of the  Company
issuable upon conversion of the Series E Preferred Stock then outstanding within
sixty  (60) days  after the  completion  of the 1998  Series E  Preferred  Stock
Private  Placement.  The shares of Series E Preferred  Stock become  convertible
into  shares of common  stock at any time  commencing  after the  earlier of (i)
ninety (90) days after the Series E Closing  Date;  (ii) five (5) days after the
Company  receives  a "no  review"  status  from the SEC in  connection  with the
Registration Statement; or (iii) the effective date of the Series E Registration
Statement.  Each share of Series E Preferred Stock is convertible  into a number
of shares of Common Stock of the Company as determined  in  accordance  with the
Conversion Formula described above under "Overview".

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

   In connection with the Series E Preferred Stock, the Company may be obligated
to redeem  the  excess of the  stated  value  over the  amount  permitted  to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.

   On January 26,  1999,  Carole  Salkind,  spouse of a former  director  and an
accredited  investor (the "Holder"),  subscribed and agreed to purchase  secured
convertible  notes of the  Company  in an  aggregate  principal  amount  of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable.  The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time,  all or from time to time,
any part of the  outstanding  and unpaid amount of the Note, into fully paid and
non-assessable  shares of common stock of the Company at the  conversion  price.
The  conversion  price shall be the lesser of (i) the average of the closing bid
prices for the common stock on the  securities  market on which the common stock
is being  traded,  for five (5)  consecutive  trading  days prior to the date of
conversion or (ii) the fixed  conversion  price of $0.237.  In no event will the
conversion  price be less than $0.15 per share.  The Holder  shall  purchase the
remaining $3.0 million  principal amount of the secured  convertible notes on or
before June 30, 1999.


<PAGE>

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

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

   The accompanying  financial  statements have been prepared  assuming that the
Company will  continue as a going  concern,  which  contemplates  continuity  of
operations,  realization  of  assets  and  satisfaction  of  liabilities  in the
ordinary  course of business.  The propriety of using the going concern basis is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  public
and private  financings and other funding sources to meet its  obligations.  The
uncertainties  described in the preceding  paragraphs raise substantial doubt at
December 31, 1998 about the  Company's  ability to continue as a going  concern.
The accompanying financial statements do not include any adjustments relating to
the  recoverability  of the carrying  amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.

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

   In early 1999, the Company implemented a plan that management believes should
generate sufficient  additional funds for the Company to continue its operations
into 1999.  Under this plan, the Company needs to generate  approximately  $22.7
million to fund its operations in 1999. Included in such amount is approximately
$10.8  million  in sales of new  products  and  approximately  $11.9  million of
technology  licensing fees and royalties.  This amount  excludes any revenues or
cash  inflows  from  the  anticipated  pending  acquisitions  of  the  Company's
subsidiary,  NCT Audio.  The Company  believes that it can generate  these funds
from 1999  operations,  although  there is no  certainty  that the Company  will
achieve this goal. Success in generating  technology  licensing fees,  royalties
and  product  sales is  significant  and  critical to the  Company's  ability to
succeed.  The Company cannot predict  whether it will be successful in obtaining
market acceptance of its new products or in completing its current  negotiations
with respect to licenses and royalty  revenues.  If,  during the course of 1999,
management  of the Company  determines  that it will be unable to meet or exceed
the plan  discussed  above,  the Company will  consider cost  reductions  and/or
additional  financing  alternatives.  The Company will  monitor its  performance
against  the plan on a monthly  basis  and,  if  necessary,  reduce its level of
operations  accordingly.  The Company  believes  that the plan  discussed  above
constitutes a viable plan for the  continuation  of the Company's  business into
2000. See "Forward Looking Statements" above.


<PAGE>

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

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

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

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

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

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

   The Company believes that the level of financial resources available to it is
an  essential  competitive  factor.  The Company  may elect to raise  additional
capital,  from  time to  time,  through  equity  or debt  financing  in order to
capitalize on business opportunities and market conditions.

   Capital Expenditures

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

   There were no material  commitments  for capital  expenditures as of December
31, 1998, and no material commitments are anticipated in the near future.

   Year 2000 Compliance

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

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


                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE
            REGISTRANT.

   The  following  table sets forth the names,  ages,  positions and the offices
held by each of the executive  officers and directors of the Company as of March
23, 1999:


       Name             Age             Positions and Offices

Jay M. Haft             63   Chairman of the Board of Directors
Michael J. Parrella     51   President, Chief Executive Officer and
                             Director
Irene Lebovics          46   Executive Vice President, Marketing
Cy E. Hammond           44   Senior Vice President, Chief Financial
                             Officer
Paul Siomkos, P.E.      52   Senior Vice President, Operations
Michael A. Hayes,       46   Senior Vice President, Chief Technical
Ph.D.                        Officer
Irving M. Lebovics      48   Senior Vice President, Global Sales
John J. McCloy II       61   Director
Samuel A. Oolie         62   Director
Stephan Carlquist       43   Director


   Jay M. Haft  currently  serves as Chairman of the Board of  Directors  of the
Company.  He served as President of the Company from November 1994 to July 1995.
He is also a Director of the Company's  subsidiary,  NCT Audio, a position which
he has held since  August 25, 1997.  In addition,  Mr. Haft is a Director of the
Company's subsidiary,  NCT Hearing Products, Inc. ("NCT Hearing"), a position to
which he was  appointed on July 15, 1998.  Mr. Haft is a strategic and financial
consultant for growth stage companies.  He is active in international  corporate
finance, mergers and acquisitions,  as well as in the representation of emerging
growth companies.  He has actively  participated in strategic  planning and fund
raising for many high-tech companies,  leading edge medical technology companies
and technical product, service and marketing companies. He is a Managing General
Partner of Gen Am "1" Venture Fund, an  international  venture capital fund. Mr.
Haft is also a Director  of  numerous  other  public and  private  corporations,
including Robotic Vision Systems,  Inc. (OTC),  DCAP Group,  Inc. (OTC),  Encore
Medical Corporation (OTC),  Viragen,  Inc. (OTC), PC Service Source, Inc. (OTC),
DUSA  Pharmaceuticals,  Inc.  (OTC),  Oryx  Technology  Corp.  (OTC) and  Thrift
Management,  Inc.  (OTC).  He is currently of counsel to Parker  Duryee Rosoff &
Haft, in New York.  He was  previously a senior  corporate  partner of such firm
(1989-1994),  and prior to that a founding partner of Wofsey, Certilman, Haft et
al  (1966-1988).  He is a  member  of  the  Florida  Commission  for  Government
Accountability to the People and Treasurer of the Miami City Ballet.

   Michael J. Parrella  currently serves as President,  Chief Executive  Officer
and  Director of the  Company.  He was  elected  President  and Chief  Operating
Officer  of the  Company in  February  1988 and  served in that  capacity  until
November 1994.  From November 1994 to July 1995 Mr. Parrella served as Executive
Vice  President  of the Company.  He  initially  became a Director in 1986 after
evaluating  the  application  potential  of  the  Company's  noise  cancellation
technology.  At that time, he formed an investment  group to acquire  control of
the Board and to raise new capital to  restructure  the Company and its research
and  development  efforts.  Mr.  Parrella was appointed a Director on August 25,
1997, and serves as Chief Executive Officer and Acting President of NCT Audio, a
position to which he was elected on September 4, 1997. In addition, Mr. Parrella
is a Director  of NCT  Hearing,  a position to which was  appointed  on July 15,
1998. Previously,  Mr. Parrella served as Chairman of the Board of Environmental
Research Information, Inc., an environmental consulting firm, from December 1987
to March 1991.

   Irene Lebovics  currently  serves as Executive Vice President,  Marketing and
Communications,  and President of NCT Hearing, a wholly-owned  subsidiary of the
Company.  She joined the Company as Vice  President of NCT and  President of NCT
Medical  Systems  (NCTM) in July 1989.  In March  1990,  NCTM became part of NCT
Personal Quieting and Ms. Lebovics served as President. In January 1993, she was
appointed  Senior Vice President of the Company.  In November 1994, Ms. Lebovics
became  President of NCT Hearing.  From August 1, 1995, to May 1, 1996, she also
served as Secretary of the Company.  Ms. Lebovics has held various  positions in
product  marketing  with  Bristol-Myers,  a consumer  products  company,  and in
advertising  with  McCaffrey  and McCall.  On April 13, 1999,  Ms.  Lebovics was
elected  Secretary  of the  Company.  Irene  Lebovics is the spouse of Irving M.
Lebovics, Senior Vice President, Global Sales.

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


<PAGE>

   Paul  Siomkos,  P.E.,  joined NCT in April 1998 as Senior Vice  President  of
Operations.  Prior  to NCT,  Mr.  Siomkos  held  the  position  of  Director  of
Operations at Perkin-Elmer,  a major technology product  manufacturer.  For more
than 20  years,  Mr.  Siomkos  managed  a  production  volume  in excess of $250
million. Mr. Siomkos holds a Bachelor's in Mechanical  Engineering from the City
College  of New  York,  a  Master's  in  Industrial  Engineering  from  Columbia
University and an MBA in Finance from the University of Connecticut.  He is also
a licensed Professional Engineer.

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

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

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

   Sam Oolie  currently  serves as a Director  of the  Company.  Mr.  Oolie also
serves as a Director of the Company's subsidiary, NCT Audio, a position to which
he was  appointed  on  September  4, 1997.  He is Chairman  and Chief  Executive
Officer of NoFire  Technologies,  Inc., a manufacturer of high  performance fire
retardant  products,  and has held that  position  since August 1995. He is also
Chairman of Oolie Enterprises, an investment company, and has held that position
since July 1985. Mr. Oolie  currently  serves as a director of Avesis,  Inc. and
Comverse Technology,  Inc. He has also served as a director of CFC Associates, a
venture capital partnership, from January 1984 to December 1998.

   Stephan  Carlquist was elected as a Director of the Company on July 14, 1997,
and currently serves as a Director of the Company.  Mr. Carlquist also currently
serves as a Director of NCT Audio since his appointment on November 14, 1997. He
is President of Electrolux IT Solutions  with  worldwide  responsibility  for IT
Services within the Electrolux Group and has held this position since June 1998.
From 1993 to June 1998, Mr.  Carlquist was President of ABB Financial  Services,
Inc. (USA), one of four business segments in the ABB Group and from June 1990 to
June 1998,  he was as well  President of ABB Treasury  Center  (USA),  Inc. From
April  1988 to 1990,  he was  Executive  Vice  President  of ABB World  Treasury
Center,  Zurich,  and from April 1986 to April 1988, he was the President of the
Geneva  branch of ASEA  Capital  Corporation.  Mr.  Carlquist  joined ASEA AB in
September  1983 as Manager,  International  Cash  Management  and served in that
capacity until April 1986.  From February 1981 to April 1983, he was employed as
a Foreign Exchange Manager/Cash Manager at Atlas Copco AB.

   Section  16(a) of the  Securities  Exchange  Act of  1934,  as  amended  (the
"Exchange Act"), requires the Company's officers and directors,  and persons who
own more than 10% of a registered class of the Company's equity  securities,  to
file  reports of  ownership  and changes in ownership  with the  Securities  and
Exchange Commission.  Officers,  directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company  with  copies of all such  reports.  Based  solely on its  review of the
copies of such reports received by it, or written  representations  from certain
reporting  persons that no reports were required for those persons,  the Company
believes that, during the period from January 1, 1998, to December 31, 1998, all
filing requirements applicable to its officers,  directors, and greater than 10%
stockholders were complied with.



<PAGE>


ITEM 11.    EXECUTIVE COMPENSATION

   Set forth  below is certain  information  for the three  fiscal  years  ended
December  31,  1998,  1997 and 1996  relating  to  compensation  received by the
Company's  Chief  Executive  Officer and all  executive  officers of the Company
other  than the Chief  Executive  Officer  (collectively  the  "Named  Executive
Officers")  whose  total  annual  salary  and bonus for the  fiscal  year  ended
December 31, 1998 exceeded $100,000 for services rendered in all capacities.

<TABLE>
<CAPTION>
                                                                                    Securities
                                                                                    Underlying       
                                                                    Other           Options/         All
Name and Principal                                                  Annual          Warrants         Other
    Position                 Year     Salary ($)    Bonus ($)       Compensation    SARs (#)         Compensation 
------------------           ----     ----------    ---------       ------------    ------------     ------------

<S>                          <C>      <C>           <C>             <C>             <C>              <C>     
Michael J. Parrella          1998     $120,000      $205,889        $20,615         12,000,000 (2)   $ 5,918 (4)
     President and           1997      120,000       243,058         15,348          3,062,500 (3)     5,218 (4)
     Chief Executive         1996      120,000       106,885         15,348            475,000         5,218 (4)
     Officer  (1)

Paul D. Siomkos              1998      105,192        78,125 (5)      8,367          1,000,000 (2)         -
     Senior Vice President,  1997            -             -              -                  -             -
     Operations              1996            -             -              -                  -             -

Cy E. Hammond                1998       94,000        42,570         12,000            500,000 (2)         -
     Senior Vice President,  1997       94,000        65,939              -            150,000 (6)         -
     Chief Financial         1996       94,000             -              -                  -             -
     Officer

Irving M. Lebovics           1998       89,583 (7)         -         27,917            600,000 (2)         -
     Senior Vice President,  1997            -             -              -            100,000 (7)         -
     Global Sales            1996            -             -              -            100,000 (7)         -

John B. Horton               1998      105,000             -         12,000            200,000 (2)         -
     Senior Vice President,  1997      105,000        50,000              -            325,000 (10)        -
     General Counsel and     1996      116,932(9)          -              -                  -             -
     and Secretary (8)

Irene Lebovics               1998      105,000             -         12,000          2,000,000 (2)         -
     Executive Vice          1997      105,000             -              -            301,250 (11)        -
     President, and          1996      105,000             -              -                  -             -
     President of  
     NCT Hearing
     Products, Inc.
</TABLE>


(1)   Mr. Haft was elected  Chairman of the Board and  relinquished the title of
      Chief Executive Officer on July 17, 1996. Prior thereto, and from November
      15, 1994, Mr. Haft served as Co-Chairman of the Board and Chief  Executive
      Officer.  From  July  17,  1996  to  June  19,  1997,  the  authority  and
      responsibility  of the Chief Executive Officer were delegated by the Board
      of Directors to the Executive  Committee  consisting  of Messrs.  Haft and
      Parrella with Mr. Haft serving as the Committee's  Chairman.  Mr. Parrella
      was elected Chief Executive Officer on June 19, 1997.

(2)   Refer to "Options  and Warrants  Granted in 1998" table and the  footnotes
      thereto. On December 4, 1998, the following options were cancelled:  as to
      Mr. Parrella,  6,000,000 shares; as to Mr. Siomkos,  500,000 shares; as to
      Mr. Hammond, 250,000 shares; as to Mr. Lebovics, 300,000 shares; as to Mr.
      Horton, 100,000 shares; and as to Ms. Lebovics, 1,000,000 shares.

(3)   Includes a warrant to  purchase  862,500  shares of the  Company's  common
      stock and an option to purchase  250,000  shares of the  Company's  common
      stock as new grants due to the  extension of the  expiration  dates for an
      additional two years.

(4)   Consists of annual  premiums for a $2.0 million  personal  life  insurance
      policy paid by the Company on behalf of Mr. Parrella.

(5)   Represents the fair market value on the date of grant of 100,000 shares of
      the  Company's  common  stock  issued  in  connection  with  his  offer of
      employment.

(6)   Includes a warrant to purchase 25,000 shares of the Company's common stock
      as a new  grant  due  to  the  extension  of the  expiration  date  for an
      additional two years.

(7)   From January 1, 1996 to February 12, 1998,  services  were rendered to the
      Company  by  Enhanced  Signal  Processing  ("ESP"),  a firm in  which  Mr.
      Lebovics was a principal.  During that period,  ESP received  $0.5 million
      from the  Company,  which  included  but was not limited to Mr.  Lebovics'
      services.  While employed by ESP, ESP received options to purchase 400,000
      shares of the Company's  common stock of which options to purchase 200,000
      shares were assigned to Mr. Lebovics.

(8)  Mr. Horton resigned as Senior Vice President, General Counsel and Secretary
     on February 19, 1999. Ms. Lebovics was elected  Secretary of the Company on
     April 13, 1999.

(9)   Mr.  Horton  was  elected  Senior  Vice  President,  General  Counsel  and
      Secretary  of the Company on May 6, 1996.  Services  were  rendered by Mr.
      Horton as a consultant to the Company for the period January, 1995 through
      April, 1996.

(10)  Includes  an option to purchase  200,000  shares of the  Company's  common
      stock as a new grant due to the  extension of the  expiration  date for an
      additional two years.

(11)  Includes a warrant to  purchase  201,250  shares of the  Company's  common
      stock as a new grant due to the  extension of the  expiration  date for an
      additional two years.

Stock Options and Warrants

The following table  summarizes the Named  Executive  Officers' stock option and
warrant activity during 1998:                                                   
                                                                                
<TABLE>                                                                         
<CAPTION>                                                                       
                      Options and Warrants Granted in 1998                      
                                                                                
                                          Percent                               
                                          of Total                                  Potential                           
                                          Options                                   Realized Value                
                         Shares           and                                       at Assumed Annual             
                         Underlying       Warrants                                  Rates of Stock Price          
                         Options          Granted    Exercise                       Appreciation for Option       
                         and              to         Price                          and Warrant Term (6)          
                         Warrants         Employees  Per        Expiration      -----------------------------     
    Name                 Granted          in 1998    Share      Date                  5%            10%           
---------------------    -------------    ---------  --------   ------------    -------------- --------------     
<S>                      <C>               <C>       <C>        <C>             <C>            <C>                
                                                                                                                  
Michael J. Parrella      6,000,000 (1)     27.3%     $0.3125    01/14/08        $1,045,296     $2,563,715         
                         6,000,000 (2)     27.3%      1.0625           - (2)             - (2)          - (2)     
                                                                                                                  
Paul D. Siomkos            500,000 (3)      2.3%      0.3125    04/19/08            87,108        213,643         
                           500,000 (2)      2.3%      0.7813           - (2)             - (2)          - (2)      
                                                                                                                   
Cy E. Hammond              250,000 (4)      1.1%      0.3125    02/13/08            43,554        106,821          
                           250,000 (2)      1.1%      1.0313           - (2)             - (2)          - (2)      
                                                                                                                   
Irving M. Lebovics         300,000 (5)      1.4%      0.3125    02/13/08            52,265        128,186          
                           300,000 (2)      1.4%      1.0313           - (2)             - (2)          - (2)      
                                                                                                                   
John B. Horton             100,000 (4)      0.5%      0.3125    02/13/08            17,422         42,729          
                           100,000 (2)      0.5%      1.0313           - (2)             - (2)          - (2)      
                                                                                                                   
Irene Lebovics           1,000,000 (4)      4.5%      0.3125    02/13/08           174,216        427,286          
                         1,000,000 (2)      4.5%      1.0313           - (2)             - (2)          - (2)      
</TABLE>                                                                        
                                                                                
(1)   Options to purchase  these shares were granted  pursuant to the 1992 Plan,
      of which an option to purchase  2,000,000 shares is currently  exercisable
      and the remaining amount vest over the passage of time.                   
                                                                                
(2)   Options to purchase these shares were cancelled on December 4, 1998.    
                                                                            
(3)   Options to purchase  these shares were  granted  pursuant to the 1992 Plan
      and in connection with an offer of employment and vest 25% immediately and
      25% on the anniversary date each year following.                          
                                                                                
(4)   Options to purchase  these shares were  granted  pursuant to the 1992 Plan
      and vested 20% on  October  20,  1998  upon the  Company's  stockholders' 
      approval of the increase in the number of shares of the  Company's  common
      stock  included  in the 1992 Plan.  The  remaining  amount vest 20% on the
      anniversary date of each grant.                                           
                                                                                
(5)   Options to purchase  these shares were  granted  pursuant to the 1992 Plan
      and vested 25% on  October  20,  1998  upon the  Company's  stockholders' 
      approval of the increase in the number of shares of the  Company's  common
      stock  included  in the 1992 Plan.  The  remaining  amount vest 25% on the
      anniversary date of each grant.                                           
                                                                                
(6)   The dollar amounts on these columns are the result of  calculations at the
      5% and 10% rates required by the SEC and,  therefore,  are not intended to
      forecast possible future appreciation, if any, of the stock price.        
                                                                                
                                                                                
                                                                                
                                                                                
<PAGE>                                                                          
                                                                                
                                                                                
<TABLE>                                                                         
<CAPTION>                                                                       
                  1998 Aggregated Options and Warrant Exercises and             
                     December 31, 1998 Option and Warrant Values                
                                                                                
                                                        Number of Shares        
                           Number                       Underlying                      Value of Unexercised           
                           of                           Unexercised Options             In-the-Money Options           
                           Shares                       and Warrants at                 and Warrants at                
                           Acquired                     December 31, 1998               December 31, 1998              
                           on         Value       -------------------------------    ------------------------ ------   
    Name                   Exercise   Realized     Exercisable    Unexercisable       Exercisable    Unexercisable     
-----------------------    --------   --------    -------------  ----------------    -------------  ---------------    
                                                                                                                       
<S>                        <C>        <C>          <C>            <C>                 <C>            <C>               
Michael J. Parrella              -    $     -      6,237,000      4,000,000           $ 7,043        $      -          
                                                                                                                       
Paul D. Siomkos                  -          -        125,000        375,000                 -               -          
                                                                                                                       
Cy E. Hammond                    -          -        444,718        200,000               783               -          
                                                                                                                       
Irving M. Lebovics               -          -        275,000        225,000             1,565               -          
                                                                                                                       
John B. Horton                   -          -        654,417         80,000               783               -          
                                                                                                                       
</TABLE>                                                                        


Compensation Arrangements with Certain Officers and Directors

   On February  1, 1996,  the  Compensation  Committee  awarded Mr.  Parrella an
incentive  bonus  equal  to 1% of the  cash  received  by the  Company  upon the
execution of the agreement or other documentation  evidencing  transactions with
unaffiliated  parties (other than certain parties involved in transactions  then
in negotiation) or otherwise  received at the closing of said transactions which
occur subsequent to January 1, 1996.



