SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-K


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

FOR THE FISCAL YEAR ENDED       DECEMBER 31, 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                        (I.R.S.
Employer or incorporation organization)                Identification No.)

1025 West Nursery Road, Suite 120,  Linthicum, MD.     21090             
(Address of principal executive offices)               (Zip Code)

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

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

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

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

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

The  aggregate   market  value  of  the   Registrant's   voting  stock  held  by
nonaffiliates of the Registrant was $57,315,604 million as of March 23, 1999.

The number of shares outstanding of the Registrant's common stock is 160,745,945
as of March 23, 1999.

                     DOCUMENTS INCORPORATED BY REFERENCE.

       Certain information  contained in the Proxy Statement for the 
         Annual Meeting of Stockholders of Registrant to be filed 
    with the Securities and Exchange Commission on or before April 30, 1999, 
       is incorporated by reference into Part III of this Form 10-K.



<PAGE>





                                    PART I

ITEM 1.     BUSINESS

A.    General Development of Business

   NCT  Group,   Inc.  ("NCT"  or  the  "Company"),   formerly  known  as  Noise
Cancellation  Technologies,  Inc.,  designs,  develops,  licenses,  produces and
distributes  electronic 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,  with 89
products currently being sold, including  NoiseBuster(R)  active noise reduction
("ANR")   communications  and  consumer   headsets,   Gekko(TM)  flat  speakers,
ClearSpeech(R)    microphones   and   speakers,   the   ProActive(R)   line   of
industrial/commercial  ANR headsets, an industrial muffler or "silencer" for use
with large vacuums and blowers and aircraft cabin quieting systems.

   The Company is organized into  strategic  business  units.  These include its
three  subsidiaries,  NCT  Audio  Products,  Inc.  ("NCT  Audio"),  NCT  Hearing
Products, Inc. ("NCT Hearing") the newly formed and  DistributedMedia.com,  Inc.
("DMC"); and NCT Communications Products, a division of the Company. Each of the
Company's strategic business units is targeted to the commercialization of their
own products in specific markets.

   In keeping  with the  direction  established  in late 1994,  during  1998 the
Company continued the practice of marketing its technology  through licensing to
third parties for fees and  subsequent  royalties in addition to continuing  its
product  distribution  efforts.  During 1998, the Company  entered into five new
technology license agreements. See F. "Strategic Alliances" and Note 3 "Notes to
Financial Statements."

   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.

   NCT believes  that it has a  significant  position in Active Wave  Management
technology, holding 444 patents and an extensive portfolio of know-how and other
unpatented technology.

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

   From the Company's inception through December 31, 1998,  approximately 26% of
its  operating  revenues  have  come  from the sale of  products  and 31% of its
operating revenues have come from licensing of the Company's  technology,  while
approximately  43% of its  operating  revenues  have come from  engineering  and
development services.

   The Company has entered  into a number of strategic  supply,  manufacturing
and marketing  alliances with leading global  companies to  commercialize  its
technology.  See F. - "Strategic  Alliances"  for further  information.  These
strategic  alliances  historically  have  funded a majority  of the  Company's
research and  development,  and provided the Company with reliable  sources of
components,  manufacturing  expertise  and  capacity,  as  well  as  extensive
marketing and  distribution  capabilities.  NCT has  continuing  relationships
with Walker  Manufacturing  Company  ("Walker")  (a division of Tennessee  Gas
Pipeline Company, a wholly-owned  subsidiary of Tenneco,  Inc.), AB Electrolux
("Electrolux"),   Analog  Devices,   Inc.  ("ADI"),   Ultra  Electronics  Ltd.
("Ultra"),  The Charles  Stark  Draper  Laboratory,  Inc.  ("Draper"),  Hoover
Universal,  Inc.  ("Hoover",  a wholly-owned  subsidiary of Johnson  Controls,
Inc.) and New Transducers,  Ltd. ("NXT"),  among others, in order to penetrate
major markets more rapidly and  efficiently,  while  minimizing  the Company's
own capital expenditures.

   An important factor for the Company's  continuing  development is its ability
to recruit and retain key personnel. As of February 28, 1999 the Company had 104
employees,  including 63 engineers and technical  staff.  Among its  engineering
staff and  consultants  are several  scientists  and inventors  that the Company
believes  are  preeminent  in the  active  noise  and  vibration  control  field
worldwide.

   The Company was  incorporated  in Nevada on May 24, 1983. In April 1985,  the
Company  moved its  corporate  domicile to Florida and assumed its former  name,
Noise  Cancellation  Technologies,  Inc.,  and in January  1987,  following  the
assumption of control of the Company by the present  management,  it changed its
state of incorporation to Delaware. At the annual meeting of stockholders of the
Company on October 20, 1998,  the  stockholders  approved  (among other  things)
changing  the name of the Company to its present  name,  NCT Group,  Inc.  NCT's
executive offices, research and product development facility are located at 1025
West Nursery Road, Suite 120, Linthicum,  Maryland 21090; telephone number (410)
636-8700.  NCT maintains sales and marketing  offices at One Dock Street,  Suite
300, Stamford, Connecticut 06902; telephone number (203) 961-0500. The Company's
European  operations are conducted through its product development and marketing
facility in  Cambridge,  England.  NCT also  maintains  a marketing  facility in
Tokyo, Japan.

B.    Technology

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

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

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

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


                            ACTIVE NOISE REDUCTION

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

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

   Signal  Enhancement.  Active Wave  Management  technology also can be used to
attenuate  unwanted  signals that enter into a communications  network,  as when
background  noise enters  telecommunications  or radio  systems from a telephone
receiver or microphone.  The Company has developed patented technology that will
attenuate the background  noise  "in-wire",  so that the signals  carried by the
communications  network include less of the unwanted noise, allowing the speaker
to be heard more clearly over the network.

   Silicon  Micromachined   Microphone  ("SMM").  In  1994,  NCT  purchased  the
exclusive  rights to  manufacture  and  commercialize  a  silicon  micromachined
microphone as a technically superior and less expensive alternative to currently
available electret microphones.  The SMM has potential  applications not only in
the audible range of frequencies, but in the ultrasonic range as well.