<PAGE>


Compensation Committee Interlocks and Insider Participation

     During the fiscal year ended  December  31,  1998,  the  following  persons
served as  members  of the  Compensation  Committee  of the  Company's  Board of
Directors:  Stephan  Carlquist,  Morton Salkind and Sam Oolie. Mr. Carlquist was
Chairman of the Committee during such fiscal year.  Messrs.  Carlquist and Oolie
have  also  served  as  members  of the Board of  Directors  of NCT Audio  since
November 14, 1997, and September 4, 1997, respectively.  Mr. Salkind resigned as
Director of the Company and Director of NCT Audio on January 19, 1999.

   In October 1990, the Company's Board of Directors  authorized the issuance of
warrants to acquire  420,000  shares of common stock to each of Messrs.  McCloy,
Parrella and Oolie and Ms. Lebovics,  exercisable through September 30, 1994, at
$0.375 per share,  such price  being the market  price of the  Company's  common
stock on the date of such authorization. The Board of Directors took such action
based upon each such person's commitment to extend his or her personal guarantee
on a joint and several basis with the others in support of the Company's attempt
to  secure  bank or other  institutional  financing,  the  amount of which to be
covered by the guarantee would not exceed  $350,000.  No firm commitment for any
such  financing has been secured by the Company and at present no such financing
is being  sought.  However,  each of such  persons'  commitment  to furnish said
guarantee continues in full force and effect.

   In 1989, the Company established a joint venture with Environmental  Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended  for  use  solely  in  the  process  of  electric   power   generation,
transmission and distribution and which reduce noise and/or vibration  resulting
from such process, (ii) personal quieting products sold directly to the electric
utility  industry,  and  (iii)  products  that  reduce  noise  and/or  vibration
emanating from fans and fan systems (collectively, "Power and Fan Products"). In
1991, in connection  with the  termination  of this joint  venture,  the Company
agreed,  among other  things,  during the period  ending  February  1996 to make
payments  to ERI  equal to (i)  4.5% of the  Company's  sales  of Power  and Fan
Products  and (ii)  23.75% of fees  derived by the  Company  from its license of
Power and Fan Products technology,  subject to an overall maximum of $4,500,000.
Michael J. Parrella,  President of the Company,  was Chairman of ERI at the time
of both  the  establishment  and  termination  of the  joint  venture  and  owns
approximately 12% of the outstanding  capital of ERI. In addition,  Jay M. Haft,
Co-Chairman  and Chief  Executive  Officer  of the  Company,  shares  investment
control over an additional  24% of the  outstanding  capital of ERI. The Company
believes  that  the  respective  terms of both the  establishment  of the  joint
venture with ERI and its  termination  were  comparable to those that could have
been  negotiated  with other  persons or entities.  During the fiscal year ended
December 31, 1998, 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 Quiet Power
Systems,  Inc.  ("QSI")  (until  March 2, 1994,  "Active  Acoustical  Solutions,
Inc."),  a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing  Agreements,  QSI has undertaken to use its best
efforts to seek research and  development  funding for the Company from electric
and natural gas utilities for applications of the Company's  technology to their
industries.  In exchange for this undertaking,  the Company has issued a warrant
to QSI to purchase  750,000 shares of Common Stock at $3.00 per share.  The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993,  the date of the  Marketing  Agreement,  was $2.9375.  The warrant
becomes  exercisable  as to  specific  portions of the total  750,000  shares of
Common Stock upon the occurrence of defined events  relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will  record a charge  for the  amount by which the  market  price of the Common
Stock on such  date  exceeds  $3.00  per  share,  if any.  The  warrant  remains
exercisable  as to each such portion from the  occurrence  of the defined  event
through  October 13,  1998.  As of December  31,  1994,  contingencies  had been
removed  against  525,000  warrants  resulting  in a  1993  non-cash  charge  of
$120,250.  This Marketing  Agreement also grants to QSI a non-exclusive right to
market the  Company's  products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America.  QSI is entitled to receive a sales commission on
any sales to a customer of such  products for which QSI is a procuring  cause in
obtaining  the first order from such  customer.  In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
of 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, 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,  1998,  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, 1998, the Company made
no payments to QSI for project management services.

   In March 1995,  the Company  entered into a Master  Agreement  with QSI under
which QSI was granted an exclusive  worldwide  license under certain NCT patents
and technical  information to market, sell and distribute  transformer  quieting
products,  turbine  quieting  products and certain other products in the utility
industry. Under the Master Agreement, QSI is to fund development of the products
by the Company and the Company is to manufacture the products.  However, QSI may
obtain  the right to  manufacture  the  products  under  certain  circumstances,
including 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  it  incurred  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.  QSI also 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 a second  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.  The payment of
the indebtedness to be paid under the first agreement described in the preceding
paragraph  also 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,
nonpayment of which is to constitute  an event of  termination  under the Master
Agreement.


<PAGE>

   On May 21, 1996,  the Company and QSI entered  into a third 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 third letter
agreement,  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 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 a fourth 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 on January 1,
1998.  The  Company  is also  entitled  to  receive  15% of any other  financing
obtained by QSI in the interim and  interest at the rate of 10% per annum on the
unpaid  amount  of such  indebtedness  from  July 1,  1997.  The  fourth  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 ten (10) days notice of termination to QSI.

   As of  December  31,  1998,  QSI owes the  Company  $239,000,  which is fully
reserved, for the exclusivity fee, rent and engineering services.

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

   On January 26,  1999,  Carole  Salkind,  spouse of a former  director  and an
accredited investor, subscribed and agreed to purchase secured convertible notes
of the  Company in an  aggregate  principal  amount of $4.0  million.  A secured
convertible  note, for $1.0 million was signed on January 26, 1999, and proceeds
were received on January 28, 1999. The Note is to mature on January 25, 2001 and
earn interest at the prime rate, as published from day to day in the Wall Street
Journal,  from the issue date until the Note becomes due and payable. The Holder
shall  have  the  right  at any  time on or prior to the day the Note is paid in
full,  to  convert  at any  time,  all or from  time to  time,  any  part of the
outstanding  and unpaid amount of the Note,  into fully paid and  non-assessable
shares of common stock of the Company at the  conversion  price.  The conversion
price  shall be the lesser of (i) the  average of the closing bid prices for the
common stock on the securities market on which the common stock is being traded,
for five (5) consecutive  trading days prior to the date of conversion,  or (ii)
the fixed conversion  price of $0.237.  In no event will the conversion price be
less than $0.15 per share.  The Holder shall purchase the remaining $3.0 million
principal amount of the secured convertible notes on or before June 30, 1999.



<PAGE>


Compensation Committee Report on Executive Compensation

   As  previously  reported,   at  the  conclusion  of  the  Annual  Meeting  of
Stockholders on July 17, 1996, Mr. Haft resigned as Chief  Executive  Officer of
the Company and was appointed  Chairman of the Board of Directors.  The Board of
Directors  designated  an  Executive  Committee  comprised  of Messrs.  Haft and
Parrella,  with Mr. Haft acting as the Chairman of the  Committee.  The Board of
Directors granted the Executive  Committee the power and authority to act in the
place of the Chief  Executive  Officer during the existence of a vacancy in that
office. On June 19, 1997, Mr. Parrella was re-elected  President and was elected
Chief Executive Officer of the Company.  At the conclusion of the Annual Meeting
of Stockholders  on October 20, 1998, Mr. Parrella was re-elected  President and
Chief Executive Officer of the Company.

   Mr.  Parrella's  salary for 1998 was  continued  at the rate of $120,000  per
year,  the same as his  salary  in 1997 and 1996.  As  reported  in last  year's
Compensation  Committee Report, on May 8, 1995, the Compensation  Committee,  in
recognition of the efforts of Mr.  Parrella  under the difficult  conditions the
Company was then facing and in  recognition  of the  importance of his continued
services to the ongoing restructuring program, awarded Mr. Parrella a cash bonus
of 1% of the  cash to be  received  by the  Company  upon the  establishment  of
certain significant business  relationships.  Any such percentage bonus was made
contingent upon the execution of relevant documentation or other form of closing
with regard to these  relationships.  Effective January 1, 1996, the above noted
percentage  bonus  arrangement  was  extended  indefinitely  until  modified  or
terminated by the Board of Directors.  Mr. Parrella was paid a bonus of $205,889
under this percentage  bonus  arrangement  during 1998. On January 15, 1998, the
Board of Directors  granted Mr. Parrella an option to purchase  6,000,000 shares
of the  Company's  common stock.  Vesting  requirements  were as follows:  As to
2,000,000  shares,  the date on which  the  Company's  stockholders  approve  an
amendment to the 1992 Plan  increasing  the number of shares covered by the 1992
Plan to  30,000,000  shares and providing for the other matters set forth in the
resolutions  adopted by the Board of Directors on January 15, 1998 (the "1/15/98
Amendment");  as to another 2,000,000 shares, the later to occur of (i) the date
on which the Company's  stockholders approve the 1/15/98 Amendment,  or (ii) the
date on which the Company's  common stock has traded on The Nasdaq Stock Market,
Inc.'s National Market System,  Small Cap Market or Electronic Bulletin Board or
other national or regional  exchange or public  trading  facility as may then be
applicable  at a price  of  $2.50  per  share  or  more  for  the  preceding  60
consecutive  days or January 15, 2001,  whichever  shall first occur;  as to the
remaining  2,000,000  shares,  the later to occur of (i) the date  described  in
clause (i) of the  preceding  sentence,  or (ii) the date on which the Company's
common  stock  has  traded  on the  trading  facilities  in  clause  (ii) of the
preceding  sentence at a price of $3.50 per share or more for the  preceding  60
consecutive days or the date set forth in clause (ii) of the preceding sentence,
whichever  shall first occur.  In addition,  in 1998,  Mr.  Parrella  received a
$20,615  annual  automobile  allowance  and the Company  paid the $5,918  annual
premium for a $2.0 million personal life insurance policy on his behalf.

   The base salary of Mr.  Siomkos,  as Senior Vice President,  Operations,  was
established at $150,000.  In addition to the salary,  the Company  granted him a
one-time  bonus of 100,000  shares of the  Company's  common stock in connection
with his employment offer. Mr. Siomkos was granted an option to purchase 500,000
shares of the Company's  common stock at an exercise  price of $0.7813 per share
on April 20, 1998, also in connection with his offer of employment.  On December
4, 1998, the option was cancelled and reissued at $0.3125, the fair market value
on the date of grant.  In addition,  Mr. Siomkos  received an $8,367  automobile
allowance.

   The base salary of Mr.  Hammond,  as Senior Vice  President,  Chief Financial
Officer,  was  $94,000  for 1998,  the same as his  salary in 1997 and 1996.  In
recognition of Mr.  Hammond's  efforts in connection with the Company's  private
placements  of  $16.0  million  of   convertible   preferred   stock  and  other
accomplishments,  Mr.  Hammond was  awarded a cash bonus of $42,570 in 1998.  In
addition,  the Company granted Mr. Hammond an option to purchase  250,000 shares
of the  Company's  common  stock at an  exercise  price of $1.0313  per share on
February 14, 1998. On December 4, 1998, the option was cancelled and reissued at
$0.3125,  the fair market value on the date of grant. In addition,  in 1998, Mr.
Hammond received a $12,000 annual automobile  allowance.  On April 13, 1999, Mr.
Hammond  was  elected to the  additional  offices  of  Treasurer  and  Assistant
Secretary of the Company.

     Mr.  Lebovics  joined  the  Company  in  February  1998 as Vice  President,
Worldwide  Sales,  at a base salary of $95,000.  In addition to the salary,  Mr.
Lebovics received a non-refundable  draw of $25,000 per annum. On July 15, 1998,
Mr. Lebovics' base salary was increased to $120,000 and the non-refundable  draw
was also  increased  to $30,000 per annum.  Mr.  Lebovics was promoted to Senior
Vice President,  Global Sales, in January 1999. The Company granted Mr. Lebovics
an  option  to  purchase  300,000  shares of the  Company's  common  stock at an
exercise  price of $1.0313 per share on February 14, 1998.  On December 4, 1998,
the option was cancelled  and reissued at $0.3125,  the fair market value on the
date of grant. In addition, Mr. Lebovics received a $5,000 automobile allowance.

   The base salary of Mr. Horton, as Senior Vice President,  General Counsel and
Secretary of the Company was established at $105,000 in 1998, which was the same
as his  salary  rate for  1997.  The  Company  granted  Mr.  Horton an option to
purchase  100,000  shares of the Company's  common stock at an exercise price of
$1.0313  per share on February  14,  1998.  On December 4, 1998,  the option was
cancelled  and reissued at $0.3125,  the fair market value on the date of grant.
In addition,  Mr. Horton  received a $12,000 annual  automobile  allowance.  Mr.
Horton  resigned as Senior Vice  President,  General  Counsel and  Secretary  on
February 19, 1999.

   The base salary of Ms. Lebovics, as Executive Vice President and President of
NCT Hearing Products,  Inc., was established at $105,000 for 1998, which was the
same as her salary for 1997 and 1996. The Company granted Ms. Lebovics an option
to purchase  1,000,000 shares of the Company's common stock at an exercise price
of $1.0313 per share on February 14, 1998.  On December 4, 1998,  the option was
cancelled  and reissued at $0.3125,  the fair market value on the date of grant.
In addition,  Ms. Lebovics  received a $12,000 annual automobile  allowance.  On
April 13, 1999, Ms. Lebovics was elected Secretary of the Company.

   Because of the  Company's  uncertain  business  prospects  and  limited  cash
resources,  in determining the appropriate  levels of compensation for the Chief
Executive Officer and the Named Executive Officers , the Compensation  Committee
did not deem it relevant,  useful or even feasible to consider the  compensation
practices  of other  companies  having more certain  prospects  and greater cash
resources.  Rather,  the  Compensation  Committee  took into  consideration  the
contribution being made to the Company's  development efforts by these officers,
the extent to which they had received  previous  reductions in overall levels of
compensation in November of 1994 in connection with the Company's restructuring,
the absence, in many instances, of any material increase in salary or other cash
compensation  for any of the past several  years,  the importance of the Company
continuing to receive their  services and the benefit of their  knowledge of the
Company's technologies,  and the Company's ability to provide them with adequate
levels of remuneration either in cash or in securities.  Accordingly,  it is the
opinion of the Committee  that the  above-described  rates of  compensation  are
reasonable in light of these factors and the financial condition of the Company.


                           THE COMPENSATION COMMITTEE


                           By:   /s/ STEPHAN CARLQUIST, Chairman
                                 /s/ SAM OOLIE


Performance Graph

Note: The stock price  performance  shown on the graph below is not 
      necessarily indicative of future price performance.

                                 NCT Group, Inc.
                              Stock Performance (1)


                                [OBJECT OMITTED]



    
              12/31/93   12/31/94   12/31/95   12/31/96   12/31/97   12/31/98
              --------   --------   --------   --------   --------   --------

NCT             100         26         63         14         38         10

NASDAQ
Composite
Index           100         98        138        170        209        294

NASDAQ
Electronic
Component
Stock Index     100        110        183        316        332        513
(2)



(1)  Assumes an investment of $100.00 in the Company's  common stock and in each
     index on December 31, 1993.

(2)  The Company  has  selected  the NASDAQ  Electronic  Components  Stock Index
     composed of companies in the electronics  components industry listed on the
     NASDAQ  National  Market  System.  Because  the  Company  knows of no other
     publicly owned company whose business  consists  solely or primarily of the
     development, production and sale of systems for the cancellation or control
     of noise and vibration by electronic means and other applications of Active
     Wave  Management  technology,  it is unable to  identify a peer group or an
     appropriate  published  industry or line of  business  index other than the
     NASDAQ Electronics Components Stock Index.






<PAGE>


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT

   The following table sets forth, as of April 9, 1999,  information  concerning
the  shares  of common  stock  beneficially  owned by each  person  who,  to the
knowledge of the Company, is the holder of 5% or more of the common stock of the
Company,  each Director,  and each Named  Executive  Officer,  and all executive
officers  and  Directors of the Company as a group.  Except as otherwise  noted,
each  beneficial  owner has sole investment and voting power with respect to the
listed shares.

                                    Amount and
                                     Nature of           Approximate
                                    Beneficial           Percentage
     Name of Beneficial Owner      Ownership (1)        Of Class (1)
  -------------------------------  --------------       --------------

  Michael J. Parrella                  6,250,333  (2)           3.38%
  John J. McCloy                       3,653,635  (3)           2.02%
  Jay M. Haft                          1,632,000  (4)           0.91%
  Sam Oolie                              715,000  (5)           0.40%
  Stephan Carlquist                      350,000  (6)           0.20%
  Paul D. Siomkos                        225,000  (7)           0.13%
  Cy E. Hammond                          444,718  (8)           0.25%
  Irving M. Lebovics                     275,000  (9)           0.15%
  John B. Horton                         654,417 (10)           0.37%
  Irene Lebovics                       1,588,067 (11)           0.89%
  All Executive Officers and
  Directors as a Group 
  (11 persons)                        15,963,170 (12)           8.33%
  Carole Salkind                      10,119,043 (13)           5.67%
  Her Majesty The Queen,
  Province of Alberta, Canada         11,250,000 (14)           6.30%

(1)   Assumes  the  exercise of  currently  exercisable  outstanding  options or
      warrants  to  purchase  shares  of  common  stock.  The  percent  of class
      ownership is calculated separately for each person based on the assumption
      that the person listed on the table has exercised all options and warrants
      shown for that person, but that no other holder of options or warrants has
      exercised such options or warrants.

(2)   Includes   862,500   shares   issuable  upon  the  exercise  of  currently
      exercisable  warrants and 5,374,500  shares  issuable upon the exercise of
      currently exercisable options.

(3)   Includes   862,500   shares   issuable  upon  the  exercise  of  currently
      exercisable  warrants and 1,050,000  shares  issuable upon the exercise of
      currently exercisable options.

(4)   Includes   218,500   shares   issuable  upon  the  exercise  of  currently
      exercisable  warrants,  10,000  restricted  shares  and  1,403,500  shares
      issuable upon the exercise of currently exercisable options.

(5)  Includes  25,000  restricted  shares and 440,000  shares  issuable upon the
     exercise of currently exercisable options.

(6)   Includes   350,000   shares   issuable  upon  the  exercise  of  currently
      exercisable options and 25,000 options to purchase shares in 1999.

(7)  Includes  100,000  restricted  shares and 125,000 shares  issuable upon the
     exercise of currently exercisable options.

(8)   Includes 25,000 shares issuable upon the exercise of currently exercisable
      warrants  and 419,718  shares  issuable  upon the  exercise  of  currently
      exercisable options.

(9)  Includes 275,000 shares issuable upon the exercise of currently exercisable
     options.

(10)  Includes 20,000 shares issuable upon the exercise of currently exercisable
      warrants  and 634,417  shares  issuable  upon the  exercise  of  currently
      exercisable options.

(11)  Includes   201,250   shares   issuable  upon  the  exercise  of  currently
      exercisable  warrants  and 591,300  shares  issuable  upon the exercise of
      currently exercisable options.


<PAGE>

(12)  Includes  2,189,750 shares issuable to 6 executive  officers and directors
      of the  Company  upon the  exercise  of  currently  exercisable  warrants,
      10,838,435  shares issuable to 11 executive  officers and directors of the
      Company  upon the  exercise  of  currently  exercisable  options,  135,000
      restricted  shares issued to 2 directors and one executive  officer of the
      Company and 25,000  shares  issuable  to 1 director  of the Company  which
      become  exercisable in 1999. Does not include 6,240,000 shares issuable to
      8 executive  officers of the Company  which  become  exercisable  over the
      passage of time.

(13) Carole Salkind's  address is 801 Harmon Cove Towers,  Secaucus,  New Jersey
     07094.

(14)  Her Majesty the Queen, Province of Alberta,  Canada's address is Room 530,
      Terrace Building, 9515 107th Street, Edmondton, Alberta T5K 2C3.




<PAGE>


                            FINANCIAL STATEMENT INDEX

                                 NCT Group, Inc.

                                                              Page

Independent Auditors' Report                                  F-1

Consolidated Balance Sheets as of December 31, 1997 and 1998  F-2

Consolidated   Statements  of  Operations  and  Consolidated  F-3 
Statement  of Comprehensive Loss for the years ended 
December 31, 1996, 1997 and 1998

Consolidated Statements of Stockholders' Equity, for the      F-4
years ended December 31, 1996, 1997 and 1998

Consolidated Statements of Cash Flows,for the years ended     F-6 
December  31, 1996, 1997 and 1998

Notes to Financial Statements                                 F-7


                           Top Source Automotive, Inc.

Report of Independent Certified Public Accountants            F-49

Balance Sheets as of September 30, 1998 and 1997              F-50

Statements of Operations for the years ended                  F-51
September 30, 1998, 1997 and 1996

Statements of Cash Flows for the years ended                  F-52
September 30, 1998, 1997 and 1996

Notes to Financial Statements                                 F-53


                           Exhibits

Exhibit 23(a) Consent of Richard A. Eisner & Company, LLP       33

Exhibit 99    Consent of Peters Elworthy & Moore                34




<PAGE>



                                                             

                  (Richard A. Eisner & Company, LLP Letterhead)
                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
NCT Group, Inc.

We have audited the accompanying  consolidated balance sheets of NCT Group, Inc.
(formerly  Noise   Cancellation   Technologies,   Inc.)  and  subsidiaries  (the
"Company")  as of  December  31,  1997 and 1998,  and the  related  consolidated
statements of  operations,  comprehensive  loss,  stockholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1998.
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 1996, 1997 and 1998 financial  statements of
the  Company's  two  foreign  subsidiaries.  These  subsidiaries  accounted  for
revenues  of  approximately  $407,000,  $67,000  and $28,000 for the years ended
December  31, 1996,  1997 and 1998,  respectively,  and assets of  approximately
$515,000,  $301,000  and  $218,000  as of  December  31,  1996,  1997 and  1998,
respectively. These statements were audited by other auditors whose reports have
been  furnished to us, one of which  contained a paragraph  on the  subsidiary's
dependence on NCT Group,  Inc. for  continued  financial  support.  Our opinion,
insofar as it relates  to the  amounts  included  for these  entities,  is based
solely on the reports of the other auditors.

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

In our opinion,  based on our audits and the reports of the other auditors,  the
financial statements  enumerated above present fairly, in all material respects,
the consolidated  financial  position of NCT Group,  Inc. and subsidiaries as of
December 31, 1997 and 1998 and the consolidated  results of their operations and
their  consolidated  cash flows for each of the years in the  three-year  period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.

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

/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
March 11, 1999

With respect to Note 8
March 24, 1999



<PAGE>

<TABLE>                                                                         
<CAPTION>                                                                                                                         
NCT GROUP, INC. AND SUBSIDIARIES                                                                                                  
CONSOLIDATED BALANCE SHEETS                                                                                                       
                                                     (in thousands of dollars)                                                    
                                                            December 31,                                                          
                                                        1997           1998                                                       
                                                     ----------     ----------                                                    
                     ASSETS                                                                                                       
Current assets:                                                                                                                   
<S>                                                  <C>           <C>                                                            
     Cash and cash equivalents                       $  12,604     $      529                                                     
     Accounts receivable:                                                                                                         
       Trade:                                                                                                                     
         Technology license fees and royalties             200            192                                                     
         Joint Ventures and affiliates                       -              -                                                     
         Other                                             368            691                                                     
       Unbilled                                              -             61                                                     
       Allowance for doubtful accounts                     (38)          (228)                                                    
                                                     ----------    -----------                                                    
             Total accounts receivable               $     530     $      716                                                     
                                                                                                                                  
     Inventories, net of reserves                        1,333          3,320                                                     
     Other current assets                                  213            185                                                     
                                                     ----------    -----------                                                    
             Total current assets                    $  14,680     $    4,750                                                     
                                                                                                                                  
Property and equipment, net                              1,144            997                                                     
Goodwill, net of accumulated amortization of                                                                                      
  $68,000                                                    -          1,506                                                     
Patent rights and other intangibles, net                 1,488          2,881                                                     
Other assets (Note 6)                                       49          5,331                                                     
                                                     ----------    -----------                                                    
                                                     $  17,361     $   15,465                                                     
                                                     ==========    ===========                                                    
                                                                                                                                  
      LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                        
Current liabilities:                                                                                                              
     Accounts payable                                $   1,324     $    3,226                                                     
     Accrued expenses                                    1,392          1,714                                                     
     Accrued payroll, taxes and related expenses           181            241                                                     
     Customers' advances                                    87              -                                                     
     Other liabilities                                       -            756                                                     
                                                     ----------    -----------                                                    
             Total current liabilities               $   2,984     $    5,937                                                     
                                                     ----------    -----------                                                    
                                                                                                                                  
Commitments and contingencies                                                                                                     
                                                                                                                                  
Minority interest in consolidated subsidiary                                                                                      
     Preferred stock, $.10 par value, 1,000                                                                                       
       shares authorized, 60 issued                                                                                               
       and outstanding (redemption amount                                                                                         
       $6,102,110)                                   $       -     $    6,102                                                     
                                                     ----------    -----------                                                    
                                                                                                                                  
              STOCKHOLDERS' EQUITY                                                                                                
Preferred stock, $.10 par value, 10,000,000                                                                                       
     shares authorized                                                                                                            
     Series C issued and outstanding 13,250 and                                                                                   
       700 shares, respectively (redemption                                                                                       
       amount $13,314,399 and $731,222 respectively  $  10,458     $      702                                                     
     Series D Preferred stock, 6,000 shares                                                                                       
       issued and outstanding (redemption                                                                                         
       amount $6,102,110)                                    -          5,240                                                     
     Series E Preferred stock, 10,580 shares                                                                                      
       issued and outstanding (redemption                                                                                         
       amount $10,582,319)                                   -          3,298                                                     
Common stock, $.01 par value, 185,000,000 and                                                                                     
     255,000,000 shares, respectively,                                                                                            
     authorized; issued and outstanding                                                                                           
     133,160,212 and 156,337,316 shares, respectively    1,332          1,563                                                     
Additional paid-in-capital                              96,379        107,483                                                     
Accumulated deficit                                    (93,521)      (107,704)                                                    
Other comprehensive loss:                                                                                                         
  Cumulative translation adjustment                        119             45                                                     
Stock subscriptions receivable                            (390)        (4,000)                                                    
Unearned portion of compensatory stock,                                                                                           
     warrants and options                                    -           (238)                                                    
Treasury stock (6,078,065 shares)                            -         (2,963)                                                    
                                                     ----------    -----------                                                    
               Total stockholders' equity            $  14,377     $    3,426                                                     
                                                     ----------    -----------                                                    
                                                     $  17,361     $   15,465                                                     
                                                     ==========    ===========                                                    
See notes to Financial Statements.                                                                                                
</TABLE>                                                                        
                                                                                
                                                                                
<PAGE>                                                                          
                                                                                
                                                                                
<TABLE>                                                                         
<CAPTION>                                                                         
                                                                                  
NCT GROUP, INC. AND SUBSIDIARIES                                                  
CONSOLIDATED STATEMENTS OF OPERATIONS                                             
                                                                                  
                                                             (in thousands, except per share amounts)                             
                                                                     Years ended December 31,                                     
                                                              1996              1997           1998                               
                                                           -----------       -----------    -----------                           
REVENUES:                                                                                                                         
<S>                                                        <C>               <C>            <C>                                   
     Technology licensing fees                             $    1,238        $    3,630     $      802                            
     Product sales, net                                         1,379             1,720          2,097                            
     Engineering and development services                         547               368            425                            
                                                           -----------       -----------    -----------                           
          Total revenues                                   $    3,164        $    5,718     $    3,324                            
                                                           -----------       -----------    -----------                           
                                                                                                                                  
COSTS AND EXPENSES:                                                                                                               
     Costs of sales                                        $    1,586        $    2,271     $    2,235                            
     Costs of engineering and development services                250               316            275                            
     Selling, general and administrative                        4,890             5,217         11,238                            
     Research and development                                   6,974             6,235          7,220                            
     Equity in net loss (income) of                                                                                               
      unconsolidated affiliates                                    80                 -              -                            
     Provision for doubtful accounts                              192               130            232                            
     Other (income) expense (Note 1)                                -                 -         (3,264)                           
     Interest expense (includes $1,420 of discounts on                                                                            
      beneficial conversion feature on convertible                                                                                
      debt in 1997)                                                45             1,514              9                            
     Interest income                                              (28)             (117)          (438)                           
                                                           -----------       -----------    -----------                           
          Total costs and expenses                         $   13,989        $   15,566     $   17,507                            
                                                           -----------       -----------    -----------                           
                                                                                                                                  
NET (LOSS)                                                 $  (10,825)       $   (9,848)    $  (14,183)                           
                                                                                                                                  
     Preferred stock dividend requirement                           -             1,623          3,200                            
     Accretion of difference between carrying amounts                                                                             
      and redemption amount of redeemable preferred stock           -               285            485                            
                                                           -----------       -----------    -----------                           
                                                                                                                                  
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS             $  (10,825)       $  (11,756)    $  (17,868)                           
                                                           ===========       ===========    ===========                           
                                                                                                                                  
Weighted average number of common shares outstanding          101,191           124,101        143,855                            
                                                           ===========       ===========    ===========                           
                                                                                                                                  
BASIC AND DILUTED NET LOSS PER COMMON SHARE                $    (0.11)       $    (0.09)    $    (0.12)                           
                                                           ===========       ===========    ===========                           
                                                                                                                                  
See notes to Financial Statements.                                                                                                 
                                                                                                                                  
                      NCT GROUP, INC. AND SUBSIDIARIES                                                                            
                CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS                                                                      
                          (in thousands of dollars)                                                                               
                                                               1996              1997           1998                              
                                                           -----------       -----------    -----------                           
                                                                                                                                  
NET (LOSS)                                                 $  (10,825)       $   (9,848)    $  (14,183)                           
                                                                                                                                  
Other comprehensive income/(loss)                                                                                                 
  Currency translation adjustment                                  (8)              (23)           (74)                           
                                                           -----------       -----------    -----------                           
                                                                                                                                  
COMPREHENSIVE (LOSS)                                       $  (10,833)       $   (9,871)    $  (14,257)                           
                                                           ===========       ===========    ===========                           
                                                                                                                                  
See notes to Financial Statements.                                                                                                
</TABLE>                                                                        
<PAGE>                                                                          
<TABLE>                                                                         
<CAPTION>                                                                                                                         
NCT GROUP, INC. AND SUBSIDIARIES                                                                                                  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                      (In thousands of dollars and shares)                         
                                                   Series C           Series D           Series E                                 
                                                  Convertible        Convertible        Convertible                               
                                                Preferred Stock    Preferred Stock    Preferred Stock          Common Stock       
                                               -----------------  -----------------  ----------------     ---------------------   
                                               Shares     Amount  Shares     Amount  Shares     Amount      Shares       Amount   
                                               -----------------  -----------------  -----------------    ---------------------   
<S>                                            <C>      <C>       <C>      <C>       <C>      <C>         <C>          <C>        
Balance at December 31, 1995                        -   $      -       -   $      -       -   $      -       92,829    $    928   
Sale of common stock, less  expenses of $245        -          -       -          -       -          -       18,595         186   
Shares issued upon exercise of warrants & options   -          -       -          -       -          -          204           2   
Net loss                                            -          -       -          -       -          -            -           -   
Translation adjustment                              -          -       -          -       -          -            -           -   
Restricted shares issued for                                                                                                      
 Director's compensation                            -          -       -          -       -          -           20           -   
Consulting expense attributable to options          -          -       -          -       -          -            -           -   
Retirement of shares related to                                                                                                   
 patent acquisition                                 -          -       -          -       -          -          (25)          -   
Retirement of shares in settlement                                                                                                
 of employee receivable                             -          -       -          -       -          -           (8)          -   
                                               --------------------------------------------------------------------------------   
Balance at December 31, 1996                        -   $      -       -   $      -       -   $      -      111,615    $  1,116   
  Sale of common stock                              -          -       -          -       -          -        2,857          29   
Shares issued upon exercise of warrants & options   -          -       -          -       -          -        1,996          20   
Sale of Series C preferred stock,                                                                                                 
 less expenses of $1,387                           13     11,863       -          -       -          -            -           -   
Discount on beneficial conversion price                                                                                           
 to preferred shareholders                          -     (3,313)      -          -       -          -            -           -   
Accretion and amortization of discount on                                                                                         
 beneficial conversion price to                                                                                                   
 preferred shareholders                             -      1,908       -          -       -          -            -           -   
Sale of subsidiary common  stock,                                                                                                 
 less expenses of $65                               -          -       -          -       -          -            -           -   
Common stock issued upon conversion of                                                                                            
 convertible debt less expenses of $168             -          -       -          -       -          -       16,683         167   
Net loss                                            -          -       -          -       -          -            -           -   
Translation adjustment                              -          -       -          -       -          -            -           -   
Restricted shares issued for                                                                                                      
 Directors' compensation                            -          -       -          -       -          -           10           -   
Warrant issued in conjunction                                                                                                     
 with convertible debt                              -          -       -          -       -          -            -           -   
Compensatory stock options and warrants             -          -       -          -       -          -            -           -   
                                               --------------------------------------------------------------------------------   
Balance at December 31, 1997                       13   $ 10,458       -   $      -       -          -      133,161       1,332   
Shares issued in consideration                                                                                                    
 for patent rights                                  -          -       -          -       -          -        1,250          12   
Return of shares for subscription receivable        -          -       -          -       -          -            -           -   
Conversion of Series C preferred stock,                                                                                           
 less expense of $53                              (12)   (11,726)      -          -       2      1,577       20,665         207   
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                        -          -       -          -       -          -            -           -   
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                           -      1,970       -          -       -          -            -           -   
Offering costs of Series A                                                                                                        
 preferred stock in subsidiary                      -          -       -          -       -          -            -           -   
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                        -          -       -          -       -          -            -           -   
  Accretion and amortization of                                                                                                   
   discount on beneficial conversion price                                                                                        
   to preferred shareholders                        -          -       -          -       -          -            -           -   
Sale of Series D preferred stock,                                                                                                 
 less expenses of $862                              -          -       6      5,138       -          -            -           -   
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                        -          -       -       (673)      -          -            -           -   
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                           -          -       -        775       -          -            -           -   
Sale of Series E preferred stock                    -          -       -          -       9      4,735            -           -   
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                        -          -       -          -       -     (3,179)           -           -   
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                           -          -       -          -       -        165            -           -   
Exchange of subsidiary common stock                                                                                               
 for parent common stock                            -          -       -          -       -          -        1,135          11   
Payment of stock subscription receivable            -          -       -          -       -          -            -           -   
Repurchase of common shares                         -          -       -          -       -          -            -           -   
Acquisition of Advancel, less expenses of $23       -          -       -          -       -          -            -           -   
Other                                               -          -       -          -       -          -            1           -   
Net loss                                            -          -       -          -       -          -            -           -   
Translation adjustment                              -          -       -          -       -          -            -           -   
Restricted shares issued for compensation           -          -       -          -       -          -          125           1   
Compensatory stock options and warrants             -          -       -          -       -          -            -           -   
                                               --------------------------------------------------------------------------------   
Balance at December 31, 1998                        1    $   702       6   $  5,240      11   $  3,298      156,337    $  1,563   
                                               ================================================================================   
See notes to Financial Statements.                                                                                                
</TABLE>                                                                        
<TABLE>                                                                         
<CAPTION>                                                                                                                         
NCT GROUP, INC. AND SUBSIDIARIES                                                                                                  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                  (In thousands of dollars and shares)                             
                                                   Add'l       Accumu-     Cumulative       Stock           Unearned Portion of   
                                                   Paid-In     lated       Translation      Subscription    Compensatory Stock/   
                                                   Capital     Deficit     Adjustment       Receivable      Options/Warrants      
                                                   ---------  -----------  -----------      ------------    -------------------   
<S>                                                <C>        <C>          <C>              <C>             <C>                   
Balance at December 31, 1995                       $ 78,667    $ (72,848)    $  150          $   (13)         $       -           
Sale of common stock, less  expenses of $245          6,178            -          -               13                  -           
Shares issued upon exercise of  warrants & options      102            -          -                -                  -           
Net loss                                                  -      (10,825)         -                -                  -           
Translation adjustment                                    -            -         (8)               -                  -           
Restricted shares issued for                                                                                                      
 Director's compensation                                 13            -          -                -                  -           
Consulting expense attributable to options               96            -          -                -                  -           
Retirement of shares related to                                                                                                   
 patent acquisition                                     (26)           -          -                -                  -           
Retirement of shares in settlement                                                                                                
 of employee receivable                                  (5)           -          -                -                  -           
                                                  -----------------------------------------------------------------------------   
Balance at December 31, 1996                       $ 85,025    $ (83,673)    $  142          $     -          $       -           
  Sale of common stock                                  471            -          -                -                  -           
Shares issued upon exercise of warrants & options     1,115            -          -              (64)                 -           
Sale of Series C preferred stock,                                                                                                 
 less expenses of $1,387                                  -            -          -                -                  -           
Discount on beneficial conversion price                                                                                           
 to preferred shareholders                            3,313            -          -                -                  -           
Accretion and amortization of discount on                                                                                         
 beneficial conversion price to                                                                                                   
 preferred shareholders                              (1,908)           -          -                -                  -           
Sale of subsidiary common  stock,                                                                                                 
 less expenses of $65                                 3,573            -          -             (326)                 -           
Common stock issued upon conversion of                                                                                            
 convertible debt less expenses of $168               4,714            -          -                -                  -           
Net loss                                                  -       (9,848)         -                -                  -           
Translation adjustment                                    -            -        (23)               -                  -           
Restricted shares issued for                                                                                                      
 Directors' compensation                                  2            -          -                -                  -           
Warrant issued in conjunction                                                                                                     
 with convertible debt                                   34            -          -                -                  -           
Compensatory stock options and warrants                  40            -          -                -                  -           
                                                  ------------------------------------------------------------------------------- 
Balance at December 31, 1997                       $ 96,379    $ (93,521)    $  119           $ (390)                 -           
Shares issued in consideration                                                                                                    
 for patent rights                                      494            -          -                -                  -           
Return of shares for subscription receivable              -            -          -               64                  -           
Conversion of Series C preferred stock,                                                                                           
 less expense of $53                                  9,889            -          -                -                  -           
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                              -            -          -                -                  -           
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                            (1,970)           -          -                -                  -           
Offering costs of Series A                                                                                                        
 Preferred Stock in subsidiary                         (862)           -          -                -                  -           
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                            673            -          -                -                  -           
  Accretion and amortization of                                                                                                   
   discount on beneficial conversion price                                                                                        
   to preferred shareholders                           (775)           -          -                -                  -           
Sale of Series D preferred stock,                                                                                                 
 less expenses of $862                                    -            -          -                -                  -           
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                            673            -          -                -                  -           
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                              (775)           -          -                -                  -           
Sale of Series E preferred stock                          -            -          -           (4,000)                 -           
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                          3,179            -          -                -                  -           
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                              (165)           -          -                -                  -           
Exchange of subsidiary common stock                                                                                               
 for parent common stock                                545            -          -                -                  -           
Payment of stock subscription receivable                  -            -          -              326                  -           
Repurchase of common shares                               -            -          -                -                  -           
Acquisition of Advancel, less expenses of $23          (151)           -          -                -                (94)          
Other                                                   (48)           -          -                -                  -           
Net loss                                                  -      (14,183)         -                -                  -           
Translation adjustment                                    -            -        (74)               -                  -           
Restricted shares issued for compensation                96            -          -                -                  -           
Compensatory stock options and warrants                 301            -          -                -               (144)          
                                               --------------------------------------------------------------------------------   
Balance at December 31, 1998                       $107,483    $(107,704)    $   45          ($4,000)            $ (238)          
                                               ================================================================================   
See notes to Financial Statements.                                                                                                
</TABLE>                                                                        
<PAGE>                                                                          
<TABLE>                                                                         
NCT GROUP, INC. AND SUBSIDIARIES                                                                                                  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                                                                                   
(in thousands of dollars)                                                                                                         
                                                                   Treasury Stock                                                 
                                                               Shares         Amount            Total                             
                                                              --------      ---------         ----------                          
<S>                                                           <C>           <C>               <C>                                 
Balance at December 31, 1995                                        -       $      -          $   6,884                           
Sale of common stock, less  expenses of $245                        -              -              6,377                           
Shares issued upon exercise of  warrants & options                  -              -                104                           
Net loss                                                            -              -            (10,825)                          
Translation adjustment                                              -              -                 (8)                          
Restricted shares issued for                                                                                                      
 Director's compensation                                            -              -                 13                           
Consulting expense attributable to options                          -              -                 96                           
Retirement of shares related to                                                                                                   
 patent acquisition                                                 -              -                (26)                          
Retirement of shares in settlement                                                                                                
 of employee receivable                                             -              -                 (5)                          
                                                              ------------------------------------------                          
Balance at December 31, 1996                                        -       $      -          $   2,610                           
  Sale of common stock                                              -              -                500                           
Shares issued upon exercise of warrants & options                   -              -              1,071                           
Sale of Series C preferred stock,                                                                                                 
 less expenses of $1,387                                            -              -             11,863                           
Discount on beneficial conversion price                                                                                           
 to preferred shareholders                                          -              -                  -                           
Accretion and amortization of discount on                                                                                         
 beneficial conversion price to                                                                                                   
 preferred shareholders                                             -              -                  -                           
Sale of subsidiary common  stock,                                                                                                 
 less expenses of $65                                               -              -              3,247                           
Common stock issued upon conversion of                                                                                            
 convertible debt less expenses of $168                             -              -              4,881                           
Net loss                                                            -              -             (9,848)                          
Translation adjustment                                              -              -                (23)                          
Restricted shares issued for                                                                                                      
 Directors' compensation                                            -              -                  2                           
Warrant issued in conjunction                                                                                                     
 with convertible debt                                              -              -                 34                           
Compensatory stock options and warrants                             -              -                 40                           
                                                             -------------------------------------------                          
Balance at December 31, 1997                                        -       $      -           $ 14,377                           
Shares issued in consideration                                                                                                    
 for patent rights                                                  -              -                506                           
Return of shares for subscription receivable                      158            (64)                 -                           
Conversion of Series C preferred stock,                                                                                           
 less expense of $53                                                -              -                (53)                          
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                                        -              -                  -                           
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                                           -              -                  -                           
Offering costs of Series A                                                                                                        
 Preferred Stock in subsidiary                                      -              -               (862)                          
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                                        -              -                673                           
  Accretion and amortization of                                                                                                   
   discount on beneficial conversion price                                                                                        
   to preferred shareholders                                        -              -               (775)                          
Sale of Series D preferred stock,                                                                                                 
 less expenses of $862                                              -              -              5,138                           
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                                        -              -                  -                           
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                                           -              -                  -                           
Sale of Series E preferred stock                                2,100           (735)                 -                           
  Discount on beneficial conversion price                                                                                         
   to preferred shareholders                                        -              -                  -                           
  Accretion and amortization of discount on                                                                                       
   beneficial conversion price to                                                                                                 
   preferred shareholders                                           -              -                  -                           
Exchange of subsidiary common stock                                                                                               
 for parent common stock                                            -              -                556                           
Payment of stock subscription receivable                            -              -                326                           
Repurchase of common shares                                     5,607         (3,292)            (3,292)                          
Acquisition of Advancel, less expenses of $23                  (1,787)         1,128                883                           
Other                                                               -              -                (48)                          
Net loss                                                            -              -            (14,183)                          
Translation adjustment                                              -              -                (74)                          
Restricted shares issued for compensation                           -              -                 97                           
Compensatory stock options and warrants                             -              -                157                           
                                                            --------------------------------------------                          
Balance at December 31, 1998                                    6,078       $ (2,963)          $  3,426                           
                                                            ============================================                          
See notes to Financial Statements                                                                                                 
</TABLE>                                                                        
<PAGE>                                                                          
<TABLE>                                                                         
NCT GROUP, INC. AND SUBSIDIARIES                                                                                                  
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                             
                                                                              (in thousands of dollars)                           
                                                                               Years Ended December 31,                           
                                                                          ---------------------------------                       
                                                                            1996        1997        1998                          
                                                                          ---------   ---------   ---------                       
Cash flows from operating activities                                                                                              
<S>                                                                       <C>         <C>         <C>                             
     Net loss                                                             $(10,825)   $ (9,848)   $(14,183)                       
     Adjustments to reconcile net loss to net cash (used in)                                                                      
     operating activities:                                                                                                        
          Depreciation and amortization                                      1,000         899       1,030                        
          Common stock options and warrants issued as consideration for:                                                          
               Compensation                                                    109          42         301                        
               Interest on debentures                                            -          51           -                        
               Convertible debt                                                  -          34           -                        
          Costs incurred related to convertible debt                             -         211           -                        
          Common stock retired in settlement of employee                                                                          
           account receivable                                                   (5)          -           -                        
          Discount on beneficial conversion feature on convertible debt          -       1,420           -                        
          Provision for tooling costs and write off                            371         515         151                        
          Provision for doubtful accounts                                      192         130         232                        
          Equity in net loss of unconsolidated                                  80           -           -                        
          Unrealized foreign currency (gain) loss                              (45)          8         (80)                       
          (Gain) loss on disposition of fixed assets                            83          (4)         34                        
          Changes in operating assets and liabilities:                           -           -           -                        
               (Increase) decrease in accounts receivable                       61        (127)       (193)                       
               (Increase) decrease in license fees receivable                 (150)        (50)          8                        
               (Increase) decrease in inventories, net of reserves             813        (433)     (1,986)                       
               (Increase) decrease in other assets                              67         (12)        (12)                       
               Increase in accounts payable and accrued expenses                55         135       1,816                        
               Increase (decrease) in other liabilities                        436        (414)         48                        
                                                                          ---------   ---------   ---------                       
          Net cash (used in) operating activities                         $ (7,758)   $ (7,443)   $(12,834)                       
                                                                          ---------   ---------   ---------                       
                                                                                                                                  