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

   Flat Panel  Transducer.  The Company has expanded  its flat panel  transducer
technology to include audio  systems for the  reproduction  of speech and music.
NCT patented Flat Panel Transducer  ("FPT")  technology  utilizes piezo electric
drivers mounted on flat rigid surfaces to create a unique wide dispersion  sound
field. Unlike conventional speakers that deliver sound through air in a pistonic
fashion, the FPT design delivers sound throughout the surface of the panel being
driven. This distributed mode method of delivering wide dispersion sound is what
NCT has termed Sweet  Space(TM),  which  floods a room with sound.  Uses for FPT
technology include home theatre, professional, car and aircraft applications.

   Java Processor  Core.  Advancel Logic  Corporation  ("Advancel"),  a majority
owned  subsidiary of the Company,  is a participant  in the native Java embedded
microprocessor  market.  The purpose of the Java(TM) (Java is a trademark of Sun
Microsystems, Inc.) 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.

C.    NCT Proprietary Rights and Protection

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

   During  1994,  the  Company  purchased  certain  assets of  Active  Noise and
Vibration Technologies, Inc. ("ANVT"), which included all of ANVT's intellectual
property  rights.  Among  the ANVT  intellectual  property  rights  were  ANVT's
interest in the 10 basic  Chaplin  Patents  which are now solely owned by NCT as
the sole  shareholder of Chaplin Patents Holding Co., Inc.  ("CPH"),  formerly a
joint venture with ANVT. See Notes to Financial Statements.  These patents cover
inventions made by Professor G.B.B.  Chaplin (the "Chaplin Patents") in the late
1970s and early 1980s (some of which have now expired).

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

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

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

   In 1994,  the  Company  obtained a license  for the  exclusive  rights to the
silicon  micromachined  microphone  technology developed by Draper in Cambridge,
Massachusetts.  At this time, four patents  describing the basic technology have
been issued.

   In 1995,  the Company  acquired  several U.S.  patents  dealing with Adaptive
Speech Filter  ("ASF") which are used in the  Company's  ClearSpeech(R)  product
line.

   Since  1996,  the  Company  has been  granted 197 new patents in the field of
Active Wave Management.

   The Company  holds or has rights to 305  inventions  as of December 31, 1998,
including 105 United States patents and over 339 corresponding  foreign patents.
The  Company  has  pending  198 U.S.  and  foreign  patent  applications.  NCT's
engineers  have made 137 invention  disclosures  for which the Company is in the
process of preparing patent applications.  The Company's presently owned patents
have expiration dates ranging from 2000 through 2016 with the majority occurring
during or after 2009.

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

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

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

   The Company has been granted the following trademarks:

           Mark                     Field of Use
           ----                     ------------
      NCT logo                      Company logo
      NoiseBuster(R)                headsets
      NoiseEater(R)                 HVAC systems
      ClearSpeech(R)                adaptive speech filter products
      VariActive(R)                 headsets
      ProActive(R)                  headsets

   The Company has also applied for 12 trademarks including:

           Mark                     Field of Use
           ----                     ------------
      NoiseBuster Extreme!(TM)      headsets
      Gekko(TM)                     flat audio speakers
      ArtGekko(TM)                  flat audio speakers
      Sweet Space(TM)               flat audio speakers
      Top Down Surround Sound(TM)   vehicular audio speakers
      X-Static(TM)                  adaptive speech filter products

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

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

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



<PAGE>


D.    Existing Products

      NCT Hearing Products

   NoiseBuster(R).  NCT is  currently  marketing  its  NoiseBuster  Extreme!(TM)
personal  active noise reduction  headphone for consumers at a suggested  retail
price of $69. This active headphone selectively reduces unwanted noise generated
by aircraft engines, lawnmowers,  street traffic, household appliances and other
annoying noise  sources,  permitting  the user to hear desired  sounds,  such as
human conversation,  warning signals or music. The product can also be used with
an aircraft's  in-flight  entertainment  system or a portable audio device.  The
Company is marketing the NoiseBuster(R) through distribution channels, including
electronics retail stores, specialty catalogues and directly through a toll-free
"800" number. Initial product shipments of the original NoiseBuster(R) were made
in September  1993.  Product  shipments of the  NoiseBuster  Extreme!(TM)  began
during the first quarter of 1997.

   The NoiseBuster(R) line has been expanded to include communications  headsets
for  cellular,  multimedia  and  telephony.  The products  will be the first ANR
offerings for these applications and will improve speech  intelligibility in the
presence of background  noise.  Product shipments began during the first quarter
of 1998. A new and improved line will be launched in the second quarter of 1999.

   ProActive(R). In 1995, the Company introduced its ProActive(R) line of active
noise reduction headsets for use in commercial and industrial settings.

   NB-PCU.  The Company is working with a leading  manufacturer  and supplier of
aircraft  cabin  products  on the  integration  of NCT's  active  noise  control
technology into in-flight passenger entertainment systems. As a component of the
system, NCT has also developed a low-cost headset specifically for in-flight use
to be used in conjunction  with the  integrated  electronics.  NCT's  technology
electronically  reduces  aircraft engine noise while enhancing the audibility of
desired sounds like speech, music and warning signals. Lowering the engine drone
can help alleviate the anxiety and fatigue often  associated with flying.  While
the  system  is in use,  passengers  inside  an  aircraft  cabin  can  carry  on
conversations at a comfortable  level or hear in-flight movies and music without
over  amplification  and distortion.  The system is currently being installed in
first and business  class  cabins on new United  Airlines  aircraft  making long
trips.

      NCT Communications Products

   ClearSpeech(R)-Acoustic  Echo  Cancellation  ("AEC").  AEC  removes  acoustic
echoes in  hands-free  full-duplex  communication  systems.  AEC is an adaptive,
frequency-based  algorithm that  continuously  tracks and updates the changes in
the acoustic path between the  loudspeaker  and the  microphone to eliminate the
acoustic  echo at the  source.  The  algorithm  can be  changed  to  accommodate
different  audio  bandwidths  and acoustic  tail lengths for use in a variety of
applications  such as  cellular  telephony,  audio and  video  teleconferencing,
computer telephony and gaming, and voice recognition.

   ClearSpeech(R)-Compression   and  TurboCompression   ("CTC").  CTC  maximizes
bandwidth   efficiency   in   wireless,   satellite   and  intra-  and  internet
transmissions and creates smaller,  more efficient voice files while maintaining
speech  quality.  The compression can be combined with ASF technology to further
improve the  compression  rate and voice quality.  CTC comes in two versions and
can be implemented as either a fixed or variable-rate speech coder. CTC has many
applications  such  as:  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 such as personal
device assistants  ("PDA") and global  positioning  satellite ("GPS") Navigation
systems.

      NCT Audio Products

   Gekko(TM) flat speaker.  In 1998,  NCT Audio,  a majority  owned  subsidiary,
launched the Gekko(TM) flat speakers and ArtGekko(TM) printed grille collection.
This was the first  product  launched by NCT Audio to the consumer  audio market
utilizing the Company's  patented FPT technology.  With this  technology,  these
products  deliver  Sweet  Space(TM)  sound  that  floods  the room with sound as
opposed to  conventional  speakers  which  deliver  sound like a spotlight.  The
Gekko(TM) flat speakers are very thin wall hanging speakers that are designed to
accept high quality reproductions of the world's most popular artwork,  which is
the ArtGekko(TM) line of replacement  prints and decorative  frames.  The art is
printed on  acoustically  transparent  material,  which allow all sound from the
flat  speaker to pass  freely.  The images  were  licensed  from  several  major
international  publishers  who have access to or  represent  the rights for over
three million pieces of art. The initial  ArtGekko(TM)  collection  includes 422
images and 14 different frame styles.


<PAGE>

      Revenues

      Product Revenues

   The following  table sets forth the percentage  contribution  of the separate
classes of the Company's products to the Company's product revenues for the year
ended December 31, 1998.

                             (000's)     As a %
          Products           Amount     of Total
          --------           -------    --------
        Hearing Products      $1,191       56.8%
        Communications           488       23.3%
        Audio Products           383       18.3%
        Other                     35        1.6%
                             -------    --------
               Total          $2,097      100.0%
                             =======    ========

      Technology Licensing Fees

   The following  table sets forth the percentage  contribution  of the separate
classes of the Company's  technology to the Company's  technology  licensing and
royalty revenue for the year ended December 31, 1998.

                           (000's)        As a %
        Technology         Amount        of Total
        ----------         -------       --------
       Audio                  $350         43.6%
       Advancel                200         24.9%
       Hearing                  86         10.7%
       Communications           18          2.2%
       Other                   148         18.6%
                           =======       ========
            Total             $802        100.0%
                           =======       ========

E.   Products Under Development

 ......NCT Hearing Products

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

 ......NCT Communications

   ClearSpeech(R)  Product Line. NCT is  continuously  improving the quality and
functionality  of  the  ClearSpeech(R)  Microphone  and  ClearSpeech(R)  Speaker
products to improve market penetration. NCT has both ASF and AEC on a variety of
DSPs including Analog-Devices and Texas Instruments general purpose DSPs so that
third party developers may integrate the technology into their applications. NCT
has also extended the availability of PC development  tools by creating software
developer's kits ("SDKs") for ASF, AEC and compression.

 ......NCT Microphones

   Silicon  Micromachined  Microphone.  In 1994,  NCT  obtained a license to the
exclusive  rights to  manufacture  and  commercialize  a  silicon  micromachined
microphone.  A  small,  compact,  surface-mountable  silicon  actuator,  the SMM
provides customers with improved and adjustable  sensitivity,  a low noise floor
and resistance to environmental  extremes.  The ability to integrate  additional
circuitry on the SMM chip also has proven  attractive  to potential  users.  The
SMM's low noise floor and adjustable  sensitivity  improve voice  recognition in
high  ambient  noise  environments.  NCT is working  with voice  processing  and
computer  hardware  companies to utilize the SMM to enhance the  performance  of
their systems.  In the first quarter of 1996, NCT released initial prototypes of
the devices. In December 1997, the Company announced that Siemens Semiconductors
of Siemens AG  ("Siemens")  had licensed the Company's SMM  technology  and that
Siemens would develop,  manufacture and market the SMM. Samples were received in
the first  quarter 1999.  Full  production is scheduled to commence in the first
quarter 2000.


<PAGE>

 ......NCT Audio

   FPT-based products. NCT Audio began development in 1998 on FPT-based products
for use in automotive and aircraft applications. For these markets, the size and
weight  benefits  offered by the technology are nearly as important as the sound
quality.  Several successful  demonstrations of prototype production  approaches
for these  markets  were  completed  in 1998.  NCT Audio will  continue  product
development for these products in 1999.

 ......Panels and Enclosures

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

   In March 1995, the Company entered into an agreement with QuietPower Systems,
Inc., ("QSI") (see Item 13. "Certain Relationships and Related Transactions" and
Note 10 - Notes to Financial  Statements)  by which QSI  received the  exclusive
rights to market,  sell and  distribute  transformer  quieting  products and gas
turbine  quieting  products in the utility  industry.  Under the agreement,  QSI
funds  development  of the systems.  The agreement  generally  provides that the
Company  manufactures  the products and receives a royalty of 6% from QSI on the
sales of the products.

   F..Strategic Alliances

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


<PAGE>

  ----------------------------------------------------------------------
                                   Date Initial
                                   Relationship
     Key Strategic Alliances       Established        Applications
  ------------------------------- --------------- ----------------------

  Walker Manufacturing Company      Nov. 1989     Mufflers, Industrial
  (a division of Tennessee Gas                    Silencers and Other
  Pipeline Company)                               Vehicular
                                                  Applications

  AB Electrolux                     Oct. 1990     Consumer Appliances

  Ultra Electronics Ltd.            June 1991     Aircraft Cabin
                                                  Quieting Systems

  Analog Devices, Inc.              June 1992     Integrated Circuits
                                                  and Related Products

  The Charles Stark Draper          July 1994     Microphones
  Laboratory, Inc.

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

  Hoover Universal, Inc.             May 1996     TDSS
  (a wholly-owned subsidiary of
  Johnson Controls, Inc.)

  New Transducers, Ltd.             Mar. 1997     Flat Panel
                                                  Transducers

  Oki Electric Industry Co.,        Oct. 1997     Communications
  Ltd.

  Siemens AG                        Dec. 1997     Microphones

  VLSI Technology, Inc.             Feb. 1998     Communications

  STMicroelectronics SA &           Nov. 1998     Java(TM) platform
      STMicroelectronics S.r.l.
  ----------------------------------------------------------------------



<PAGE>


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

   In  November  1989,  NCT  signed  its  strategic   alliance  with  Walker,  a
world-leading  manufacturer  of  automotive  parts and  mufflers.  The  alliance
consisted of a Joint Venture and  Partnership  Agreement  with  ownership in the
resulting joint venture Walker Noise Cancellation  Technologies  ("WNCT") shared
equally  between  NCT  Muffler,  Inc.  and WEM,  a  wholly-owned  subsidiary  of
Tennessee Gas Pipeline Company.