Cash flows from investing activities:                                                                                             
     Capital expenditures                                                 $   (186)       (244)       (548)                       
     Acquisition of patent rights                                                -           -        (822)                       
     Acquisition of Advancel (net of $100 cash acquired)                         -           -          40                        
     Acquisition and advances, including $135 of costs (Note 6)                  -           -      (5,134)                       
     Sale of capital expenditures                                                -          67          46                        
                                                                          ---------   ---------   ---------                       
          Net cash (used in) investing activities                         $   (186)   $   (177)   $ (6,418)                       
                                                                          ---------   ---------   ---------                       
                                                                                                                                  
Cash flows from financing activities:                                                                                             
     Proceeds from:                                                                                                               
          Convertible notes (net)                                         $      -    $  3,199    $      -                        
          Sale of common stock and expenses                                  6,377         500         (51)                       
          Sale of Series C preferred stock and expenses                          -      11,863         (53)                       
          Sale of Series D preferred stock                                       -           -       5,138                        
          Sale of subsidiary Series A preferred stock                            -           -       5,138                        
          Sale of subsidiary stock and expenses                                  -       3,247         (21)                       
          Exercise of stock purchase warrants and options                      104       1,071           -                        
          Collections on subscriptions receivable                                -           -         326                        
          Purchase of treasury stock                                             -           -      (3,292)                       
                                                                          ---------   ---------   ---------                       
          Net cash provided by financing activities                       $  6,481    $ 19,880    $  7,185                        
                                                                          ---------   ---------   ---------                       
                                                                                                                                  
Effect of exchange rate changes on cash                                   $      -    $    (24)   $     (8)                       
                                                                                                                                  
Net increase (decrease) in cash and cash equivalents                      $ (1,463)   $ 12,236    $(12,075)                       
Cash and cash equivalents - beginning of period                              1,831         368      12,604                        
                                                                          ---------   ---------   ---------                       
Cash and cash equivalents - end of period                                 $    368    $ 12,604    $    529                        
                                                                          =========   =========   =========                       
Cash paid for interest                                                    $      4    $      8    $      9                        
                                                                          =========   =========   =========                       
                                                                                                                                  
See Note 7 for issuance of common stock for patents and acquisitions.                                                             
See Note 8 with respect to issuance of securities for compensation.                                                               
See notes to Financial Statements.                                                                                                
</TABLE>                                                                        

<PAGE>
                                                                                


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

1.   Background:

   NCT  Group,  Inc.  ("NCT"  or the  "Company")  designs,  develops,  licenses,
produces and distributes electronic systems for Active Wave Management including
systems that  electronically  reduce noise and vibration.  The Company's systems
are designed for integration into a wide range of products serving major markets
in  the  transportation,   manufacturing,   commercial,  consumer  products  and
communications  industries.  The Company has begun commercial application of its
technology  through  a  number  of  product  lines,   including   NoiseBuster(R)
communications   headsets  and  NoiseBuster   Extreme!(TM)   consumer  headsets,
Gekko(TM)  flat speakers,  flat panel  transducers  ("FPT(R)"),  ClearSpeech(R),
microphones,  speakers and other products,  adaptive speech filters ("ASF"), the
ProActive(R)  line  of  industrial/commercial  active  noise  reduction  ("ANR")
headsets,  an aviation headset for pilots,  an industrial  muffler or "silencer"
for use with large  vacuums and  blowers,  quieting  headsets for patient use in
magnetic  resonance  imaging  ("MRI")  machines,  and an aircraft cabin quieting
system.

   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 amounted to $107.7 million on a cumulative  basis through
December 31, 1998 and has negative  working  capital of $1.2 million at December
31, 1998. These losses,  which include the costs for development of products for
commercial  use,  have been funded  primarily  from the sale of common stock and
preferred  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  amounted to $0.5 million at December 31, 1998.  Management believes
that currently available funds will not be sufficient to sustain the Company for
the next 12 months.  Such  funds  consist  of  available  cash and cash from the
exercise of warrants and options,  the funding derived from technology licensing
fees, royalties and product sales and engineering development revenue.  Reducing
operating  expenses and capital  expenditure  alone will not be  sufficient  and
continuation  as a going concern is dependent  upon the level of  realization of
funding from technology licensing fees, royalties, product sales and engineering
and development revenue, all of which are presently uncertain. In the event that
anticipated technology licensing fees, royalties, product sales, and engineering
and development  revenue are not realized,  then management  believes additional
working  capital  financing  must be obtained.  There is no  assurance  any such
financing is or would become available.

   In that event that funding from internal sources is insufficient, the Company
would have to substantially  cut back its level of operations.  These reductions
could have an  adverse  effect on the  Company's  relations  with its  strategic
partners  and  customers.  Uncertainty  exists with  respect to the  adequacy of
current funds to support the Company's  activities until positive cash flow from
operations can be achieved,  and with respect to the  availability  of financing
from other  sources to fund any cash  deficiencies  (see Note 8 with  respect to
recent financing).

   On April 30, 1998,  the Company  completed  the sale of 5.0 million  ordinary
shares of NXT plc  (formerly  Verity  Group plc )  acquired  upon the  Company's
exercise  on April 7, 1998 of the option it held to  purchase  such  shares at a
price of 50 pence  per  share.  This  option  was  acquired  by the  Company  in
connection with the cross license agreement entered into by the Company, NXT plc
and New  Transducers  Ltd.  ("NXT"),  a wholly-owned  subsidiary of NXT plc. The
Company  realized a $3.2  million  gain from the exercise of such option and the
sale of the Verity  ordinary  shares  received  therefrom,  which is included in
other income in 1998.

   The accompanying  financial  statements have been prepared  assuming that the
Company will  continue as a going  concern,  which  contemplates  continuity  of
operations,  realization  of  assets  and  satisfaction  of  liabilities  in the
ordinary  course of business.  The propriety of using the going concern basis is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  public
and private  financings and other funding sources to meet its  obligations.  The
uncertainties  described in the preceding  paragraphs raise substantial doubt at
December 31, 1998 about the  Company's  ability to continue as a going  concern.
The accompanying financial statements do not include any adjustments relating to
the  recoverability  of the carrying  amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.


2.   Summary of Significant Accounting Policies:

Consolidation:

   The financial statements include the accounts of the Company and its majority
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:

Product Sales:

   Revenue is recognized when 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 to total estimated costs at completion.
Estimated losses are recorded when identified.

   Revenues  recorded  under the  percentage  of completion  method  amounted to
$9,000,  zero and $61,000 for the years ended December 31, 1996,  1997 and 1998,
respectively.

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.  If any  license  fee is subject to
completion of any  performance  criteria  specified  within the agreement,  such
license fee is deferred until such performance  criteria is met. See Note 3 with
respect to the license fee  recorded  by the  Company in  connection  with Ultra
Electronics, Ltd.("Ultra") and NXT.


Advertising:

   Advertising costs are expensed as incurred.  Expense for years ended December
31,  1996,  1997 and  1998 was $0.5  million,  $0.5  million  and $1.7  million,
respectively.



<PAGE>


Cash and cash equivalents:

   The Company considers all money market accounts and highly liquid investments
with  original  maturities  of  three  months  or less at the  time of  purchase
(principally  comprised of high quality  investments in commercial  paper) to be
cash equivalents.

Inventories:

   Inventories are stated at the lower of cost (average) or market.

   With regard to the Company's  assessment of the  realizability  of inventory,
the Company periodically conducts a complete physical inventory, and reviews the
movement of inventory  on an item by item basis to determine  the value of items
which are slow moving and obsolete.  After  considering  potential for near term
product  engineering  changes  and/or  technological  obsolescence  and  current
realizability,  the Company determines the current need for inventory  reserves.
After  applying the above noted  measurement  criteria at December 31, 1997, and
December 31,  1998,  the Company  determined  that a reserve of $0.5 million for
each year 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.

Patent Rights:

   Patent  rights are stated at cost and are  amortized on a straight line basis
over  the  remaining  life  of  each  patent  (ranging  from  1  to  15  years).
Amortization  expense was $0.4 million,  $0.3 million and $0.5 million for 1996,
1997 and 1998, respectively.  Accumulated amortization was $1.8 million and $2.3
million at December 31, 1997 and 1998, respectively.

   It is the  Company's  policy to review the carrying  value of its  individual
patents when events have  occurred  which could impair the valuation on 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 and have not been material.



<PAGE>


Loss per common share:

   The Company adopted Statement of Financial  Accounting Standards ("SFAS") No.
128,  "Earnings  Per  Share,"  in the  year  ended  December  31,  1997  and has
retroactively   applied   the  effects   thereof  for  all  periods   presented.
Accordingly,  the presentation of per share information includes calculations of
basic and diluted loss per share. The impact on the per share amounts previously
reported  (primary and fully diluted) was not  significant.  Except as described
below,  the per share  effects of  potential  common  shares  such as  warrants,
options, and convertible  preferred stock have not been included,  as the effect
would be antidilutive (see Notes 8 and 9).

   The SEC has taken the position that when  preferred  stock is  convertible to
common stock at a conversion  rate that is the lower of a rate fixed at issuance
or a  fixed  discount  from  the  common  stock  market  price  at the  time  of
conversion,   the  discounted  amount  is  an  assured  incremental  yield,  the
"beneficial  conversion  feature",  to the preferred  shareholders and should be
accounted for as an embedded dividend to preferred  shareholders.  As such, this
dividend was recognized in the loss per share calculation.

Concentrations of Credit Risk:

   Financial  instruments which potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents. The Company primarily holds
its cash and cash  equivalents  in two banks.  Deposits  in excess of  federally
insured  limits were $0.3 million at December 31,  1998.  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 33.5% of revenues during 1998 and
38.8% of accounts  receivable at December 31, 1998. The Company does not require
collateral or other security to support customer receivables.

                                          (in thousands of dollars)
                                           As of December 31, 1998,
                                         and for the year then ended
                                       ---------------------------------
                                         Accounts                       
               CUSTOMER                 Receivable           Revenue
    --------------------------------   -------------      --------------
    VLSI Technology, Inc.                      $---                $285
    TS/2 Inc.                                     9                 275
    STMicroelectronics SA and
        STMicroelectronics S.r.l                246                 246
    Telex Communications, Inc.                  ---                 189
    Cleverdevices Ltd.                           23                 119
    All Other                                   438               2,210
                                       -------------      --------------
                              Total            $716              $3,324
                                       =============      ==============

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

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 employee stock option
and warrant incentive plans. (See Note 9.)

Reporting Comprehensive Loss:

     During  1998,  the  Company  adopted  Statement  of  Financial   Accounting
Standards  No. 130,  "Reporting  Comprehensive  Income"  ("SFAS No.  130").  The
provisions  for SFAS No.  130  require  the  Company to report the change in the
Company's equity during the period from transactions and events other than those
resulting from investments by and distributions to the shareholders.


<PAGE>

Segments of an Enterprise and Related Information:

     During  1998,  the  Company  adopted  Statement  of  Financial   Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information"  ("SFAS No.  131").  The  provisions  of SFAS No. 131  require  the
Company to  disclose  the  following  information  for each  reporting  segment:
general  information  about factors used to identify  reportable  segments,  the
basis of organization,  and the sources of revenues;  information about reported
profit or loss and  segment  assets;  and  reconciliations  of certain  reported
segment information to consolidated amounts.  Please refer to Note 14 and 15 for
further information.


3.   Joint Ventures and Other Strategic Alliances:

   The  following is a summary of certain of the  Company's  joint  ventures and
other strategic alliances as of December 31, 1998.

   The Company and certain of its majority-owned  subsidiaries have entered into
agreements to establish joint ventures and other strategic  alliances related to
the  design,  development,   manufacture,  marketing  and  distribution  of  its
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, 1998, 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,  1998.  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.

   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:

                                               (in thousands of dollars)
                                                Years ended December 31,
                                          -------------------------------------
        Joint Venture/Alliance                 1996         1997         1998
----------------------------------------  -----------  -----------   ----------
Walker Noise Cancellation Technologies          $ 90         $ 61         $  -
Ultra Electronics, Ltd.                           62            -           68
Magneti Marelli S.p.A.                            28            -           80
Siemens Medical Systems, Inc.                    319          172          102
Foster/NCT Supply, Ltd.                           10           28            -
AB Electrolux                                     12           34            -
Hoover Universal, Inc.                           713            -            -
OnActive Technologies, LLC                         -            -           75
TS/2 Inc.                                          -            -          275
VLSI Technology, Inc.                              -            -          285
STMicroelectronics S.A. &                          -            -          246
    STMicroelectronics S.r.l
NXT plc                                            -        3,000            -
                                          -----------  -----------   ----------

                 Total                        $1,234       $3,295       $1,131
                                          ===========  ===========   ==========

<PAGE>

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

Joint Ventures:

   OnActive  Technologies,  L.L.C.  ("OAT")  and  the  Company  entered  into an
Operating  Agreement in December 1995 with Applied  Acoustic  Research,  L.L.C.,
("AAR") to design, develop, manufacture,  market, distribute and sell flat panel
transducers  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  neither  company  was  required to make any
additional contribution to OAT. In May 1996, the Operating Agreement was amended
to include Johnson Controls,  Inc.'s ("JCI's) $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  provided  that  services  and  subcontracts  provided  to  OAT by the
Company, AAR, or JCI (collectively, 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.
During 1996 such  services  were  nominal.  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.  On  October 8, 1998,  the  Members  signed a
Redemption Agreement,  an Amended and Restated License Agreement,  a Termination
Agreement, and a License Agreement (collectively,  the "Termination Agreements")
terminating  the ownership  interest of NCT Audio,  a subsidiary of the Company.
NCT Audio had its ownership  interest in OAT redeemed by OAT in exchange for the
rights and licenses granted NCT Audio, under the License Agreement together with
a cash payment of seventy-five thousand dollars ($75,000),  the discharge of any
indebtedness  of NCT  Audio  to  OAT,  the  license  to  certain  technology  in
accordance  with  specific  terms  and  limitations  set  forth in that  certain
Aftermarket-TDSS  License,  and the right to receive 22.5%  (twenty-two  and one
half percent) of all  royalties to be paid by JCI,  relating to the licensing of
that certain proprietary  intellectual property of the Company known as Top Down
Surround Sound ("TDSS").

Other Strategic Alliances:

   Ultra  Electronics  Ltd.  (formerly  Dowty Maritime  Limited) 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 1.5% of sales  commencing in 1998.  Under the  agreement,  Ultra also
acquired the Company's  active  aircraft  quieting  business based in Cambridge,
England,  leased a portion of the Cambridge facility and employed certain of the
Company's employees.

   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.  The
Company has recognized $68,000 in royalty revenue in 1998.

   New  Transducers  Ltd.(NXT),  a wholly-owned  subsidiary of NXT plc (formerly
Verity Group PLC ) and the Company  executed a cross  licensing  agreement  (the
"Cross  License")  on March 28,  1997.  Under  terms of the Cross  License,  the
Company  licensed  patents and patents pending which relate to FPT technology to
NXT,  and NXT  licensed  patents and patents  pending  which  relate to parallel
technology to the Company.  In  consideration  of the license,  during the first
quarter 1997,  NCT recorded a $3.0 million  license fee  receivable  from NXT as
well as  royalties on future  licensing  and product  revenue.  The Company also
executed a security  deed (the  "Security  Deed") in favor of NXT granting NXT a
conditional  assignment in the patents and patents pending licensed to NXT under
the Cross License in the event a default in a certain  payment to be made by the
Company under the Cross License  continued beyond fifteen days.  Concurrent with
the Cross License,  the Company and NXT plc executed agreements granting each an
option  for a four year  period  commencing  on March  28,  1998,  to  acquire a
specified amount of the common stock of the other subject to certain  conditions
and restrictions.  With respect to the Company's option to NXT plc (the "NXT plc
Option"),  3.8 million  shares of common stock  (approximately  3.4% of the then
issued and  outstanding  common stock) of the Company are covered by such option
and the Company  executed a registration  rights  agreement  (the  "Registration
Rights   Agreement")   covering  such  shares.   Five  million  ordinary  shares
(approximately  2.0% of the then issued and outstanding  ordinary shares) of NXT
plc are covered by the option  granted by NXT plc 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.  On April 15,  1997,  NXT plc,  NXT and the
Company executed several  agreements and other documents (the "New  Agreements")
terminating  the Cross  License,  the Security  Deed, the NXT plc Option and the
Registration   Rights   Agreement  and  replacing   them  with  new   agreements
(respectively the "New Cross License", the "New Security Deed", the "New NXT plc
Option" and the "New  Registration  Rights  Agreement").  The  material  changes
effected by the New  Agreements  were the  inclusion of NXT plc as a party along
with its wholly-owned  subsidiary NXT; providing that the license fee payable to
NCT could be paid in ordinary shares of NXT plc stock; and reducing the exercise
price under the option  granted to NXT plc to purchase  shares of the  Company's
common stock to $0.30 per share. The subject license fee was paid to the Company
in ordinary shares of NXT plc stock which were subsequently sold by the Company.
On September 27, 1997, NXT plc, NXT, NCT Audio and the Company  executed several
agreements and other  documents,  terminating  the New Cross License and the New
Security Deed and replacing them with new agreements  (respectively,  the "Cross
License Agreement dated September 27, 1997" and the "Master License Agreement").
The material changes effected by the most recent agreements were an expansion of
the fields of use  applicable to the exclusive  licenses  granted to NXT plc and
NXT,  an  increase  in the  royalties  payable on future  licensing  and product
revenues, cancellation of the New Security Deed covering the patents licensed by
the Company,  and the acceleration of the date on which the parties can exercise
their  respective  stock  purchase  option to September 27, 1997. On February 9,
1999 NCT Audio and NXT expanded the Cross License  Agreement dated September 27,
1997 to  increase  NXT's  fields  of use to  include  aftermarket  ground  based
vehicles and aircraft  sound  systems and  increased the royalties due NCT Audio
from NXT to 10% from 6% and increased the royalties due NXT from NCT Audio to 7%
from 6%. In consideration for granting NXT these expanded  licensing rights, NCT
Audio received $0.5 million license fee. Also on February 9, 1999, NCT Audio and
NXT amended the Master License Agreement to include a minimum royalty payment of
$160,000 in 1999, to be paid in equal quarterly installments.

   TS/2, Inc. ("TS/2"). On January 23, 1998, NCT Audio entered into an agreement
with  TS/2.  Under  the  terms  of  the  agreement,  NCT  Audio  granted  TS/2 a
non-exclusive  license to market NCT  Audio's  Gekko(TM)  flat  speakers  in the
pro-audio market. NCT Audio recorded $0.3 million license fee and is entitled to
future per-unit  revenues on Gekko(TM)  products sold by TS/2 into the pro-audio
market.  NCT Audio recognized $0.4 million in marketing and product  development
expenses in connection with this agreement.