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

   WNCT is currently  producing  and selling  industrial  silencers on which the
Company receives a royalty.

      AB Electrolux (Sweden)

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

      Ultra Electronics Ltd. (U.K.)

   Since 1991, NCT and Ultra and Ultra's  predecessor,  part of the Dowty Group,
have been  designing  and  developing  systems to enhance  passenger  comfort by
quieting aircraft passenger compartments in certain  propeller-driven  aircraft,
which Ultra sells to the  worldwide  turbo-prop  aircraft  market.  In May 1993,
Ultra and the Company signed a teaming  agreement to produce and install the NCT
cabin quieting system on the SAAB 340 aircraft.  Deliveries under this agreement
began in 1994.  In March  1995,  the  Company  and  Ultra  amended  the  teaming
agreement and concluded a licensing and royalty  agreement for $2.6 million.  In
addition,  Ultra  will pay the  Company a royalty  of 1.5% of sales of  products
incorporating NCT technology beginning in 1998. See Note 3 - "Notes to Financial
Statements Joint Ventures and Other Strategic Alliances" for further discussion.

      Analog Devices, Inc. (U.S.)

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

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

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

      Applied Acoustic Research, L.L.C, (US) ("AAR")

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

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

   On October 8, 1998, AAR, NCT Audio and JCI signed a Redemption Agreement,  an
Amended and Restated License Agreement, a Termination  Agreement,  and a License
Agreement (collectively,  the "Termination  Agreements") terminating NCT Audio's
ownership  interest in OAT. 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 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 TDSS.

      New Transducers Ltd. (U.K.)

   New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT, plc (formerly
The 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 from NXT and the Company
will receive royalties on future NXT licensing and product revenue. On April 15,
1997,  NXT,  plc,  NXT and the Company  executed  several  agreements  and other
documents (the "New Agreements") which terminated the Cross License, and certain
related  agreements  and replaced  them with a new cross license (the "New Cross
License"), and new related agreements.  The material changes effected by the New
Agreements  included  the  inclusion  of NXT,  plc as a  party  along  with  its
wholly-owned  subsidiary  NXT and providing  that the license fee payable to NCT
could be paid in ordinary  shares of stock.  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 a related  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  included  an  expansion  of  the  fields  of use  applicable  to the
exclusive  licenses granted to NXT, plc and NXT and an increase in the royalties
payable on future licensing and product revenues. 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 license  fee.  See Note 3 - "Notes to  Financial  Statements  - Joint
Ventures and Other Strategic Alliances" for further discussion.

      Oki Electric Industry Co., Ltd. ("Oki")

   In October 1997, the Company and Oki executed a license agreement.  Under the
terms of the agreement,  which  included an up-front  license fee and future per
unit royalties,  Oki licensed the Company's  ClearSpeech(R)  noise  cancellation
algorithm   for   integration   into   large-scale   integrated   circuits   for
communications   applications.   The  Company  has  granted  Oki  the  right  to
manufacture, use and sell products incorporating the algorithm. The algorithm is
specifically   designed  to  remove  background  noise  from  speech  and  other
transmitted   signals,   greatly  improving   intelligibility   and  clarity  of
communications.

      Siemens Semiconductors, Siemens AG

   In December 1997, the Company and Siemens executed a license agreement. Under
the terms of the agreement,  which  included an up-front  license fee and future
per unit  royalties,  Siemens  licensed  the  Company's  SSM and  will  develop,
manufacture and market such microphones as surface  mountable  devices.  The SMM
technology delivers  microphone  technology on a silicon chip, a breakthrough in
the microphone marketplace. Siemens and the Company have targeted the SMM to the
multimedia,  cellular phone, wireless phone, voice recognition and other related
markets.  The  SMM's  small  chip  dimensions  of only 3 mm on each side make it
useful for packaging  into products with tight size  constraints,  such as noise
canceling ear plugs and hearing aids.

      VLSI Technology, Inc. ("VLSI")

   In February  1998, the Company and VLSI executed a license  agreement.  Under
the terms of the agreement,  which included up-front development fees and future
per  unit   royalties,   VLSI  licensed  the  Company's   ClearSpeech(R)   noise
cancellation  and echo  cancellation  algorithms for use with VLSI's current and
future  integrated  circuits  targeted  to the  digital  cellular  and  personal
communications  systems  ("PCS")  phone  market,  as well as  emerging  computer
telephony markets. The noise cancellation  algorithm is specifically designed to
remove  background  noise from  speech and other  transmitted  signals,  greatly
improving  intelligibility and clarity of communications.  The echo cancellation
algorithm cancels acoustical echo for hands-free  telephony operations including
cellular and speaker phones.

      STMicroelectronics SA & STMicroelectronics S.r.l ("ST")

      In November 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  tiny2J(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.

H.    Marketing and Sales

   In addition to marketing its Active Wave  Management  technology  and systems
through its strategic  alliances as described above, the Company has an internal
sales and marketing force of twenty  professionals,  its executive  officers and
directors,  and nine independent  sales  representatives.  The independent sales
representatives may earn commissions of generally up to 6% of revenues generated
from sales of NCT products to customers the sales  representatives  introduce to
NCT and up to 5% of research and development  funding revenues  provided by such
customers.  During 1998 and through  February  1999,  the Company  expanded  its
internal  sales  and  marketing  force  by ten,  from  nineteen  to  twenty-nine
professionals  and will continue to expand its internal sales force on a limited
basis as the need dictates.

   Note 15 - Notes to  Financial  Statements  sets forth  financial  information
relating  to  foreign  and  domestic  operations  and sales for the years  ended
December 31, 1998, 1997 and 1996.

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

I.    Concentrations of Credit Risk

   The Company  sells its products and  services to OEMs,  distributors  and end
users in various  industries  worldwide.  As shown  below,  the  Company's  five
largest  customers  accounted for  approximately 34% of revenues during 1998 and
39% of gross  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                 246               246
      STMicroelectronics S.r.l
    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.

   Financial  instruments which potentially subject the Company to concentration
of  credit  risk  consist  principally  of cash and cash  equivalents  and trade
receivables.  The Company  considers all money market  accounts and  investments
with  original  maturities of three months or less at the time of purchase to be
cash  equivalents.  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.

J.    Competition

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

K.    Government Contracts

   The Company has acted as a government  subcontractor  in connection  with its
performance  of  certain  engineering  and  development   services.   Government
contracts provide for their cancellation at the government's sole discretion, in
which event the contractor or  subcontractor  may recover its actual costs up to
the date of  cancellation,  plus a  specified  profit  percentage.  Governmental
expenditures  for defense are  subject to the  political  process and to rapidly
changing  world  events,  either  or both of which  may  result  in  significant
reductions in such  expenditures in the proximate future.  Government  contracts
are  not  viewed  as a  significant  part  of the  Company's  business.  No such
contracts were in effect during 1998.

L.    Research and Development

   Company-sponsored  research and development expenses aggregated $7.2 million,
$6.2 million and $7.0 million for the fiscal years ended December 31, 1998, 1997
and 1996, respectively.

M.    Environmental Regulation Compliance

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

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



<PAGE>


N.    Employees

   The Company had 104 employees as of February 28, 1999. None of such employees
is represented by a labor union. The Company  considers its  relationships  with
employees to be satisfactory.

O.    Acquisitions and Proposed Transactions

   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 (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 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.  If the Advancel
Shareholders elect to take payment in the form of shares of the Company's Common
Stock,  a  formula  has been  established  to  determine  the  number  of shares
issuable.  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.

   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 may elect to
receive the possible future contingent  payments in either cash or shares of NCT
Audio's  common  stock.  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 option (the "TSA Option") to purchase the assets
of TSA through March 31, 1999. On March 30, 1999, NCT Audio and TST entered into
a letter  agreement  extending  the TSA Option to May 28,  1999 and  agreeing to
other certain terms and conditions.  Among such terms and conditions,  NCT Audio
agreed to pay TST $350,000 consisting of a $204,315 note payable,  due April 16,
1999 (the "TST Note"),  and $145,685 in cash (collectively the "Extension Fee").
The  Extension  Fee shall be  credited  in full  against  the balance due TST at
closing.  Certain penalties apply, including forfeiture of the Extension Fee, if
NCT  Audio  fails to pay the TST Note by April  16,  1999 or fails to close  the
transaction by May 28, 1999. In addition, NCT Audio agreed to issue TST $100,000
of NCT Audio convertible preferred stock.
<PAGE>

   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 U.S..  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 retire  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 retire 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.  PPI also has requested  that the Company or
NCT Audio advance them an additional  $1,000,000 loan. The Company and NCT Audio
declined to do so.

   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
stockholders  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. 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.

P.    Business Segments

   For a full discussion of business segments and geographic areas, see Note 14.
- Notes to Financial  Statements - "Business Segment Information" and Note 15. -
Notes to Financial Statements - "Geographical Information".


ITEM 2.     PROPERTIES

   The  Company's  executive  office is located at the site of its  research and
technical   support   laboratory  in  Linthicum,   Maryland,   where  it  leases
approximately  40,000  square feet of space under  leases  which  expire in July
2003. The leases provide for current monthly rentals of  approximately  $36,000,
subject to annual inflationary adjustments.

   The Company's majority owned subsidiary, Advancel, maintains its research and
engineering  facility  in San Jose,  California,  where it leases  approximately
6,000 square feet of space under a lease which expires in August 2000. The lease
provides for current monthly rentals of approximately $13,000, subject to annual
inflationary adjustments.

   The Company  maintains a sales and marketing office in Stamford,  Connecticut
where it leases  approximately  6,400  square  feet of space under a lease which
expires  in  February  2001  and  provides  for  a  current  monthly  rental  of
approximately $7,000, subject to annual inflationary adjustments.

   The Company's United Kingdom  operations are conducted in Cambridge,  England
where it leases 4,000 square feet of space under a lease which  expires in April
2007, and provides for a current monthly rental of approximately $5,000, subject
to annual inflationary adjustments.
<PAGE>


ITEM 3.     LEGAL PROCEEDINGS

   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 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  recovering  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. Ally does, however,  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  would not have a severe  material
effect on quarterly operating results.

   On December 15, 1998,  Balmore Funds,  S.A. and Austost  Anstalt Schaan filed
suit  against  the  Company's  majority  owned  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 the  financial  position  and  results  of
operations.



<PAGE>

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

   An annual  meeting of  stockholders  of the  Company  was held on October 20,
1998. At the meeting,  Jay M. Haft, Michael J. Parrella,  John J. McCloy II, Sam
Oolie,  Stephan  Carlquist and Morton  Salkind were elected  directors,  each to
serve until the next annual meeting of  stockholders  and until his successor is
elected and  qualified.  The  stockholders  also  approved an  amendment  of the
Company's Restated  Certificate of Incorporation to change the corporate name to
NCT Group,  Inc. and to increase the number of shares of common stock authorized
thereunder from 185,000,000 shares to 255,000,000 shares,  approved an amendment
to the NCT Group,  Inc. Stock Incentive  Plan,  approved the grant of options to
certain  directors of the Company,  and ratified the  appointment  of Richard A.
Eisner & Company, LLP as the Company's  independent auditors for the year ending
December 31, 1998. The vote taken at such meeting was as follows:

   (a)With respect to the election of the directors:

                                  FOR              WITHHELD
      Jay M. Haft             122,204,128          2,808,617
      Michael J. Parrella     122,184,858          2,407,917
      John J. McCloy II       122,210,058          2,382,717
      Sam Oolie               122,190,358          2,402,417
      Stephan Carlquist       122,209,758          2,383,017
      Morton Salkind          122,206,158          2,386,617

   (b)With  respect to the proposal to approve the  amendment  of the  Company's
Restated  Certificate of Incorporation to change the name of the Company to "NCT
Group, Inc.":

                                                ABSTENTIONS AND
                FOR           AGAINST           BROKER NON-VOTES
            122,370,730       1,436,417              776,628

   (c)With  respect to the proposal to approve the  amendment  of the  Company's
Restated Certificate of Incorporation to increase the number of shares of common
stock authorized thereunder from 185,000,000 to 255,000,000 shares:

                                                ABSTENTIONS AND
                FOR           AGAINST           BROKER NON-VOTES
            114,559,314       9,230,281              794,180

   (d)With  respect to the proposal to approve the adoption of an amendment to
the NCT Group, Inc. Stock Incentive Plan:

                                                ABSTENTIONS AND
                FOR           AGAINST           BROKER NON-VOTES
              35,686,222      9,600,157            1,644,990

   (e)With  respect  to the  proposal  to  approve a plan  granting  options  to
purchase common stock of the Company to two non-employee directors:

                                                ABSTENTIONS AND
                FOR           AGAINST           BROKER NON-VOTES
              36,735,982      8,472,160            1,723,226

   (f)With  respect to the proposal to ratify the selection of Richard A. Eisner
   & Company,  LLP  independent  auditors for the  Company's  fiscal year ending
   December 31, 1998:

                                                ABSTENTIONS AND
               FOR            AGAINST           BROKER NON-VOTES
            122,707,302       1,048,472              828,001



<PAGE>


                                   PART II

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

   The Company's  common stock is currently  traded on the NASDAQ OTC Electronic
Bulletin Board under the symbol "NCTI".  Prior to January 7, 1999, the Company's
common stock was traded on the NASDAQ National Market System.  High and low last
sale information for 1998 and 1997 for the common stock for specified  quarterly
periods is set forth below:

                                 1998                    1997
                         ----------------------   -------------------
                           HIGH         LOW        HIGH        LOW
                         ----------   ---------   --------   --------
            1st Quarter    15/16       14/16       29/32       3/8
            2nd Quarter    23/32       21/32       15/32      7/32
            3rd Quarter    9/16        17/32       1 1/8      7/32
            4th Quarter    11/32        9/32      2 1/32      9/16


   At December 31, 1998,  there were  approximately  40,000 holders of record of
the Company's common stock.

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

   See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" for a  description  of the Company's  sales of
unregistered securities during the year ended December 31, 1998.

   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.




<PAGE>


ITEM 6.     SELECTED FINANCIAL DATA.

   The selected consolidated  financial data set forth below is derived from the
historical  financial  statements  of the  Company.  The data set forth below is
qualified  in its  entirety  by and  should  be read  in  conjunction  with  the
Company's "consolidated  Financial Statements" and "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations"  that are included
elsewhere herein.
<TABLE>
<CAPTION>

                                          (In Thousands of Dollars and Shares, except per share amount)
                                                            Years Ended December 31,
                                       ------------------------------------------------------------------
                                             1994         1995         1996          1997         1998
                                       ------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
REVENUES
<S>                                      <C>          <C>          <C>           <C>          <C>      
 Product Sales                           $  2,337     $  1,589     $  1,379      $  1,720     $   2,097
 Engineering and development services       4,335        2,297          547           368           425
 Technology licensing fees and other          452        6,580        1,238         3,630           802
                                         --------     --------     --------      --------     ---------
      Total revenues                     $  7,124     $ 10,466     $  3,164      $  5,718     $   3,324
                                         --------     --------     --------      --------     ---------
COSTS AND EXPENSES:
 Cost of product sales                   $  4,073     $  1,579     $  1,586      $  2,271     $   2,235
 Cost of engineering and            
   development services                     4,193        2,340          250           316           275
 Selling, general and administrative        9,281        5,416        4,890         5,217        11,238
 Research and development                   9,522        4,776        6,974         6,235         7,220
 Interest (income) expense, net              (580)         (49)          17         1,397 (3)      (429)
 Equity in net (income)         
   loss of unconsolidated affiliates        1,824          (80)          80            --            --
 Other (income) expense, net                  718          552          192           130        (3,032)(4)
                                         --------     --------     --------      --------      --------
      Total costs and expenses           $ 29,031     $ 14,534     $ 13,989      $ 15,566      $ 17,507
                                         --------     --------     --------      --------      --------
 Net loss                                $(21,907)    $ (4,068)    $(10,825)     $ (9,848)     $(14,183)
Less:
 Preferred stock dividend requirement           -            -            -         1,623         3,200
 Accretion of difference between
   carrying amount and redemption
   amount of Redeemable preferred      
   stock                                        -            -            -           285           485
                                         --------     --------     --------      --------      --------
Net (loss) attributable to                                              
   common stockholders                   $(21,907)    $(4,068)     $(10,825)     $(11,756)     $(17,868)
                                         ========     =======      ========      ========      ========
 Weighted average number of common
   shares outstanding(1) - basic 
   and diluted                             82,906      87,921       101,191       124,101       143,855
                                         ========     =======      ========      ========      ========    
 Basic and Diluted Net loss per share    $  (0.26)    $ (0.05)     $  (0.11)     $  (0.09)     $  (0.12)
                                         ========     =======      ========      ========      ========

<CAPTION>


                                                                  December 31,
                                       -------------------------------------------------------------------
                                             1994        1995          1996          1997          1998
                                       -------------------------------------------------------------------
BALANCE SHEET DATA:
<S>                                      <C>         <C>           <C>           <C>           <C>     
 Total assets                            $ 12,371    $  9,583      $  5,881      $ 17,361      $ 15,465

 Total liabilities                          6,903       2,699         3,271         2,984         5,937
 Long-term debt                                --         105            --            --            --
 Accumulated deficit                      (68,780)    (72,848)      (83,673)      (93,521)     (107,704)
 Stockholders' equity (2)                   5,468       6,884         2,610        14,377         3,426
 Working capital (deficiency)                 923       1,734        (1,312)       11,696        (1,187)
</TABLE>

(1)Excludes  shares  issuable upon the exercise of  outstanding  stock  options,
   warrants  and  convertible  Preferred  Stock,  since  their  effect  would be
   antidilutive.

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

(3)Includes  interest  expenses of  approximately  $1.4 million  relating to the
   beneficial conversion feature on convertible debt issued in 1997.

(4)Includes a $3.2  million gain from the  exercise of an option  received  from
   Verity in  connection  with the cross license  agreement  entered into by the
   Company.



<PAGE>

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

   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  been
increasing,  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  its  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.

   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.


<PAGE>

   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 the 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.

   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.


<PAGE>

   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.


<PAGE>

   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.


<PAGE>

   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 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 and  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 and
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.
<PAGE>


   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.


<PAGE>

      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.


<PAGE>

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.

   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.


<PAGE>

      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:

   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
                                                                  ----------
            Loss 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.


<PAGE>

   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.

   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.


<PAGE>

   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
20% interest in TSA and a total of $1.5 million was loaned to PPI under a demand
promissory note. The Company has signed letters of intent from both TSA and PPI.
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>

ITEM 8.     FINANCIAL STATEMENTS.