   VLSI Technology, Inc. ("VLSI"). On February 5, 1998, the Company entered into
a license,  engineering and royalty  agreement with VLSI. Under the terms of the
agreement,  the Company has granted a non-exclusive  license to VLSI for certain
patents  and  patents  pending  which  relate  to the  Company's  ClearSpeech(R)
technologies.  Along with the license,  the Company has recorded $0.3 million in
related  engineering  revenue.  The Company will  recognize  royalties on future
products sold by VLSI incorporating the ClearSpeech(R) technology.

   STMicroelectronics  SA &  STMicroelectronics  S.r.l  ("ST").  On November 16,
1998,  Advancel  and ST  executed  a license  agreement.  Under the terms of the
agreement,  which included a license fee, a minimum royalty within two years and
future per unit  royalties,  ST  licensed  Advancel's  tiny  2J(TM)for  Java(TM)
("t2J-Processor  Core") to combine it with its proven  secure  architecture  and
advanced  nonvolatile  memory  technology,  to offer a new  generation of secure
microcontrollers for smartcard applications. The t2J-Processor Core is the ideal
architecture  to  accelerate  the  execution  of  Javacard(TM)-based   smartcard
applications such as electronic purse credit/debit card functions, ID cards that
provide authorized access to networks and subscriber identification modules that
secure certain PCS cellular phones against fraud. Advancel recorded $0.2 million
license fee in 1998 and an additional $0.4 million license fee is to be recorded
upon making deliverables, along with $0.9 million minimum royalty over two years
and $0.9 million research and engineering revenue.


4.   Inventories:

   Inventories comprise the following:

                                                (in thousands of dollars)
                                                      December 31,
                                               ----------------------------
                                                   1997            1998
                                               --------------   -----------

  Components                                   $    514          $   745
  Finished goods                                  1,291            3,083
                                               --------------   -----------
  Gross inventory                              $  1,805          $ 3,828
  Reserve for obsolete & slow moving inventory     (472)            (508)
                                               --------------   -----------
  Inventory, net of reserves                   $  1,333          $ 3,320
                                               ==============   ===========




<PAGE>


5.   Property and Equipment:

   Property and equipment comprise the following:
                              
                                              (in thousands of dollars)
                                Estimated           December 31,
                               Useful Life    -------------------------
                                 (Years)         1997         1998
                               -------------  ------------ ------------

 Machinery and equipment           3-5        $   1,801    $   1,935
 Furniture and fixtures            3-5              869        1,057
 Leasehold improvements            7-10           1,177        1,038
 Tooling                           1-3              670          181
 Other                             5-10              74           60
                                              ------------ ------------
      Gross                                   $   4,591    $   4,271
 Less accumulated                                           
 depreciation                                    (3,447)      (3,274)
                                              ------------ ------------
      Net                                     $   1,144    $     997
                                              ============ ============

     Depreciation  expense for the years ended December 31, 1996,  1997 and 1998
was $0.5 million, $ 0.6 million and $0.5 million, respectively.

6. Other Assets:

     On August 14, 1998,  NCT Audio agreed to acquire  substantially  all of the
business assets of Top Source Automotive,  Inc. ("TSA"),  an automotive original
equipment  audio  system   supplier.   On  June  11,  1998,  NCT  Audio  paid  a
non-refundable  deposit of  $1,450,000  towards  the  purchase  price,  which is
included in other assets.  The total cash purchase price is $10,000,000,  and up
to $6,000,000 in possible  future  contingent  payments to be paid in either NCT
Audio common stock or cash, at the seller's election. The transaction is subject
to approval of the shareholders of Top Source Technologies,  Inc. ("TST"), TSA's
parent company.  On July 31, 1998, NCT Audio paid TST $2,050,000,  to be held in
escrow with  securities  and  documentation  necessary to  represent  beneficial
ownership of 20% of the total  equity  rights and  interests in TSA,  until such
time as TST's stockholders  approve the sale of the business assets of TSA. Such
approval was received on December 15, 1998, and at that time, the $2,050,000 was
delivered to TSA. In return,  NCT Audio took ownership of the  documentation and
securities.  The Company has the exclusive  option to purchase the assets of TSA
at any time through  March 31, 1999. If the  acquisition  of the 20% interest in
TSA had occurred as of January 1, 1998, the Company's unaudited net loss and net
loss per share basic and diluted  would have been  $(14.8)  million and $(0.13),
respectively.

   Unaudited summarized financial information of TSA is as follows:


                                        For the Twelve
                                         Months Ended
      (in thousands of dollars)       September 30, 1998
                                      ------------------
      Current assets                      $  2,050
      Non-current assets                       383
      Current liabilities                      288
      Non-current liabilities                    -

      Income statement data:
           Net revenues                     10,815
           Gross profit                      3,398
           Net income                          632


<PAGE>

   On August 17, 1998, NCT Audio agreed to acquire all of the members'  interest
in Phase  Audio LLC dba  Precision  Power,  Inc.  ("PPI"),  a supplier of custom
automotive  audio systems.  In  consideration,  the members of PPI shall receive
$2.0 million.  NCT Audio also agreed to retire approximately $8.5 million of PPI
debt.  This  acquisition  is subject  to NCT  Audio's  receipt of the  necessary
financing to close the transaction.  In addition to the above, on June 17, 1998,
NCT Audio provided a working  capital loan in the amount of $0.5 million to PPI,
which is evidenced by a demand  promissory  note. On August 18, 1998,  NCT Audio
provided an  additional  working  capital  loan in the amount of $1.0 million to
PPI, which is also evidenced by a demand  promissory  note. The unpaid principal
balance of these notes bear  interest at a rate equal to the prime  lending rate
plus one percent (1.0%).  The notes  aggregating $1.5 million have been included
in other assets.

7.   Other Liabilities:

   On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an agreement
with the Company  granting the Company a license to, and an option to purchase a
joint  ownership  interest in, patents and patents pending which relate to IPI's
speech  recognition  technologies,  speech  compression  technologies and speech
identification and verification technology.  The aggregate value of the patented
technology is $1,250,000, which was paid by a $150,000 cash payment and delivery
of 1,250,000  shares of the Company's  common stock valued at $0.65625 per share
on June 5,  1998.  At such time as IPI sells any of such  shares,  the  proceeds
thereof will be allocated towards a fully paid-up license fee for the technology
rights noted above.  In the event that the proceeds  from the sale of shares are
less than the $1,100,000,  the Company will record a liability  representing the
cash payment  due. On July 5, 1998 the Company paid IPI $50,000,  which was held
in escrow as security for the fulfillment of the Company's obligations,  towards
the liability.  The Company has recorded a liability of $544,000 at December 31,
1998  representing  the difference  between the payment  obligations and the net
proceeds from the sale of shares of the Company's common stock received by IPI.

   On September 4, 1998, the Company acquired the issued and outstanding  common
stock  of  Advancel  Logic  Corporation  ("Advancel"),  a  Silicon  Valley-based
developer of microprocessor cores that execute Sun Microsystems'  Java(TM) code.
The  acquisition  was pursuant to a stock purchase  agreement dated as of August
21,  1998 (the "Stock  Purchase  Agreement")  among the  Company,  Advancel  and
certain   shareholders   of  Advancel   (the   "Advancel   Shareholders").   The
consideration  for the  acquisition of the Advancel common stock consisted of an
initial payment of $1.0 million  payable by the delivery of 1,786,991  shares of
the Company's treasury stock (see Note 8) together with future payments, payable
in cash or in  common  stock of the  Company  at the  election  of the  Advancel
Shareholders (individually,  an "earnout payment" and collectively, the "earnout
payments") based on Advancel's earnings before interest, taxes, depreciation and
amortization  (as  defined  in the  Stock  Purchase  Agreement)  for each of the
calendar years 1999,  2000, 2001 and 2002  (individually,  an "earnout year" and
collectively,  the "earnout years").  While each earnout payment may not be less
than $250,000 in any earnout year,  there is no maximum  earnout payment for any
earnout year or for all earnout years in the aggregate.  In connection therewith
the Company  recorded a $77,000  earnout at December 31,  1998.  At December 31,
1998 the Company has a $100,000  note payable to a former  employee of Advancel.
The note bears  interest at a rate of 8.25%,  compounded  annually and is due in
two equal  installments on December 1, 1998 and March 1, 1999. Such note is past
due.


8.   Common Stock:

Private Placements and Stock Issuances:

   On March 28, 1996, the Company sold 2.0 million shares of its common stock in
a private  placement  with an investor that provided net proceeds to the Company
of $0.7 million.

   On April 10, 1996, the Company sold an additional 1.0 million 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 1.0  shares  subject  to certain
adjustments.

   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 13.4 million 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 a 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.

   Between  January 15, 1997 and March 25, 1997,  the Company issued and sold an
aggregate  amount  of  $3.4  million  of  non-voting  subordinated   convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the  "Investors")  through  multiple dealers (the "First Quarter 1997
Financing")  from which the Company  realized $3.2 million of net proceeds.  The
Debentures  were to mature between  January 15, 2000 and March 25, 2000 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 Investors, at their discretion,  had the right to convert the
principal  due on the  Debentures  into the  Company's  common stock at any time
after  the 45th day  following  the  date of the sale of the  Debentures  to the
Investors.  In the  event of such a  conversion,  the  conversion  price was the
lesser of 85% of the  closing  bid price of the  Company's  common  stock on the
closing date of the  Debentures'  sale or between 75% to 60%  (depending  on the
Investor  and other  conditions)  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 reserved 15 million
shares of the Company's common stock for issuance upon such conversion.  Subject
to certain  conditions,  the Company also had the right to require the Investors
to convert all or part of the Debentures  under the above noted conversion price
conditions  after  February  15, 1998.  As of June 6, 1997,  the  Investors  had
converted  all $3.4 million of the  Debentures  into 16.5 million  shares of the
Company's  common  stock.  At the Company's  election,  interest due through the
conversion  dates  of  the  Debentures  was  paid  through  the  issuance  of an
additional 0.2 million shares of the Company's common stock. In conjunction with
the  Debentures,  the  Company  granted a warrant to purchase  75,000  shares of
common stock to one  investor.  During the year ended  December  31,  1997,  the
Company valued this warrant,  using the  Black-Scholes  pricing model at $34,000
which was  expensed  as debt  discount.  The  Company  recorded  a $1.4  million
non-cash  interest expense  attributable to the conversions of the Debentures in
the first and second quarters of 1997 as an adjustment during the fourth quarter
of 1997.  If the shares were issued in lieu of debt at the  respective  issuance
dates of the debt,  supplementary  basic and  diluted net loss per share for the
year ended December 31, 1997 would have been a loss of $0.08 per share.

   On July 30, 1997 the Company sold 2.9 million  shares,  in the aggregate,  of
its  common  stock at a price of $0.175  per share in a private  placement  that
provided net proceeds to the Company of $0.5 million.

   On  September  4, 1997,  the Company  transferred  $5,000 cash and all of the
business  and assets of its Audio  Products  Division as then  conducted  by the
Company and as reflected  on the business  books and records of the Company to a
newly incorporated company, NCT Audio Products, Inc., in consideration for 5,867
shares of NCT Audio  common  stock  whereupon  NCT Audio  became a  wholly-owned
subsidiary  of the  Company.  The Company  also  granted NCT Audio an  exclusive
worldwide  license with respect to all of the  Company's  relevant  patented and
unpatented  technology  relating  to FPT(TM) and  FPT(TM)  based  audio  speaker
products for all markets for such products  excluding (a) markets licensed to or
reserved by NXT plc and NXT under the Company's cross licensing  agreements with
NXT plc and NXT, (b) the ground based  vehicle  market  licensed to OAT, (c) all
markets for hearing aids and other hearing enhancing or assisting  devices,  and
(d) all markets for headsets, headphones and other products performing functions
substantially  the same as those performed by such products in consideration for
a license fee of $3.0  million  (eliminated  in  consolidation)  to be paid when
proceeds  are  available  from the sale of NCT Audio  common  stock and on-going
future royalties payable by NCT Audio to the Company as provided in such license
agreement.  In  addition,  the Company  agreed to transfer all of its rights and
obligations  under its cross  licensing  agreements  with NXT plc and NXT to NCT
Audio and to transfer the Company's interest in OAT to NCT Audio, which was then
redeemed  by OAT on  October  8,  1998.  (Please  refer  to  Note 3 for  further
information.)

   Between  October 10, 1997 and  December 4, 1997 NCT Audio issued 2,145 shares
of its common stock  (including  533 shares  issued to NXT plc) for an aggregate
purchase price of $4.0 million in a private  placement  pursuant to Regulation D
under the  Securities  Act (the "NCT  Audio  Financing").  NCT Audio has not met
certain  conditions  regarding  the filing of a  registration  statement for NCT
Audio common stock.  As such,  holders of NCT Audio common stock have a right to
convert  their NCT Audio  common stock into a  sufficient  number of  restricted
shares of NCT common stock to equal their original cash investment in NCT Audio,
plus a 20% discount to market.  During  1998,  two NCT Audio  shareholders  have
exercised  their right to  exchange  296 shares of NCT Audio  common  stock into
1,135,542  shares of NCT common stock under the terms noted above. In connection
therewith the Company  recorded  goodwill of $556,000  which is being  amortized
over five years.

   Between  October 28, 1997 and December 11, 1997,  the Company  entered into a
series of subscription  agreements  (the "Series C Subscription  Agreements") to
sell an  aggregate  amount of $13.3  million of Series C  Convertible  Preferred
Stock (the  "Series C  Preferred  Stock") in a private  placement,  pursuant  to
Regulation D of the Securities Act, to 32 unrelated accredited investors through
two dealers (the "1997 Series C Preferred Stock Private  Placement").  The total
1997 Series C Preferred  Stock  Private  Placement was completed on December 11,
1997.  The  aggregate net proceeds to the Company of the 1997 Series C Preferred
Stock Private Placement were $11.9 million. Each share of the Series C Preferred
Stock  has a par  value of $.10 per  share  and a stated  value of one  thousand
dollars  ($1,000)  with an accretion  rate of four percent (4%) per annum on the
stated value.  Each share of Series C Preferred Stock is convertible  into fully
paid and  nonassessable  shares of the Company's common stock subject to certain
limitations.  The shares of Series C Preferred  Stock  become  convertible  into
shares of common  stock at any time  commencing  after  the  earlier  of (i) the
effective date of the Series C Registration  Statement; or (ii) ninety (90) days
after the date of filing of the Series C Registration  Statement.  Each share of
Series C Preferred Stock is convertible  into a number of shares of common stock
of the Company as determined in accordance with the Series C Conversion  Formula
as set forth in the  agreement  using a conversion  price equal to the lesser of
(x)  120% of the  five  (5) day  average  closing  bid  price  of  common  stock
immediately  prior to the  closing  date of the Series C  Preferred  Stock being
converted or (y) 20% below the five (5) day average  closing bid price of common
stock immediately prior to the conversion date thereof.

   The conversion  terms of the Series C Preferred Stock also provide that in no
event shall the average closing bid price referred to in the Series C Conversion
Formula  be less than  $0.625  per share and in no event  shall the  Company  be
obligated  to issue more than 26.0  million  shares of its  common  stock in the
aggregate in connection  with the  conversion  of the Series C Preferred  Stock.
Accordingly,  26.0 million  shares of common stock which could be issuable  upon
conversion of the Series C Preferred Stock are included in the offering to which
the prospectus relates. Under the terms of the Series C Subscription Agreements,
the Company may be subject to a penalty if the Series C  Registration  Statement
is not declared  effective  within one hundred twenty (120) days after the first
closing of any incremental  portion of the offering of Series C Preferred Stock,
such  penalty to be in an amount  equal to one and one half  percent  (1.5%) per
month of the aggregate  amount of Series C Preferred  Stock sold in the offering
up to a maximum of ten  percent  (10%) of such  aggregate  amount.  The Series C
Subscription Agreements also provide that for a period commencing on the date of
the signing of the Series C Subscription  Agreements and ending ninety (90) days
after the closing of the offering the Company  will be  prohibited  from issuing
any debt or equity  securities other than Series C Preferred Stock, and that the
Corporation  will be  required  to make  certain  payments  in the  event of its
failure  to  effect  conversion  in a timely  manner or in the event it fails to
reserve  sufficient  authorized  but unissued  common  stock for  issuance  upon
conversion  of the Series C Preferred  Stock.  As of December 31,  1998,  10,850
shares of Series C Preferred  Stock have been converted to 20,665,000  shares of
NCT common stock.

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

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

   On July 27, 1998,  the Company  entered  into  subscription  agreements  (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Convertible  Preferred Stock ("Series D Preferred  Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the  Securities  Act of 1933, as amended  (respectively  "Regulation  D" and the
"Securities Act"), to six unrelated accredited investors through one dealer (the
"1998 Series D Preferred  Stock Private  Placement.  The sale of 6,000 shares of
Series D Preferred  Stock  having an  aggregate  $6.0  million  stated value was
completed  on August 6, 1998.  $5.2 million net  proceeds  were  received by the
Company from the 1998 Series D Preferred Stock Private Placement.  Each share of
the  Series D  Preferred  Stock  has a par  value of $.10 per share and a stated
value of one thousand  dollars  ($1,000) with an accretion  rate of four percent
(4%) per annum on the stated  value.  Each share of Series D Preferred  Stock is
convertible  into fully paid and  nonassessable  shares of the Company's  common
stock  subject  to  certain  limitations.  Under  the  terms  of  the  Series  D
Subscription  Agreements,  the  Company  is  required  to  file  a  registration
statement  ("the Series D  Registration  Statement")  covering the resale of all
shares of common stock of the Company  issuable upon  conversion of the Series D
Preferred Stock then outstanding  within sixty (60) days after the completion of
the 1998 Series D Preferred Stock Private Placement (respectively, the "Series D
Filing Date" and the "Series D Closing Date").  The shares of Series D Preferred
Stock  become  convertible  into shares of common  stock at any time  commencing
after the earlier of (i) ninety (90) days after the Series D Closing Date;  (ii)
five (5) days after the Company  receives a "no  review"  status from the SEC in
connection with the Series D Registration Statement; or (iii) the effective date
of the Series D  Registration  Statement.  The Series D  Registration  Statement
became  effective  on October 30, 1998,  and shares of Series D Preferred  Stock
became  convertible  on that  date.  Each share of Series D  Preferred  Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the Series D Conversion Formula as set forth in the agreement
using a  conversion  price  equal to the  lesser of (x) 120% of the five (5) day
average closing bid price of common stock  immediately prior to the closing date
of the Series D Preferred  Stock being  converted  or (y) 20% below the five (5)
day  average  closing  bid  price  of  common  stock  immediately  prior  to the
conversion date thereof.

   The conversion  terms of the Series D Preferred Stock also provide that in no
event shall the conversion price referred to in the Series D Conversion  Formula
be less than $0.50 per share and in no event shall the Company be  obligated  to
issue  more than  12,000,000  shares of its  common  stock in the  aggregate  in
connection  with the conversion of the 6,000 shares of Series D Preferred  Stock
issued under the 1998 Series D Preferred Stock Private  Placement.  The Series D
Subscription  Agreements  also provide that the Company will be required to make
certain  payments in the event of its failure to effect  conversion  in a timely
manner.  Including shares of common stock issued for accretion,  as of March 12,
1999,  all shares of Series D Preferred  Stock have been converted to 12,273,685
shares of NCT common stock.

   On July 27, 1998, NCT Audio entered into  subscription  agreements  (the "NCT
Audio  Subscription  Agreements")  to sell 60  shares  of NCT  Audio's  Series A
Convertible  Preferred  Stock ("NCT Audio Series A Preferred  Stock")  having an
aggregate  stated  value of $6.0  million in a private  placement,  pursuant  to
Regulation  D of the  Securities  Act,  to six  unrelated  accredited  investors
through  one  dealer  (the  "1998 NCT Audio  Series A  Preferred  Stock  Private
Placement").  The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate  $6.0 million  stated value was  completed on August 17, 1998.  NCT
Audio  received  net  proceeds of $5.2  million from the 1998 NCT Audio Series A
Preferred  Stock  Private  Placement.  Each  share  of the NCT  Audio  Series  A
Preferred  Stock has a par  value of $.10 per  share  and a stated  value of one
hundred thousand dollars  ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value.  Each share of NCT Audio Series A Preferred Stock
is convertible  into fully paid and  nonassessable  shares of NCT Audio's common
stock  subject  to  certain  limitations.  Under  the  terms  of the  NCT  Audio
Subscription  Agreements NCT Audio is required to file a registration  statement
("NCT Audio Registration Statement") covering the resale of all shares of common
stock of NCT Audio issuable upon  conversion of the NCT Audio Series A Preferred
Stock then  outstanding by a date (the "Series A Filing  Deadline") which is not
later than  thirty  (30) days after the Company  becomes a  "reporting  company"
under the Exchange Act. The shares of NCT Audio Series A Preferred  Stock become
convertible into shares of NCT Audio common stock at any time after the date the
Company  becomes a "reporting  company"  under the Exchange  Act.  Each share of
Series A Preferred Stock is convertible  into a number of shares of common stock
of NCT Audio as determined in accordance with the Series A Conversion Formula as
set forth in the agreement  using a conversion  price equal to the lesser of (x)
120% of the five (5) day average  closing bid price of common stock  immediately
prior to the closing date of the Series A Preferred Stock being converted or (y)
20% below the five (5) day average closing bid price of common stock immediately
prior to the conversion date thereof.