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

                                                              Page

Independent Auditors' Report                                  F-1

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

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-5  
  December  31, 1996, 1997 and 1998

Notes to Financial Statements                                 F-6


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

   There have been no disagreements  with independent  accountants on accounting
and  financial  disclosure  matters  during the Company's two most recent fiscal
years.


<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, Ph.D.   46   Senior Vice President, Chief Technical Officer
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.  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  serves as Chief Executive  Officer and
Acting  President of NCT Audio,  a position to which he was elected on September
4, 1997,  and was  appointed a Director on August 25, 1998. He was also 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.

   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.

   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.

   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.

   Information  required  under this item is  contained  in a  definitive  proxy
statement  which the  Registrant  will file on or before April 30, 1999,  and is
incorporated herein by reference.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT.

   Information  required  under this item is  contained  in a  definitive  proxy
statement  which the  Registrant  will file on or before April 30, 1999,  and is
incorporated herein by reference.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

   In 1989, the Company established a joint venture with Environmental  Research
Information, Inc., ("ERI") to jointly develop, manufacture and sell (i) products
intended  for  use  solely  in  the  process  of  electric   power   generation,
transmission and distribution and which reduce noise and/or vibration  resulting
from such process, (ii) personal quieting products sold directly to the electric
utility industry and (iii) products that reduce noise and/or vibration emanating
from fans and fan systems (collectively,  "Power and Fan Products"). In 1991, in
connection with the termination of this joint venture, the Company agreed, among
other things,  during the period ending  February  1996, to make payments to ERI
equal to (i) 4.5% of the  Company's  sales of Power  and Fan  Products  and (ii)
23.75% of fees derived by the Company from its license of Power and Fan Products
technology,  subject to an overall  maximum of $4,500,000.  Michael J. Parrella,
President  of  the  Company,  was  Chairman  of  ERI at the  time  of  both  the
establishment and termination of the joint venture and owns approximately 12% of
the outstanding capital of ERI. In addition, Jay M. Haft, Co-Chairman, and Chief
Executive Officer of the Company,  shares investment  control over an additional
24% of the outstanding  capital of ERI. The Company believes that the respective
terms  of  both  the  establishment  of the  joint  venture  with  ERI  and  its
termination  were comparable to those that could have been negotiated with other
persons or entities. During the fiscal year ended December 31, 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 QuietPower
Systems,  Inc.  ("QSI")  (until  March 2, 1994,  "Active  Acoustical  Solutions,
Inc."),  a company which is 33% owned by ERI and 2% owned by Mr. Haft. Under the
terms of one of these Marketing  Agreements,  QSI has undertaken to use its best
efforts to seek research and  development  funding for the Company from electric
and natural gas utilities for applications of the Company's  technology to their
industries.  In exchange for this undertaking,  the Company has issued a warrant
to QSI to purchase  750,000 shares of Common Stock at $3.00 per share.  The last
sale price for the Common Stock reported on the NASDAQ National Market System on
May 15, 1993,  the date of the  Marketing  Agreement,  was $2.9375.  The warrant
becomes  exercisable  as to  specific  portions of the total  750,000  shares of
Common Stock upon the occurrence of defined events  relating to QSI's efforts to
obtain such funding for the Company. When such defined events occur, the Company
will  record a charge  for the  amount by which the  market  price of the Common
Stock on such  date  exceeds  $3.00  per  share,  if any.  The  warrant  remains
exercisable  as to each such portion from the  occurrence  of the defined  event
through  October 13,  1998.  As of December  31,  1994,  contingencies  had been
removed  against  525,000  warrants  resulting  in a  1993  non-cash  charge  of
$120,250.  This Marketing  Agreement also grants to QSI a non-exclusive right to
market the  Company's  products that are or will be designed and sold for use in
or with equipment used by electric and/or natural gas utilities for non-retrofit
applications in North America.  QSI is entitled to receive a sales commission on
any sales to a customer of such  products for which QSI is a procuring  cause in
obtaining  the first order from such  customer.  In the case of sales to utility
company customers, the commission is 6% of the revenues received by the Company.
On sales to original equipment manufacturers for utilities, the commission is 6%
on the gross  revenue NCT  receives on such sales from the customer in the first
year, 4% in the second year, 2% in the third year, and 1% in the fourth year and
 .5% in any future years after the fourth year. QSI is also entitled to receive a
5% commission on any research and development funding it obtains for NCT, and on
any license  fees it obtains for the Company  from the license of the  Company's
technology.  The  initial  term of  this  Agreement  is  three  years  renewable
automatically  thereafter on a  year-to-year  basis unless a party elects not to
renew.


<PAGE>

   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  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.


<PAGE>

   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 March 11, 1999, 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 (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>


                                   PART IV


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

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

      (1)   Financial Statements.

Independent Auditors' Report

Consolidated Balance Sheets, as of December 31, 1997, and December 31, 1998.

Consolidated   Statements  of   Operations   and   Consolidated   Statements  of
Comprehensive Loss, for the years ended December 31, 1996, 1997 and 1998.

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

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

Notes to Financial Statements.

      (2)   Financial Statement Schedules.

Report of Independent Auditors with Respect to Schedule.

Schedule II.  Valuation and Qualifying Accounts.

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



<PAGE>


(3)   Exhibits.

Exhibit
Number      Description of Exhibit

       2(a)       Stock  Purchase  Agreement  dated August 21,  1998,  among the
                  Company,  Advancel  Logic  Corporation  and the Holders of the
                  Outstanding  Capital  Stock  of  Advancel  Logic  Corporation,
                  incorporated  by  reference  to  Exhibit  2 of  the  Company's
                  Registration   Statement   on  Form  S-3   (Registration   No.
                  333-64967)   filed  on  September  30,  1998,  as  amended  by
                  Amendment No. 1 thereto filed on October 30, 1998.

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

       3(b)       Certificate  of  Amendment  of  the  Restated  Certificate  of
                  Incorporation  of  the  Company  filed  in the  Office  of the
                  Secretary  of State of the State of Delaware on June 20, 1997,
                  incorporated  by reference  to Exhibit  3(a) to the  Company's
                  Quarterly  Report on Form 10-Q for the quarter  ended June 30,
                  1997.

  *    3(c)       Certificate of Amendment of the Restated  Certificate of
                  Incorporation  of  the  Company  filed  in the  Office  of the
                  Secretary  of State of the State of  Delaware  on October  21,
                  1998.