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

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

   On September 4, 1998, the Company acquired the issued and outstanding  common
stock of Advancel. The acquisition was pursuant to the Stock Purchase Agreement.
The  consideration for the acquisition of the Advancel common stock consisted of
an initial payment of $1.0 million  payable by the delivery of 1,786,991  shares
of the Company's  treasury stock together with future payments,  payable in cash
or in common stock of the Company at the  election of the Advancel  Shareholders
based  on  Advancel's   earnings  before  interest,   taxes,   depreciation  and
amortization  for each of the calendar years 1999,  2000,  2001 and 2002.  While
each earnout payment may not be less than $250,000 in any earnout year, there is
no maximum  earnout payment for any earnout year or for all earnout years in the
aggregate.  To  determine  the number of shares of the  Company's  common  stock
issuable in connection  with an earnout  payment,  each earnout payment is to be
calculated using the average of the closing prices of the Company's common stock
for each of the  twenty  (20)  business  days  following  the 21st day after the
release of Advancel's  audited year-end  financials for an earnout year. At that
time,  Advancel  Shareholders  will elect to  receive  payment in cash or common
stock of the  Company.  In the event that the Company is unable to maintain  the
registration  statement covering the resale of 1,786,991 shares effective for at
least thirty (30) days, each Advancel  Shareholder  shall have the right,  until
April 15,  1999,  to have the  Company  redeem up to  one-third  of the  initial
payment shares acquired by such Advancel  Shareholder by paying in cash therefor
a sum  calculated by using the formula used to determine the number of shares of
the Company's  common stock to be delivered in payment of the initial payment of
$1.0  million.  The cost of the  acquisition  has been  allocated  to the assets
acquired and liabilities assumed based on their fair values as follows:

      Asset acquired and liabilities assumed:

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

   The  acquisition has been accounted for as a purchase and,  accordingly,  the
accompanying  consolidated financial statements include the accounts of Advancel
from the date of  acquisition.  Goodwill on acquisition is being  amortized over
five years.

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

   On  November  24,  1998,  the  Company  paid  $1,000 in  consideration  for a
wholly-owned  subsidiary,   DistributedMedia.com  ("DMC").  DMC  was  formed  to
develop,   install,  and  provide  an  audio/visual  advertising  medium  within
commercial/professional settings.

   On December  30,  1998,  the Company  entered  into a series of  subscription
agreements (the " Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2  million  of Series E  Convertible  Preferred  Stock  (the "
Series E  Preferred  Stock")  in  consideration  of $4.0  million,  in a private
placement,  pursuant to  Regulation D of the  Securities  Act, to six  unrelated
accredited  investors  through  one dealer (the "1998  Series E Preferred  Stock
Private Placement).  The sale of 8,145 shares of Series E Preferred Stock having
an aggregate  $8.1 million  stated  value was  completed on March 12, 1999.  The
Company  received  net proceeds of $1.8 million from the 1998 Series E Preferred
Stock Private  Placement  through March 24, 1999. In addition to the above noted
Series E  Subscription  Agreements,  the  Company  issued and sold an  aggregate
amount of $1.7 million of Series E Preferred Stock to three accredited investors
through the above noted  dealer,  in exchange for an  aggregate  stated value of
$1.7  million  of the  Company's  Series C  Preferred  Stock  held by the  three
accredited  investors.  The Company also issued and sold an aggregate  amount of
$0.7 million of Series E Preferred  Stock to four accredited  investors  through
the above noted dealer,  in exchange and  consideration  for an aggregate of 2.1
million  shares  of the  Company's  common  stock  held by the  four  accredited
investors.  Each share of the Series E  Preferred  Stock has a par value of $.10
per share and a stated value of one thousand  dollars ($1,000) with an accretion
rate of four percent (4%) per annum on the stated value.  Each share of Series E
Preferred Stock is convertible into fully paid and  nonassessable  shares of the
Company's  common stock subject to certain  limitations.  Under the terms of the
Series E Subscription  Agreements the Company is required to file a registration
statement ("the Series E Registration Statement") on (i) Form S-3 on or prior to
the date which is no more than  sixty  (60) days from the date that the  Company
has issued a total of 7,438 shares of Series E Preferred  Stock if filed or (ii)
Form S-1 on or prior to a date which is no more than  ninety  (90) days from the
date that the Company  has issued a total of 7,438  shares of Series E Preferred
Stock, covering the resale of all of the Registrable  Securities.  The shares of
Series E Preferred Stock become  convertible  into shares of common stock at any
time  commencing  after the  earlier of (i) ninety  (90) days after the Series E
Closing Date; (ii) five (5) days after the Company receives a "no review" status
from  the SEC in  connection  with the  Registration  Statement;  or  (iii)  the
effective  date of the Series E Registration  Statement.  Each share of Series E
Preferred  Stock is  convertible  into a number of shares of common stock of the
Company as determined in accordance with the Series E Conversion  Formula as set
forth in the agreement using a conversion  price equal to the lesser of (x) 120%
of the five (5) day average closing bid price of common stock  immediately prior
to the closing date of the Series E Preferred  Stock being  converted or (y) 20%
below the five (5) day  average  closing bid price of common  stock  immediately
prior to the conversion date thereof.

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

   In connection with the Series E Preferred Stock, the Company may be obligated
to redeem  the  excess of the  stated  value  over the  amount  permitted  to be
converted into common stock. Such obligation will be triggered in the event that
the Company issues 30,000,000 shares on conversion of Series E Preferred Stock.



<PAGE>


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

   At December 31, 1998, the aggregate number of shares of common stock required
to be reserved for issuance  upon the  exercise of all  outstanding  options and
warrants  was 30.6  million  shares  (see Note 9), and the  aggregate  number of
shares of common stock  required to be reserved for issuance upon  conversion of
issued and  outstanding  shares of Series C Convertible  Preferred Stock was 1.5
million  shares.  The Company  also has reserved  15.4 million  shares of common
stock for  issuance  to  certain  holders of NCT Audio  common  stock upon their
exercise of certain  rights to exchange  their  shares of NCT Audio common stock
for shares of the Company's  common stock,  26.0 million  shares of common stock
for issuance upon the  conversion  of the 1998 Series D Preferred  Stock Private
Placement  and 30.0  million  shares  of  common  stock  for  issuance  upon the
conversion of the 1998 Series E Preferred Stock Private  Placement.  At December
31,  1998,  the number of shares  available  for the  exercise  of  options  and
warrants was 39.4 million and of the outstanding  options and warrants,  options
and warrants to purchase 22.6 million shares were currently exercisable.  Common
shares  issued and issuable  exceed the number of shares  authorized at December
31, 1998.  However,  should  shares of common stock issued reach the  authorized
limit, shares in excess of the limit will be borrowed from the 1992 Plan.

   Stock subscription receivable:

   The  $0.4  million  stock  subscription   receivable  at  December  31,  1997
represents a receivable of $0.1 million due from a director, which was paid with
157,956 shares of NCT common stock in 1998, and a $0.3 million  receivable  from
the escrow agent for the NCT Audio financing which was paid on June 30, 1998.

   The $4.0 million  subscription  receivable at December 31, 1998  represents a
receivable  due from the Series E Subscription  Agreements.  Net proceeds to the
Company as of March 24, 1999 was $1.8 million.


9.   Common Stock Options and Warrants:

     The Company  applies APB 25 in accounting  for its various  employee  stock
option incentive plans and warrants and,  accordingly,  recognizes  compensation
expense as the  difference,  if any,  between the market price of the underlying
common  stock and the  exercise  price of the  option on the date of grant.  The
effect of  applying  SFAS No.  123 on 1996,  1997 and 1998 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 $(12.8)
million,  $(15.8) million and $(19.0) million,  or $(0.13),  $(0.14) and $(0.16)
basic and diluted per share in 1996, 1997 and 1998, respectively. The fair value
of the options and warrants  granted in 1996, 1997 and 1998 are estimated in the
range  of $0.48  to  $0.58,  $0.16 to  $4.07  and  $0.24  to  $0.81  per  share,
respectively,  on the date of grant using the Black-Scholes option-pricing model
utilizing the following  assumptions:  dividend  yield 0%,  volatility of 1.225,
1.289 and 1.307 in 1996, 1997 and 1998,  respectively,  risk free interest rates
in the range of 5.05% to 6.50%, 5.79% to 6.63% and 5.28% to 5.55% for 1996, 1997
and 1998, respectively,  and expected life of 3 years. The weighted average fair
value of options  granted during 1996,  1997 and 1998 are estimated in the range
of $0.49,  $0.13 to $0.58,  and $0.53 per  share,  respectively  also  using the
Black-Scholes option-pricing model.

Stock Options:

   The  Company's  1987 Stock  Option Plan (the "1987  Plan")  provides  for the
granting of up to  4,000,000  shares of common stock as either  incentive  stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options,  are
full-time employees  (including  officers and directors) of the Company;  or, in
the case of nonstatutory stock options, are employees or non-employee  directors
of the Company.  The exercise  price of all  incentive  stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable  over a ten-year  period.  The exercise price and duration of
the  nonstatutory  stock options are to be determined by the Board of Directors.
Options  granted under the 1987 Plan  generally  vest 20% upon grant and 20% per
annum thereafter as determined by the Board of Directors.                       
                                                                                
                                                                                
                                                                                
<PAGE>                                                                          
                                                                                
                                                                                
   Information with respect to 1987 Plan activity is summarized as follows:     
<TABLE>                                                                       
<CAPTION>                                                                                                               
                                                                                                                        
                                    Years Ended December 31,                                                            
                       ------------------------------------------------------------------                               
                               1996                  1997                     1998                                      
                       ------------------------------------------------------------------                               
                                   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      1,540,000    $0.56     1,500,000    $0.54      1,350,000  $0.51                                  
Options granted                -        -     1,350,000    $0.51              -      -                                  
Options exercised              -        -             -        -              -      -                                  
Options canceled,                                                                                                       
expired or forfeited     (40,000)   $1.31    (1,500,000)   $0.54              -      -                                  
                       ----------            -----------             ----------                                         
Outstanding at end of                                                                                                   
year                   1,500,000    $0.54     1,350,000    $0.51      1,350,000  $0.51                                  
                       ==========            ===========              =========                                         
Options exercisable                                                                                                     
at year-end            1,500,000    $0.54     1,350,000    $0.51      1,350,000  $0.51                                  
                       ==========            ===========              =========                                         
</TABLE>                                                                      
                                                                               
   As of December  31,  1998,  options for the  purchase of 217,821  shares were
available for future grant under the 1987 Plan.                                 
                                                                                
   The  Company's  non-plan  options  are  granted  from  time  to  time  at the
discretion of the Board of Directors. The exercise price of all non-plan options
generally  must be at least equal to the fair market value of such shares on the
date of grant and  generally are  exercisable  over a five to ten year period as
determined by the Board of Directors.  Vesting of non-plan  options  varies from
(i) fully vested at the date of grant to (ii)  multiple  year  apportionment  of
vesting as determined by the Board of Directors.                                
                                                                                
   Information  with respect to non-plan stock option  activity is summarized as
follows:                                                                        
<TABLE>                                                                         
<CAPTION>                                                                                                               
                                                                                                                        
                                       Years Ended December 31,                                                         
                       ---------------------------------------------------------------                                  
                             1996                  1997                  1998                                           
                       ---------------------------------------------------------------                                  
                                  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       403,116   $1.04        372,449  $1.08      4,319,449  $0.36                                     
Options granted               -       -      7,844,449  $0.41              -      -                                     
Options exercised       (26,667)  $0.50              -      -              -      -                                     
Options canceled,                                                                                                       
expired or forfeited     (4,000)  $1.33     (3,897,449) $0.53              -      -                                     
                        -------              ---------            ---------                                             
Outstanding at end of                                                                                                   
year                    372,449   $1.08      4,319,449  $0.36     4,319,449   $0.36                                     
                        =======              =========            =========                                             
                                                                                                                        
Options exercisable                                                                                                     
at year-end             370,449   $1.07      4,319,449  $0.36     4,319,449   $0.36                                     
                        =======              =========            =========                                             
</TABLE>                                                                        
                                                                                
   On October 6, 1992,  the Company  adopted a stock option plan as amended, the
1992 Plan, for the granting of options to purchase up to 10,000,000  shares of  
common stock to officers,  employees, certain consultants and certain directors.
The  exercise  price of all 1992 Plan options must be at least equal to the fair
market  value of such shares on the date of the grant and 1992 Plan  options are
generally  exercisable over a five to ten year period as determined by the Board
of Directors.  Vesting of 1992 Plan options  varies from (i) fully vested at the
date of grant to (ii)  multiple year  apportionment  of vesting as determined by
the Board of  Directors.  On October  20,  1998,  the  stockholders  approved an
amendment  to the 1992  Plan to increase  the  aggregate  number of shares of   
common stock  reserved for grants of  restricted  stock and grants of options to
purchase  shares of common stock to  30,000,000  shares.  The 1992 Plan was also
amended to  eliminate  the  automatic  grant of 75,000  shares of the  Company's
common stock upon a new  director's  initial  election to the Board of Directors
and to eliminate  the automatic  grant of 5,000 shares of the  Company's  common
stock to each  non-employee  director  for services as a director of the Company
for each subsequent election.                                                   
                                                                                
   Information with respect to 1992 Plan activity is summarized as follows:     
<TABLE>                                                                         
<CAPTION>                                                                       
                                                                                
                                           Years Ended December 31,             
                       -------------------------------------------------------------------                              
                                1996                  1997                    1998                                      
                       --------------------------------------------------------------------                             
                                    Weighted               Weighted               Weighted                              
                                    Average                Average                Average                               
                                    Exercise               Exercise               Exercise                              
                           Shares   Price        Shares    Price        Shares    Price                                 
                       --------------------------------------------------------------------                             
<S>                    <C>          <C>        <C>         <C>      <C>           <C>                                   
Outstanding at                                                                                                          
beginning of year      4,004,248    $1.00      6,022,765   $0.86     9,029,936    $0.72                                 
Options granted        2,156,500    $0.67      4,652,222   $0.55    21,989,000    $0.69                           
Options exercised       (33,533)    $0.75     (1,141,795)  $0.64        (1,561)   $0.27                           
Options canceled,                                                                                                 
expired or forfeited   (104,450)    $1.37       (503,256)  $0.99   (11,185,554)   $1.03                           
                      ---------                ---------            ----------                                    
Outstanding at end of                                                                                             
year                  6,022,765     $0.86      9,029,936   $0.72    19,831,821    $0.52                           
                      =========                =========            ==========                                    
                                                                                                                  
Options exercisable                                                                                               
at year-end           5,835,265     $0.86      6,592,436   $0.73    12,053,571    $0.60                           
                      =========                =========            ==========                                    
</TABLE>                                                                        
                                                                                
   As of December  31, 1998,  options for the purchase of 8,515,776  shares were
available  for future  grants of  restricted  stock  awards  and for  options to
purchase common stock under the 1992 Plan.                                      
                                                                                
   On November 15, 1994, the Board of Directors  adopted the 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.  Options  granted  under the
Directors Plan are fully vested at the grant date.                              
                                                                                
   Information with respect to Directors Plan activity is summarized as follows:
<TABLE>                                                                         
<CAPTION>                                                                       
                                                                                
                                         Years Ended December 31,               
                       -------------------------------------------------------------------                        
                               1996                 1997                    1998                                  
                       -------------------------------------------------------------------                        
                                   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        821,000   $0.73      746,000   $0.73        746,000     $0.73                            
Options granted                -       -            -       -              -         -                            
Options exercised              -       -            -       -              -         -                            
Options canceled,                                                                                                 
expired or forfeited     (75,000)  $0.75            -       -              -         -                            
                        --------              -------                -------                                      
Outstanding at end of                                                                                             
year                     746,000   $0.73      746,000   $0.73        746,000     $0.73                            
                        ========              =======                =======                                      
Options exercisable                                                                                               
at year-end              746,000   $0.73      746,000   $0.73        746,000     $0.73                            
                        ========              =======                =======                                      
</TABLE>                                                                        
                                                                                
   As of December 31, 1998, there were 75,000 options for the purchase of shares
available for future grants under the Directors Plan.                           
                                                                                
                                                                                
                                                                                
<PAGE>                                                                          
                                                                                
                                                                                
   The following  information  summarizes  information about the Company's stock
options outstanding at December 31, 1998:                                       
<TABLE>                                                                         
<CAPTION>                                                                       
                                                                                
                                                                                
                                                 Options Outstanding               Options Exercisable            
                                        ------------------------------------     -----------------------          
                                                         Weighted                                                 
                                                         Average                                                  
                                                         Remaining    Weighted                   Weighted         
                                                         Contractual  Average                    Average          
                    Range of              Number         Life         Exercise     Number        Exercise         
      Plan          Exercise Price        Outstanding    (In Years)   Price        Exercisable   Price            
----------------    --------------        -----------    -----------  --------     -----------   --------         
                                                                                                                  
<S>                 <C>      <C>           <C>              <C>         <C>         <C>           <C>             
1987 Plan           $0.50 to $0.63         1,350,000        0.18        $0.51       1,350,000     $0.51           
Non-Plan            $0.27 to $5.09         4,319,449        3.14        $0.36       4,319,449     $0.36           
1992 Plan           $0.22 to $4.00        19,831,821        6.83        $0.52      12,053,571     $0.60           
Director's Plan     $0.66 to $0.75           746,000        0.88        $0.73         746,000     $0.73           
                                                                                                                  
</TABLE>                                                                        
                                                                                
Warrants:                                                                       
                                                                                
   The Company's warrants are granted from time to time at the discretion of the
Board of  Directors.  The exercise  price of all warrants  generally  must be at
least  equal  to the fair  market  value of such  shares  on the date of  grant.
Warrants are generally  exercisable over a five to ten year period as determined
by the Board of Directors. Warrants generally vest on the grant date.           
                                                                                
   Information with respect to warrant activity is summarized as follows:       
<TABLE>                                                                         
<CAPTION>                                                                       
                                                                                
                                               Years Ended December 31,         
                      ------------------------------------------------------------------------                    
                                  1996                    1997                   1998                             
                      ------------------------------------------------------------------------                    
                                      Weighted                Weighted               Weighted                     
                                      Average                 Average                Average                      
                                      Exercise                Exercise               Exercise                     
                          Shares      Price       Shares      Price       Shares     Price                        
                      ------------------------------------------------------------------------                    
<S>                     <C>           <C>       <C>           <C>       <C>          <C>                          
Outstanding at                                                                                                    
beginning of year       4,032,541     $0.71     3,888,539     $0.72     3,146,920    $0.81                        
Warrants granted                -         -     2,846,923     $0.76     1,588,164    $0.92                        
Warrants exercised       (144,002)    $0.45      (854,119)    $0.41             -        -                        
Warrants canceled,                                                                                                
expired or forfeited            -         -    (2,734,423)    $0.75      (362,400)   $1.16                        
                        ---------               ---------               ---------                                 
Outstanding at end                                                                                                
of year                 3,888,539     $0.72     3,146,920     $0.81     4,372,684    $0.82                        
                        =========               =========               =========                                 
                                                                                                                  
Warrants exercisable                                                                                              
at year-end             3,888,539     $0.72     3,146,920     $0.81     4,172,684    $0.86                        
                        =========               =========               =========                                               
</TABLE>                                                                        
                                                                                
   The following  table  summarizes  information  about warrants  outstanding at
December 31, 1998:                                                              
                                                                                
<TABLE>                                                                         
<CAPTION>                                                                       
                                                                                
                                                                                
                                                                                
                              Warrants Outstanding                Warrants Exercisable                            
                    ----------------------------------------    ------------------------                          
                                      Weighted                                                                    
                                      Average                                                                     
                                      Remaining     Weighted                    Weighted                          
                                      Contractual   Average                     Average                           
Range of            Number            Life          Exercise    Number          Exercise                          
Exercise Price      Outstanding       (In Years)    Price       Exercisable     Price                             
--------------      -----------       -----------   --------    -----------     --------                          
<S>      <C>         <C>                 <C>         <C>         <C>             <C>                              
$0.50 to $4.00       4,372,684           2.02        $0.82       4,172,684       $0.86                            
</TABLE>                                                                        
                                                                                
<PAGE>                                                                          
                                                                                

10.  Related Parties:

   Environmental Research Information, Inc.

   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, 1998,
the  Company  was not  required  to make any such  payments  to ERI under  these
agreements.

   Quiet Power Systems, Inc.

   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.

   For the years  ended  December  31,  1996,  1997 and 1998 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, 1997 and 1998 no
payments were required to be made 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
including 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 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  December  31,  1998,  QSI owes the  Company  $239,000,  which is fully
reserved, for the exclusivity fee, rent and engineering services.


<PAGE>

   Other Parties

   The President and Chief Executive  Officer,  who is also a stockholder of the
Company,  receives an  incentive  bonus equal to 1% of the cash  received by the
Company  upon the  execution of  agreements  or other  documentation  evidencing
transactions with unaffiliated parties. For the year ended December 31, 1997 and
1998,  approximately  $243,000 and $206,000 was incurred in connection with this
arrangement.

   During 1996, 1997 and 1998, the Company purchased $0.6 million,  $0.7 million
and $0.2 million, respectively, of products from its various manufacturing joint
venture entities.


11.  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,  1998,   the  Company  had  available  net  operating  loss
carryforwards of approximately $85.8 million and research and development credit
carryforwards  of $1.6 million for federal  income tax purposes  which expire as
follows:

                              (in thousands of dollars)
                                              Research and
                           Net Operating      Development
                Year          Losses            Credits
                          ----------------   ---------------
                1999                $ 151              $  --
                2000                  129                 --
                2001                  787                 --
                2002                2,119                 --
                2003                1,974                 --
                2004                1,620                 --
                2005                3,870                141
                2006                1,823                192
                2007                6,866                118
                2008               13,456                321
                2009               16,293                413
                2010                9,415                 61
                2011                9,051                 67
                2012                4,902 (1)            267
                2018               13,314 (2)
                          ----------------   ----------------
               Total              $85,770             $1,580
                          ================   ================

(1)  Includes  approximately  $1.2 million net  operating  loss  relating to NCT
     Audio Products,  Inc. 

(2)  Includes  approximately  $4.4 million net  operating  loss  relating to NCT
     Audio Products, Inc.

   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 $3.3 million, $3.0 million and $1.4 million in 1996, 1997
and 1998, respectively.



<PAGE>


   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, 1997 and 1998 were as follows:

                                         (in thousands of dollars)
                                        -------------------------
                                          1997          1998
                                        ---------     ----------
   Accounts receivable                  $    207      $     157
   Inventory                                 191            173
   Property and equipment                     68             68
   Accrued expenses                           69             65
   Stock compensation                      2,698          2,711
   Other                                     299            349
                                        ---------     ----------
      Total temporary differences       $  3,532      $   3,523
   Federal net operating losses           26,149         27,258
   Federal research and development                    
   credits                                 1,313          1,580
                                        ---------     ----------
                                        $ 30,994      $  32,361
   Less: Valuation allowance             (30,994)       (32,361)
                                        ---------     ----------
      Deferred taxes                    $      -              -
                                        =========     ==========


12.  Litigation:

   On or about June 15, 1995,  Guido  Valerio  filed suit against the Company in
the  Tribunale di Milano,  Milano,  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;  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 any case for no less than 500  million  Lira.  The
Company has retained the Italian law firm Verusio e Cosmelli,  Giovanni Verusio,
Esq., a member of that 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.  Submission 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. At the hearing
on May 19, 1998, the Discovery Judge established dates for the parties to submit
final  pleadings  and set September 22, 1998 as the date to send the case before
the Tribunal of Milan  sitting in full bench.  As of the date hereof the Company
has not been  informed  of any  decision  of the  Tribunal.  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.

   By a letter dated September 9, 1997,  outside  counsel to Andrea  Electronics
Corporation ("AECorp.") notified the Company that AECorp. believed the Company's
use of the term "ANR READY"  constituted the use of a trademark owned by AECorp.
The  Company  has also been  informed  by  representatives  of  existing  and/or
potential  customers  that AECorp.  has made  statements  claiming the Company's
manufacture and/or sale of certain in-flight  entertainment  system products may
infringe a patent owned by AECorp.  On March 25, 1998, the Company received from
AECorp.'s   intellectual  property  counsel  a  letter  dated  March  24,  1998,
announcing  and  notifying  the Company of the  issuance of U.S.  patent  Number
5,732,143  to AECorp.  and  enclosing a copy of the patent.  The subject  letter
appears to be one of notice and  information  and did not  contain  any claim of
infringement.  Following  that date,  additional  correspondence  was  exchanged
between Company Counsel and counsel to AECorp. The Company again was informed by
representatives  of  existing,  and/or  potential  customers  that  AECorp.  was
continuing to make statements  inferring that the Company's  manufacture  and/or
sale of certain  in-flight  entertainment  system products may infringe  patents
owned by  AECorp.  On  October  9, 1998 the Board of  Directors  of the  Company
authorized the commencement of litigation  against AECorp.  On November 17, 1998
the Company and NCT Hearing  filed a  complaint  in the United  States  District
Court,  Eastern  District of New York  against  Andrea  Electronics  Corporation
("AECorp.")  requesting that the Court enter judgment in their favor as follows:
(i) declare  that the two  subject  AECorp.  patents and all claims  thereof are
invalid and  unenforceable  and that the Company's  products do not infringe any
valid  claim of the  subject  AECorp.  patents;  (ii)  declare  that the subject
AECorp.  patents are unenforceable  due to their misuse by AECorp.;  (iii) award
compensatory  damages in an amount of not less than  $5,000,000 as determined at
trial and punitive  damages of $50,000,000 for AECorp.'s  tortious  interference
with prospective contractual advantages of the Company; (iv) enjoin AECorp. from
stating in any manner that the Company's  products,  or the use of the Company's
products  infringe on any claims of the subject AECorp.  patents;  and (v) award
such other and further relief as the Court may deem just and proper. On or about
December  30,  1998,  AECorp.  filed its Answer and  Counterclaims  against  the
Company and NCT Hearing. In its answer,  AECorp.  generally denies the Company's
and NCT Hearing's  allegations,  asserts certain procedural affirmative defenses
and brings  counterclaims  against the Company and NCT Hearing alleging that the
Company has: (i) infringed the two subject  AECorp.  patents and AECorp.'s  "ANR
Ready"  mark;  (ii)  violated the Lanham Act through the  Company's  use of such
mark; and (iii) unfairly competed with AECorp.  through the use of such mark. On
or  about  January  26,  1999,  the  Company  and NCT  Hearing  filed a Reply to
AECorp.'s  counterclaims  generally denying AECorp.'s  counterclaims,  asserting
certain affirmative defenses to AECorp.'s counterclaims and requesting that: (i)
the  counterclaims  be dismissed with  prejudice;  (ii) the Court enter judgment
that the term "ANR  Ready"  is not a valid  trademark;  (iii)  the  Court  enter
judgment that the Company and NCT Hearing have not infringed any trademark right
of AECorp.;  (iv) the Court enter judgment that the Company and NCT Hearing have
not  engaged  in any form of  federal  or state  statutory  or common law unfair
competition;  (v) the Court  enter  judgment  that  AECorp.  is  precluded  from
recovery of any claim of right to the term "ANR Ready" by the equitable doctrine
of  estoppel;  (vi) the Court enter  judgment  that AECorp.  is  precluded  from
recoving any damages from the Company and NCT Hearing by the equitable  doctrine
of laches;  (vii) the Court award the  Company  and NCT Hearing  their costs and
reasonable  attorneys'  fees; and (viii) the Court enter  judgment  granting the
relief  requested in the Company's  and NCT Hearing's  complaint as well as such
other and further  relief as the Court deems just and proper.  In the opinion of
management,  after  consultation  with outside counsel,  resolution of this suit
should not have a material adverse effect on the Company's financial position or
operations.  However, in the event that the lawsuit does result in a substantial
final judgment  against the Company,  said judgment could have a material effect
on quarterly or annual operating results.

   On September 16, 1997, Ally Capital  Corporation  ("Ally") filed suit against
the Company, John J. McCloy, II, Michael J. Parrella,  Jay M. Haft, and Alastair
J. Keith in the United  States  District  Court for the District of  Connecticut
(the "District Court"). Mr. McCloy is a Director of the Company. Mr. Parrella is
the President and Chief  Executive  Officer of the Company as well as a Director
of the Company.  Mr. Haft is a Director of the Company and Chairman of the Board
of  Directors.  Mr. Keith is a former  Director of the Company.  The summons and
complaint  in this suit were  served on the Company on January  16,  1998.  Ally
purports to be a creditor of ANVT. On September 14, 1994,  the Company  acquired
certain assets of ANVT.  Specifically,  the Company acquired ANVT's patented and
unpatented  intellectual  property,  the rights and obligations  under a defined
list of  agreements  between  ANVT and other  parties  relating  to  existing or
potential joint ventures licensing agreements and other business  relationships,
and certain items of office and  laboratory  equipment.  For these  assets,  the
Company paid ANVT two hundred thousand dollars ($200,000.00) and issued ANVT two
million  (2,000,000)  shares  of the  Company's  common  stock.  Count  1 of the
complaint  alleges  misrepresentation  and deceit with respect to matters  which
allegedly  were  relevant  to the ANVT  transaction.  Count 2 alleges  negligent
misrepresentation  with  respect to the same facts.  Count 3 alleges  unfair and
deceptive  trade  practices  in  violation  of  Connecticut   General   Statutes
ss.42-110a et sec. consisting of the actions described in Counts 1 and 2. In the
complaint,  Ally requests  actual and punitive  damages  together with costs and
attorneys  fees under Count 1; actual  damages  together with costs and attorney
fees with respect to Count 2; and, actual damages,  treble damages and costs and
attorney  fees with respect to Count 3. Ally also  requests  such other  further
relief  as may be just.  It is not  certain  from  the  complaint  what  Ally is
claiming as actual damages;  although, Ally does state that its deficiency claim
against  ANVT as of August,  1994,  was  approximately  six  hundred  twenty-one
thousand  dollars  ($621,000.00)  and that  under  the  terms of the  settlement
agreement between Ally and ANVT, Ally is entitled to receive up to an additional
six hundred three thousand  eight hundred  ninety-one  dollars and  ninety-seven
cents  ($603,891.97)  from certain  earn-out  payments  under the asset purchase
agreement  between  ANVT  and  the  Company.  It is  not  clear  whether  Ally's
deficiency  claim against ANVT was  calculated as being in addition to the value
of the common stock of the Company which Ally received. The Company, through its
special litigation  counsel,  obtained an extension of the time in which it must
answer the  complaint to March 4, 1998. On March 4, 1998,  the Company,  through
such  counsel,  filed with the District  Court a motion to dismiss the complaint
or, in the alternative, to join necessary parties. On March 16, 1998, Ally filed
a notice of voluntary dismissal as to the individual defendants,  Messrs McCloy,
Parrella,  Haft and Keith.  On March 25, 1998,  Ally filed its opposition to the
Company's motion to dismiss. On July 15, 1998 the Company paid plaintiff,  Ally,
twenty-five  thousand  ($25,000)  dollars  in  settlement  of the suit which was
dismissed on behalf of all  defendants  with prejudice and without costs on July
16, 1998.

   On June 10, 1998,  Schwebel  Capital  Investments,  Inc.  ("SCI")  filed suit
against the Company and Michael J. Parrella,  President, Chief Executive Officer
and a Director of the Company,  in the Circuit  Court for Anne  Arundel  County,
Maryland.  The summons and  complaint  alleges  the  Company  breached,  and Mr.
Parrella  interfered  with, a purported  contract entered into "in 1996" between
the Company and SCI under  which SCI was to be paid  commissions  by the Company
when the Company  received  capital from  investors who purchased  debentures or
convertible preferred stock of the Company during a period presumably commencing
on the date of the alleged  contract and allegedly  extending at least to May 1,
1998. In this regard,  the  complaint  alleges that SCI by virtue of a purported
right  of  first  refusal  that  the  Company  did not  honor,  is  entitled  to
commissions  totaling  $1,500,000  in  connection  with  the  Company's  sale of
$13,300,000  of  preferred  stock  and a  subsidiary  of the  Company's  sale of
$4,000,000 of stock convertible into stock of the Company.  In the complaint SCI
demands  judgment  against the Company for  compensatory  damages of $1,673,000,
punitive  damages of $50,000 and attorneys' fees of $50,000 and demands judgment
against Mr. Parrella for compensatory  damages of $150,000,  punitive damages of
$500,000 and attorneys' fees of $50,000 as well as unspecified other appropriate
relief.  On July 23, 1998 the Company and Mr.  Parrella filed a motion to strike
the complaint or in the alternative,  to dismiss the tortious  interference with
contract  claim and the  punitive  damages  claim.  On or about  August 26, 1998
plaintiffs  filed an amended  complaint  and a response to the Company's and Mr.
Parrella's  motion to strike. On September 15, 1998 the Company and Mr. Parrella
filed a motion to strike the amended  complaint.  On or about September 25, 1998
the Company and Mr.  Parrella  served the plaintiff with their first request for
the  production  of  documents.  On November  12,  1998,  the Court  granted the
Company's and Mr.  Parrella's  motion to dismiss the tortious  interference with
contracts  claim and the punitive  damages claim. On or about November 25, 1998,
SCI filed a second amended complaint, which abandoned the punitive damages claim
and the  claim  against  Mr.  Parrella.  In the  opinion  of  management,  after
consultation  with outside  counsel,  resolution  of this suit should not have a
material  adverse  effect on the  Company's  financial  position or  operations.
However,  in the event  that the  lawsuit  does  result in a  substantial  final
judgment  against the Company,  said  judgment  could have a material  effect on
quarterly or annual operating results.

   On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott & Co.,
Inc.  ("AWC")  and the Company in the United  States  District  Court,  Southern
District of New York. In the complaint,  Mellon demands judgment against AWC and
the  Company in the amount of  $326,000 by reason of its having paid each of AWC
and the Company such sum when acting as escrow agent for the  Company's  private
placement of securities with certain  institutional  investors identified to the
Company by AWC. On or about July 27, 1998 AWC filed its Answer, Counterclaim and
Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against AWC;
(ii)  commissions  in the amount of  $688,000  to be paid by the Company to AWC;
(iii) issuance to AWC of 784,905 shares of the Company's common stock registered
for resale under the Securities Act of 1933, as amended; (iv) a declaration that
AWC is entitled to retain the $326,000  sought by Mellon;  and (v) delivery of a
warrant to  purchase  461.13  shares of common  stock of NCT Audio.  On or about
August 20, 1998 the Company filed its reply to AWC's cross-claims.  Discovery is
currently  taking  place in this  action.  In the opinion of  management,  after
consultation  with outside  counsel,  resolution  of this suit should not have a
material  adverse  effect on the  Company's  financial  position or  operations.
However,  in the event  that the  lawsuit  does  result in a  substantial  final
judgment  against the Company,  said  judgment  could have a material  effect on
quarterly operating results.

   On December 15, 1998,  Balmore Funds,  S.A. and Austost  Anstalt Schaan filed
suit  against  the  Company's  subsidiary,  NCT Audio , and the  Company  in the
Supreme Court of the State of New York County of New York. The complaint alleges
an action for breach of contract, common law fraud, negligent misrepresentation,
deceptive trade  practices under Section 349 of the General  Business Law of the
State of New York,  and money had and  received,  all arising out of NCT Audio's
and the  Company's  alleged  unlawful  conduct in  connection  with an agreement
entered into with plaintiffs for the sale of shares of common stock of NCT Audio
to the plaintiffs in a private  placement in December 1997. In this regard,  the
complaint  alleges  that:  (i) NCT Audio  breached  an  alleged  agreement  with
plaintiffs  to  register  shares  of  NCT  Audio's  common  stock  purchased  by
plaintiffs  or,  in the  alternative,  shares  of  the  Company's  common  stock
exchangeable  for  such  shares  of  NCT  Audio's  common  stock  under  certain
circumstances and to pay penalties set forth in the alleged agreement; (ii) that
NCT Audio made representations that were materially false and misleading through
its facsimiles of  non-negotiated  agreements as  substitutions  for the alleged
contract  between  the  parties;  (iii)  that NCT  Audio and the  Company  acted
negligently  and violated  duties of full,  fair and complete  disclosure to the
plaintiffs;  (iv) that NCT Audio and the  Company  engaged  in  deceptive  trade
practices  under Section 349 of the New York General  Business Law; and (v) that
as a result thereof,  NCT Audio and the Company possess money that in equity and
good conscience  should not to be retained by NCT Audio and the Company.  In the
complaint the plaintiffs demand judgment against NCT Audio and the Company:  (i)
for damages in an amount to be determined but not less than $1,819,000; (ii) for
punitive damages in the amount of $3,000,000;  (iii) requiring NCT Audio and the
Company  to  register  the  shares  of  common  stock of NCT  Audio  held by the
plaintiffs;  (iv)  alternatively,  rescission  with the  return  of  plaintiffs'
$1,000,000 plus interest; (v) for treble damages, reasonable attorney's fees and
costs pursuant to Section 349 and 350 of the New York General  Business Law; and
(vi) such other and  further  relief as the Court may deem just and  proper.  On
January 14, 1999,  NCT Audio and the Company  filed  removal  papers to move the
suit to the United States  District Court for the Southern  District of New York
and on  January  22,  1999,  NCT Audio and the  Company  filed  with that  Court
Defendants'  Answer,   Affirmative   Defenses,   Counterclaims  and  Third-Party
Complaint.  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.

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


13.  Commitments and Contingencies:

   The Company is obligated for minimum annual rentals (net of sublease  income)
under  operating  leases for  offices,  warehouse  space and  laboratory  space,
expiring through April 2007 with various renewal options, as follows:


                                          (in thousands
                                           of dollars)
                -----------------------  ----------------
                     Year Ending
                     December 31,            Amount
                -----------------------  ----------------
                         1999                $  679
                         2000                   669
                         2001                   523
                         2002                    63
                         2003                    63
                      Thereafter                203
                                         ================
                        Total                $2,200
                                         ================

   Rent expense (net of sublease income) was $0.6 million, $0.4 million and $0.6
million for each of the three  years ended  December  31,  1996,  1997 and 1998,
respectively.

   In April,  1996,  the Company  established  the Noise  Cancellation  Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage,  certain
health care benefits to employees  and directors of the Company's  United States
operations.  The Company  administers  this modified  self-insured  Benefit Plan
through a  commercial  third  party  administrative  health care  provider.  The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million while combined individual and family benefit exposure in
each Benefit Plan fiscal year is limited to $35,000. Benefit claims in excess of
the above mentioned individual or the maximum aggregate stop loss are covered by
a commercial third party insurance  provider to which the Company pays a nominal
premium for the subject stop loss coverage.  The Company  records  benefit claim
expense in the period in which the benefit  claim is  incurred.  As of March 11,
1999, the Company was not aware of any material benefit claim liability.

   On September 16, 1994, the Company  acquired the patents,  technology,  other
intellectual  property and certain related tangible assets of ANVT. 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.  As of the period ended December 31,
1998, no such contingent earn-out or payments were due ANVT.

   As of December 31, 1998,  the Company is obligated  under various  agreements
for minimum royalty payments as follows: $295,000,  $335,000, $220,000, $240,000
and $60,000 for 1999, 2000, 2001, 2002 and each year thereafter.

   In  connection  with the  acquisition  of Advancel  the Company  entered into
employment agreements with four employees.  The Company is obligated under these
agreements for $471,500 per annum through 2002.




<PAGE>
14.  Business Segment Information:                                              
<TABLE>                                                                         
<CAPTION>                                                                                                                          
                                                                                                                                   
                                                                (in thousands of dollars)                                          
                                                                                    Advancel      Total                 Grand      
                               Audio     Hearing   Communications    Europe         Logic Corp    Segments  Other       Total      
                               -------   -------   --------------    ----------     ----------   ---------  -------     ---------- 
1998                                                                                                                               
<S>                            <C>       <C>       <C>               <C>            <C>          <C>        <C>         <C>        
Net Sales - External           $   383   $ 1,191   $   780           $       28     $     69     $   2,451  $    71     $   2,522  
Net Sales - Other                                                                                                                  
 Operating Segments                  2        23         6                1,113            -         1,144   (1,144)            -  
License Fees and royalties         350        86        18                    -          200           654      148           802  
Interest Income                    110         -         -                   15            -           125      313           438  
Depreciation/Amortization            5         -         -                   38            8            51      979         1,030  
Operating Income (Loss)         (4,359)   (3,697)   (4,326)                 (12)        (658)      (13,052)  (1,131)      (14,183) 
Segment Assets                   6,752     2,449       301                  218          922        10,642    4,823        15,465  
Capital Expenditures                33         8        21                  102           34           198      350           548  
                                                                                                                                   
1997                                                                                                                               
Net Sales - External           $     4   $ 1,709   $   127           $       67     $      -     $   1,907  $   181     $   2,088  
Net Sales - Other                                                                                                                  
 Operating Segments                  -         -         -                  847            -           847     (847)            -  
License Fees                     3,000         -       345                    -            -         3,345      285         3,630  
Interest Income                      -         -         -                   18            -            18       99           117  
Depreciation/Amortization            -         -         -                   44            -            44      855           899  
Operating Income (Loss)            785    (3,618)   (2,582)                (411)           -        (5,826)  (4,022)       (9,848) 
Segment Assets                   2,333     1,227       397                  301            -         4,258   13,103        17,361  
Capital Expenditures                12         5        13                   26            -            56      188           244  
                                                                                                                                   
1996                                                                                                                               
Net Sales - External           $    42   $ 1,333   $    27           $      407     $      -     $   1,809   $  117     $   1,926  
Net Sales - Other                                                                                                                  
 Operating Segments                  -         -         -                  355            -           355     (355)            -  
License Fees                         -         2         -                    -            -             -    1,236         1,238  
Interest Income                      -         -         -                    -            -             -       28            28  
Depreciation/Amortization            -         -         -                   63            -            63      937         1,000  
Operating Income (Loss)         (1,451)   (2,492)   (2,266)                (912)           -        (7,121)  (3,704)      (10,825) 
Segment Assets                       -     1,781       108                  515            -         2,404    3,477         5,881  
Capital Expenditures                15        13         2                   71            -           101       85           186  
</TABLE>                                                                        


   Audio:

   NCT Audio is engaged in the design,  development,  and  marketing of products
which utilizes  innovative FPT technology.  The products  available by NCT Audio
are the Gekko(TM) flat speaker and ArtGekko(TM)  printed grille collection.  The
Gekko(TM)  flat  speaker is marketed  primarily to the home audio  market,  with
potential in many other markets including the professional audio systems market,
the automotive audio aftermarket,  the aircraft industry,  other  transportation
markets,  as well as the  multimedia  markets.  The principal  customers are end
users,  automotive  OEM's  and  manufacturers  of  integrated  cabin  management
systems.

   Hearing:

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

   Communications:

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


<PAGE>

   Europe:

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

   Advancel Logic Corp.:

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



<PAGE>


   Other:

   The Net Sales - Other Operating  Segments  primarily consists of intercompany
sales and  eliminated in  consolidation.  Segment assets  consists  primarily of
corporate assets.
Operating Loss primarily includes corporate charges.


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


                            (in thousands of dollars)
                                  December 31,
                              ----------------------------------------
                                   1996          1997          1998
                              ------------  ------------  ------------
     Revenues
        United States              $2,674        $2,089        $3,209
        Europe                        480         3,270            71
        Far East                       10           359            44
                              ------------  ------------  ------------
             Total                 $3,164        $5,718        $3,324
                              ============  ============  ============
     Net (Income) Loss
        United States              $9,752        $9,211       $13,728
        Europe                        912           411            12
        Far East                      161           226           443
                              ------------  ------------  ------------
           Total                  $10,825        $9,848       $14,183
                              ============  ============  ============
     Identifiable Assets
         United States             $5,366       $17,060       $15,166
         Europe                       515           301           218
         Far East                       -             -            81
                              ------------  ------------  ------------
             Total                 $5,881       $17,361       $15,465
                              ============  ============  ============


16.  Subsequent Events:

   On January 26,  1999,  Carole  Salkind,  spouse of a former  director  and an
accredited  investor (the "Holder"),  subscribed and agreed to purchase  secured
convertible  notes of the  Company  in an  aggregate  principal  amount  of $4.0
million. A secured convertible note (the "Note"), for $1.0 million was signed on
January 26, 1999, and proceeds were received on January 28, 1999. The Note is to
mature on January 25, 2001 and earn interest at the prime rate as published from
day to day in the Wall Street Journal from the issue date until the Note becomes
due and payable.  The Holder shall have the right at any time on or prior to the
day the Note is paid in full, to convert at any time,  all or from time to time,
any part of the  outstanding  and unpaid amount of the Note, into fully paid and
non-assessable  shares of common stock of the Company at the  conversion  price.
The  conversion  price shall be the lesser of (i) the average of the closing bid
prices for the common stock on the  securities  market on which the common stock
is being  traded,  for five (5)  consecutive  trading  days prior to the date of
conversion or (ii) the fixed  conversion  price of $0.237.  In no event will the
conversion  price be less than $0.15 per share.  The Holder  shall  purchase the
remaining $3.0 million  principal amount of the secured  convertible notes on or
before June 30, 1999.

   On February 9, 1999 NCT Audio and NXT  expanded the Cross  License  Agreement
dated September 27, 1997 to increase NXT's fields of use to include  aftermarket
ground-based vehicles and aircraft sound systems and increased the royalties due
NCT Audio from NXT to 10% from 6% and  increased  the royalties due NXT from NCT
Audio to 7% from 6%. In consideration for granting NXT these expanded  licensing
rights, NCT Audio received a $0.5 million license fee. Also on February 9, 1999,
NCT Audio and NXT  amended  the Master  License  Agreement  to include a minimum
royalty payment of $160,000 in 1999, to be paid in equal quarterly installments.



<PAGE>


                                                                                


                               ARTHUR ANDERSEN LLP


                     REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Stockholders of Top Source Technologies, Inc.:

We have audited the accompanying  balance sheets of Top Source Automotive,  Inc.
(a Michigan  corporation)  as of September 30, 1998,  and 1997,  and the related
statements  of  operations  and cash  flows for each of the  three  years in the
period  ended   September  30,  1998.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  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 opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Top Source Automotive,  Inc. as
of September  30, 1998 and 1997 and the results of its  operations  and its cash
flows for each of the three  years in the period  ended  September  30,  1998 in
conformity with generally accepted accounting principles.


/s/ ARTHUR ANDERSEN LLP
West Palm Beach, Florida
January 7, 1999



<PAGE>



<TABLE>
<CAPTION>
                           TOP SOURCE AUTOMOTIVE, INC.

                                  BALANCE SHEETS
                        AS OF SEPTEMBER 30, 1998 and 1997
-------------------------------------------------------------------------------
ASSETS                                            1998               1997
                                              -----------        -----------
Current Assets:                                                        
<S>                                           <C>                <C>        
  Accounts receivable trade                   $ 1,599,456        $ 2,198,633
  Inventories                                     349,320            764,788
  Prepaid expenses                                 79,186             64,552
  Other                                            21,988             37,619
                                              -----------        -----------
Total current assets                            2,049,950          3,065,592
Property and equipment, net                       234,960            456,938
Manufacturing and distribution rights, net        147,876            157,013
                                              ===========        ===========
TOTAL ASSETS                                  $ 2,432,786        $ 3,679,543
                                              ===========        ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                            $   245,596        $   615,420
  Accrued liabilities                              42,044            261,969
                                              -----------        -----------
Total current liabilities                         287,640            877,389

Commitments and contingencies (Note 6 )

Stockholders' equity:
  Common stock-$.10 par value, 1,000 shares
authorized, issued and outstanding in 1998
and 1997, respectively                                100                100
  Additional paid-in capital                      394,821            394,821
  Retained earnings                             5,655,589          5,024,029
  Receivable from parent                       (3,905,364)        (2,616,796)
                                              ------------       ------------
Total stockholders' equity                      2,145,146          2,802,154
                                              ------------       ------------
                                             
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $ 2,432,786        $ 3,679,543
                                              ============       ============

The  accompanying  notes to financial  statements  are an integral part of these
balance sheets.
</TABLE>






<PAGE>



<TABLE>
<CAPTION>
                           TOP SOURCE AUTOMOTIVE, INC.


                             STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
------------------------------------------------------------------------------------------------
                                                   1998             1997             1996
                                              --------------------------------------------------
<S>                                           <C>               <C>              <C>        
Product sales                                 $ 10,815,205      $16,580,270      $16,102,523

Cost of product sales                            7,417,402       11,197,664       10,749,431
                                              --------------------------------------------------

Gross profit                                     3,397,803        5,382,606        5,353,092
                                              --------------------------------------------------

Expenses:
  General and administrative                       654,561          674,265          660,198
  Selling and marketing                            448,393          354,136          369,292
  Overhead allocation from parent                1,100,000        1,100,000        1,100,000
  Depreciation and amortization                     68,850           76,573           94,080
  Restructuring expense                             15,471           51,433                -
  Research and development                          38,871           35,038           35,689
                                              --------------------------------------------------
Total expenses                                   2,326,146        2,291,445        2,259,259
                                              --------------------------------------------------

Income from operations                           1,071,657        3,091,161        3,093,833

Other income (expense):
  Interest income                                      306            1,208            2,489
  Interest expense                                  (1,831)          (2,660)          (1,805)
  Other income (expense), net                      (24,244)          (4,143)          44,775
                                              --------------------------------------------------
Net other income (expense)                         (25,769)          (5,595)          45,459
                                              --------------------------------------------------
Income before income taxes                       1,045,888        3,085,566        3,139,292
Income tax expense                                (414,328)      (1,173,092)      (1,242,359)
                                              --------------------------------------------------
Net income                                    $    631,560     $  1,912,474     $  1,896,933
                                              ==================================================

The accompanying  notes to  financial  statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                           TOP SOURCE AUTOMOTIVE, INC.


                             STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
                                                 ---------------------------------------------
                                                      1998          1997           1996
                                                 ---------------------------------------------
OPERATING ACTIVITIES:   
<S>                                              <C>           <C>              <C>         
    Net income                                   $   631,560   $  1,912,474     $  1,896,933
    Adjustments to reconcile net income to
       net cash provided by operating 
       activities:
    Depreciation                                     278,175        323,444          339,783
    Amortization                                      47,055         45,413           44,737
    Loss on disposal of equipment                      6,188         33,788           23,722
    Decrease (increase) in accounts
      receivable, net                                599,177      1,271,344         (690,613)
    Decrease (increase) in inventories               415,468       (293,877)          (2,742)
    Decrease (increase) in prepaid expenses          (14,634)        69,983          (89,660)
    Decrease (increase) in other current                               
      assets                                          15,631         11,365          (23,821)
    Increase (decrease) in accounts payable         (369,824)      (620,777)         330,267
    Increase (decrease) in accrued 
      liabilities                                   (219,925)         6,748           47,881
                                                ----------------------------------------------
Net cash provided by operating activities          1,388,871      2,759,905        1,876,487
                                                ----------------------------------------------

INVESTING ACTIVITIES:
    Purchases of property and equipment, 
      net                                            (62,385)      (357,940)        (516,968)
    Reimbursement of tooling costs                         -         63,364          465,222
    Additions to manufacturing and
      distribution rights, net                       (37,918)        (2,706)         (14,787)
                                                -----------------------------------------------
Net cash used in investing activities               (100,303)      (297,282)         (66,533)
                                                -----------------------------------------------

FINANCING ACTIVITIES:
   Increase in receivable from Parent             (1,288,568)    (2,462,623)      (1,809,954)
                                                -----------------------------------------------
Net cash used in financing activities             (1,288,568)    (2,462,623)      (1,809,954)
                                                -----------------------------------------------
Net increase (decrease) in cash and cash
  equivalents                                   $          -     $        -     $          -
                                                ===============================================

The accompanying  notes to  financial  statements
are an integral part of these statements.
</TABLE>
<PAGE>


TOP SOURCE AUTOMOTIVE, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - Top Source  Automotive,  Inc. (the  "Company" or "TSA") is focused on
developing and assembling a patented automotive overhead mounted speaker system,
which is called the  Overhead  Speaker  System.  The  Company is a wholly  owned
subsidiary of Top Source Technologies, Inc. (the "Parent Company")

Revenue  Recognition  - Revenue is currently  derived from sales of the OHSS for
both production line and automotive dealership installed units.

Inventories  -  Inventories  are  stated at the lower of cost or market  and are
valued by the first-in, first-out (FIFO) method.

Fair  value of  Financial  Instruments  - The  carrying  amount of cash and cash
equivalents,  accounts  receivable,  accounts payable,  and accrued  liabilities
approximates fair value.

Property and Equipment - Property and equipment are stated at cost.  Repairs and
maintenance  costs  are  charged  to  expense  as  incurred.   Depreciation  and
amortization  are computed  using the  straight-line  method over the  estimated
useful  lives of the  assets,  or the lease term if  shorter.  When  property or
equipment is retired or otherwise disposed of, the cost less related accumulated
depreciation  is removed from the accounts and the resulting gains or losses are
included in other expense in the accompanying statements of operations.

Manufacturing  and Distribution  Rights and Patents - These assets are valued at
the lower of cost or net  realizable  value and are  being  amortized  using the
straight-line  method over the terms of the  agreements  or life of the patents,
ranging from ten to thirteen years.

Research and Development - The costs associated with research and development of
products and technologies are expensed as incurred.

Use of Estimates - The  preparation  of the  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  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.

2. STATEMENTS OF CASH FLOWS

There were no  significant  non-cash  investing or financing  activities for the
years ended September 30, 1998, 1997 and 1996.









<PAGE>


3. INVENTORIES

Inventories consisted of the following at September 30, 1998 and 1997:

                         1998           1997 

Raw materials          $247,538       $704,586
Finished goods          101,782         60,202
                       --------       --------
                       $349,320       $764,788
                       ========       ========

4. PROPERTY AND EQUIPMENT

Property  and  equipment  consisted of the  following at September  30, 1998 and
1997:

                                 Useful
                              Life (Years)            1998          1997
                              ------------       ------------  ------------

Equipment                        2-12            $   305,813   $   296,028
Computer equipment               3-4                 292,273       274,583
Tooling                          2                   276,446       242,360
Furniture and fixtures           3-5                 126,914       126,089
Vehicles and delivery equipment    3                  47,124        60,230
Leasehold improvements           2-5                 146,746       146,746
                                                 ------------  ------------
                                                   1,195,316     1,146,036
Less:  accumulated depreciation                     (960,356)     (689,098)
                                                 ------------  ------------
                                                 $   234,960   $   456,938
                                                 ============  ============

Depreciation of tooling and production  equipment incurred in manufacturing OHSS
in the amount of $256,380,  $292,284, and $290,440 for the years ended September
30, 1998, 1997, and 1996,  respectively,  has been allocated to cost of sales as
it directly relates to the products sold.

5. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS

Manufacturing and distribution  rights and patents consisted of the following at
September 30, 1998 and 1997:

                                     Useful
                                   Life (Years)       1998          1997
                                   ------------  ------------  ------------

Manufacturing rights                   13        $    58,438   $    58,438
Distribution rights                    13            437,501       437,501
 Patents                               10            111,223        73,305
                                                 ------------  ------------
                                                     607,162       569,244
Less: accumulated amortization                      (459,286)     (412,231)
                                                 $   147,876   $   157,013
                                                 ============  ============




<PAGE>




5. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS (continued)

OHSS  (Overhead Speaker System)
The Company has the exclusive  right to produce and sell Pelo Sound  products in
North,  Central and South America and a non-exclusive  right to produce and sell
the  products in all other areas of the world,  excluding  Europe.  The value of
these rights is being  amortized  over thirteen  years,  and has a remaining net
book value of $13,211 at September 30, 1998.

The Company has  distribution  rights acquired from B&R  International  Imports,
Corp.  related  to its  Overhead  Speaker  System.  The net book  value of these
rights,  which are being  amortized over thirteen years, is $51,864 at September
30, 1998. The Company also has patents on the OHSS relating to improvements  and
perfection's on the Overhead Speaker System. The value of these patents is being
amortized  over ten years  and has a  remaining  net book  value of  $82,801  at
September 30, 1998.

6. COMMITMENTS AND CONTINGENCIES

The Company leases office space under  noncancelable  operating  leases.  Future
minimum rental commitments under these leases are as follows:

      Fiscal Year Ending September 30:
      1999      $191,100
      2000       143,325

Total rental expense  amounted to $197,482,  $192,486 and $191,000 for the years
ended September 30, 1998, 1997, and 1996, respectively.

The Parent  Company  enacted a  Retirement  Salary  Savings Plan  (401(k))  (the
"Plan")  effective  October 1, 1993. All employees that were employed on October
1, 1993 were  eligible  to join the Plan.  Otherwise,  they will be  eligible to
participate in the Plan if they have completed  three months of service and have
attained the age of 21. The enrollment  dates are the first day of each quarter.
The Company will match 25% of each dollar contributed by an employee to the Plan
on the first 6% of the salary  deferral,  not to exceed 1 1/2% of the employee's
total salary eligible under the Plan. The cost the Company incurred for matching
employee  contributions and  administrative  costs during fiscal 1998, 1997, and
1996 was $9,282, $10,694, and $8,096, respectively.














<PAGE>




6. COMMITMENTS AND CONTINGENCIES (continued)

TSA is a co-borrower to the Parent Company's $5,000,000 credit facility ("Credit
Facility") with  NationsCredit  Commercial  Corporation  ("NationsCredit").  The
Credit  Facility,  which is  secured by  substantially  all of the assets of the
Company,  enables the Parent Company to borrow up to $5,000,000 based on certain
percentages of accounts receivable and inventory  balances.  The Credit Facility
allows  for  borrowing  up to 85% of  eligible  accounts  receivable  and 50% of
inventory.  The interest  rate on this Credit  Facility is 1-1/2% over the prime
rate  and is  payable  monthly  with  a  required  minimum  borrowing  level  of
$2,500,000 for fee calculation  purposes.  The Credit Facility calls for certain
financial  covenants  that,  if not met,  would cause a default under the Credit
Facility  and  increase  the  interest  rate by 2% over  current  levels.  As of
September  30, 1998,  the covenant  requiring the Parent  Company's  fiscal year
pre-tax loss, not to exceed certain  levels,  as defined in the Credit  Facility
has not been met by the  Parent  Company.  NationsCredit  agreed  to waive  this
covenant  through  fiscal  1999.  The Parent  Company  plans to repay the Credit
Facility in full upon the  ultimate  sale of TSA (See Note 10 Sale of Top Source
Automotive,  Inc.).  Upon  payment of the Credit  Facility,  NationsCredit  will
release  the lien,  which it holds on all of the  assets of the  Parent  Company
including TSA's common stock and assets.

For  accounting  purposes,  all amounts  outstanding  under the Credit  Facility
appear on the financial statements of the Parent Company. Therefore, all amounts
drawn or repaid in  connection  with activity  associated  with TSA flow through
their intercompany account,  which is non interest bearing, and is classified as
a receivable from parent which is a component of stockholders' equity. (See Note
9 Related Party Transactions)

7. INCOME TAXES

The Company's taxable results are included within the consolidated tax return of
the Parent Company for the years ended  September 30, 1998,  1997, and 1996. The
provision  for income taxes is based on the  application  of the  provisions  of
Statement of  Financial  Accounting  Standards  No. 109  "Accounting  for Income
Taxes"  ("SFAS  No.  109") to the  Company  as if it were a  separate  taxpayer.
Accordingly,  the income tax expense included in the  accompanying  statement of
operations includes both Federal tax at a statutory rate of 34% and state taxes.

Cash paid for state income taxes for the years ended  September  30, 1998,  1997
and 1996 was  approximately  $59,000,  $124,000  and  $140,000  which  primarily
related to state income tax expense.

8. CONCENTRATION OF CREDIT RISK

In fiscal 1998, the majority of the Company's  overall  revenue was derived from
one customer,  an OEM, which  accounted for 99% of the total business  activity.
That same  customer  accounted for 99% of net sales in both 1997 and 1996. As of
September 30, 1998 the Company's  receivable  balance from this OEM customer was
approximately  $1,598,612.  The  loss of this  customer  would  have a  material
adverse  effect  on the  Company.  Export  sales  in 1998,  1997  and 1996  were
insignificant.






<PAGE>



9.  RELATED PARTY TRANSACTIONS

The Parent Company's corporate general and administrative costs not specifically
attributable  to its operating  subsidiaries  have been allocated to TSA and its
other oil analysis  subsidiary.  Such costs are included in "overhead allocation
from parent" in the accompanying Statements of Operations and were approximately
$1,100,000 for the years ended September 30, 1998, 1997 and 1996,  respectively.
Management  believes  that the  amounts  allocated  to the  Company  are no less
favorable to the Company  than the  expenses  the Company  would incur to obtain
such services on its own or from unaffiliated third parties.

In connection with the sale of  substantially  all of the assets and liabilities
of TSA as discussed in Note 10,  management of the Company  intends to treat the
receivable  from  the  parent  as  an  equity  distribution.   Accordingly,  the
receivable  from the parent has been shown as a separate  line in  Stockholders'
Equity  as a  reduction  of  stockholders'  equity in the  accompanying  balance
sheets.

10. SALE OF TOP SOURCE AUTOMOTIVE, INC.

On August 14, 1998,  the Parent  Company  executed a Definitive  Asset  Purchase
Agreement  ("Agreement")  with NCT Audio Products Inc., (the "Buyer"or "NCT"), a
subsidiary of the NCT Group, Inc. of Stamford,  Connecticut (NASDAQ:  "NCTI") to
purchase substantially all of the assets and liabilities of TSA.

Under the terms and subject to the conditions of the  Agreement,  on the closing
date (the "Closing" or the "Closing Date"), the Buyer agreed to purchase 100% of
the assets (the "Assets") and assume substantially all of the liabilities of TSA
for a minimum of $10,000,000. The purchase consideration of $10,000,000 consists
of a  non-refundable  deposit of $1,450,000  paid to TSA on June 10, 1998 ("Step
I"), $2,050,000, which was paid into escrow on July 30, 1998 and released to the
Parent Company (and became  non-refundable)  on December 15, 1998 as a result of
an affirmative  shareholder approval from the Parent Company shareholders ("Step
II"),  and the balance of $6,500,000  due at the Closing,  which was to occur by
March 31, 1999 ("Step III"). Additionally, under the terms of the Agreement, TSA
could receive up to an additional  $6,000,000  payable to the Parent  Company in
cash expressly  contingent upon the future earnings of the Buyer's subsidiary as
defined under the Agreement, for a two-year period following the Closing.

The  consummation of the proposed  transaction is subject to the satisfaction or
waiver of  certain  conditions  including  the  Buyer  obtaining  the  necessary
financing.  As a result of the completion of Steps I and II of the  transaction,
the Buyer became a 20% owner of the Common Stock of TSA. On January 7, 1999, the
Buyer of TSA's  Assets,  by virtue of not  exercising  its right to  receive  an
additional 15% minority stake in TSA maintained its exclusive  right to complete
the remainder of the transaction by March 31, 1999. As a result,  the Buyer will
remain as a 20%  minority  owner of TSA unless  Step III of the  transaction  is
completed.  On March 30, 1999, the Parent Company granted the Buyer an extension
until May 28, 1999 to complete  the purchase of TSA. As  consideration  for this
extension,  the Parent Company received a  non-refundable  fee from the Buyer of
$350,000.  This  extension  fee  consisted  of $20,685 in cash,  $125,000 of the
Buyer's  minority  interest in TSA earnings and a $204,  315 note payable due on
April 16,  1999 (the  "Note")  from the Buyer to TSA.  Additionally,  due to the
Buyer's  failure to close the  transaction by March 31, 1999, the Parent Company
received a penalty  premium of  $100,000 of the  Buyer's  convertible  preferred
stock.


<PAGE>



10. SALE OF TOP SOURCE AUTOMOTIVE, INC. (continued)

If the Note is paid to TSA by April 16, 1999 and the  transaction  closes by May
28, 1999, then the Buyer will be allowed to apply the $350,000  extension fee as
a credit  against the  $6,500,000  due to be paid at  closing.  In the event the
closing  occurs by May 28,  1999 and the Note is paid after  April 16,  1999 but
before May 1, 1999,  then $145,685 of the extension fee can no longer be applied
as a credit against the $6,500,000 due to be paid at closing.

In event the  closing  occurs by May 28,  1999 and the Note is not paid by April
30,  1999,  then none of the $350,000  extension  fee can be applied as a credit
against the $6,500,000 due to be paid at closing.  In the event the closing does
not occur by May 28, 1999, irrespective of whether or not the Note has been paid
by April 16, 1999 or before April 30, 1999 then none of the  $350,000  extension
fee can be applied as a credit against the $6,500,000 due to be paid at closing.
Additionally,  if the  closing  does not occur by May 28,  1999,  the buyer will
forfeit all minority earnings in TSA from June 1999 through May 2000.

If the  transaction  fails to close by May 28, 1999,  the Parent Company will be
free to attempt to find another purchaser of TSA and the Buyer will be obligated
to sell its TSA shares to any such purchaser on the same terms and conditions as
the Company receives for its TSA Common Stock.

If the Buyer fails to complete Step III of the  transaction,  the Parent Company
will not  receive  the final  payment  of  $6,500,000.  This may have an adverse
effect on the short-term financial condition of the Parent Company.

In order to consummate the proposed transaction,  the Parent Company must pay in
full  its  Credit  Facility  with  NationsCredit.  Upon  payment  of its  Credit
Facility,  NationsCredit  will  release  the lien,  which it holds on all of the
assets of the Company, and thus effectively cancel the Credit Facility.




















<PAGE>








                                   SIGNATURES

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

                                                NCT GROUP, INC.


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

April 30, 1999