       3(d)       Certificate of Designations,  Preferences and Rights of Series
                  C  Convertible  Preferred  Stock of the  Company  filed in the
                  Office of the  Secretary  of State of the State of Delaware on
                  October 29, 1997, incorporated by reference to Exhibit 3(c) to
                  the  Company's  Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997.

       3(e)       Certificate  of Increase in the Number of Shares in the Series
                  C  Convertible  Preferred  Stock of the  Company  filed in the
                  Office of the  Secretary  of State of the State of Delaware on
                  November 14, 1997,  incorporated  by reference to Exhibit 3(d)
                  to the  Company's  Annual  Report on Form 10-K for the  fiscal
                  year ended December 31, 1997.

       3(f)       Certificate  of  Designations,  Preferences  and  Rights  of
                  Series D  Convertible  Preferred  Stock of the Company filed
                  in the  Office  of the  Secretary  of State of the  State of
                  Delaware on July 24,  1998,  incorporated  by  reference  to
                  Exhibit 4 of the  Company's  Registration  Statement on Form
                  S-3  (Registration  No.  333-64967)  filed on September  30,
                  1998,  as  amended  by  Amendment  No.  1  thereto  filed on
                  October 20, 1998.


  *    3(g)       Certificate of  Designations,  Preferences and Rights of
                  Series E Convertible  Preferred  Stock of the Company filed in
                  the Office of the  Secretary of State of the State of Delaware
                  on December 24, 1998.


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

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

       4(b)       Warrant #BW-1-R to purchase  862,500 shares of Common Stock of
                  the  Company at a purchase  price of $.75 per share  issued to
                  John J. McCloy II, incorporated herein by reference to Exhibit
                  4(b) to the  Company's  Annual  Report  on Form  10-K  for the
                  fiscal year ended December 31, 1996.

       4(c)       Warrant #BW-2-R to purchase  862,500 shares of Common Stock of
                  the  Company at a purchase  price of $.75 per share  issued to
                  Michael  J.  Parrella,  incorporated  herein by  reference  to
                  Exhibit 4(c) to the  Company's  Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1996.


<PAGE>

       4(d)       Warrant #BW-4-R to purchase  201,250 shares of Common Stock of
                  the  Company at a purchase  price of $.75 per share  issued to
                  Irene  Lebovics,  incorporated  herein by reference to Exhibit
                  4(d) to the  Company's  Annual  Report  on Form  10-K  for the
                  fiscal year ended December 31, 1996.

       4(e)       Warrant  #BW-9-R and  #BW-46-R to purchase  218,500  shares of
                  Common  Stock of the  Company at a purchase  price of $.75 per
                  share issued to Jay M. Haft,  incorporated herein by reference
                  to Exhibit 4(e) to the  Company's  Annual  Report on Form 10-K
                  for the fiscal year ended December 31, 1996.

       4(f)       Secretary's  Certificate dated March 20, 1998, as to a two (2)
                  year  extension  of  the  expiration  dates  of  the  Warrants
                  described in 4(b), (c), (d) and (e) above, incorporated herein
                  by reference to Exhibit 4(f) to the Company's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1997.

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

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

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

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

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

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

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

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



<PAGE>


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

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

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

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

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

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

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



<PAGE>


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

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

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

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

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

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

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



<PAGE>


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

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

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

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

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

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

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

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



<PAGE>


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

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

      10(q)(2)    Letter Agreement between Noise Cancellation Technologies, Inc.
                  and QuietPower Systems, Inc. dated May 21, 1996,  incorporated
                  herein by  reference  to  Exhibit  10(q)(2)  of the  Company's
                  Annual Report on Form 10-K for the fiscal year ended  December
                  31, 1996.

      10(q)(3)    Letter Agreement between Noise Cancellation Technologies, Inc.
                  and QuietPower Systems, Inc. dated April 9, 1997, incorporated
                  herein by  reference  to  Exhibit  10(q)(3)  of the  Company's
                  Annual Report on Form 10-K for the fiscal year ended  December
                  31, 1996.

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

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

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

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

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

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

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

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

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

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


<PAGE>

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

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

      10(w)(1)    Cross  License  Agreement  dated April 15, 1997,  among Verity
                  Group plc,  New  Transducers  Limited  and Noise  Cancellation
                  Technologies, Inc., incorporated by reference to Exhibit 10(a)
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1997.***

      10(w)(2)    Security  Deed dated April 14, 1997,  from Noise  Cancellation
                  Technologies,  Inc.  to  Verity  Group  plc,  incorporated  by
                  reference to Exhibit 10(b) to the Company's  Quarterly  Report
                  on Form 10-Q for the quarter ended June 30, 1997.

      10(w)(3)    Common Stock Purchase  Option dated April 15, 1997, from Noise
                  Cancellation   Technologies,   Inc.   to  Verity   Group  plc,
                  incorporated  by reference to Exhibit  10(c) to the  Company's
                  Quarterly  Report on Form 10-Q for the quarter  ended June 30,
                  1997.

      10(w)(4)    Letter Agreement dated April 17, 1997, from Noise Cancellation
                  Technologies,  Inc.  to  Verity  Group  plc,  incorporated  by
                  reference to Exhibit 10(d) to the Company's  Quarterly  Report
                  on Form 10-Q for the quarter ended June 30, 1997.

      10(x)(1)    New Cross License  Agreement dated  September 27, 1997,  among
                  Verity Group plc, New Transducers Limited,  Noise Cancellation
                  Technologies,  Inc. and NCT Audio Products, Inc., incorporated
                  by  reference  to  Exhibit  10(a) to the  Company's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1997.

      10(x)(2)    Master License Agreement dated September 27, 1997, between New
                  Transducers Limited and NCT Audio Products, Inc., incorporated
                  by  reference  to  Exhibit  10(b) to the  Company's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1997.

      10(x)(3)    Letter   Agreement   dated  September  27,  1997,  from  Noise
                  Cancellation   Technologies,   Inc.   to  Verity   Group  plc,
                  incorporated  by reference to Exhibit  10(c) to the  Company's
                  Quarterly  Report on Form 10-Q for the quarter ended September
                  30, 1997.

      10(x)(4)    License  Agreement  dated  September  4, 1997,  between  Noise
                  Cancellation Technologies,  Inc. and NCT Audio Products, Inc.,
                  incorporated  by reference to Exhibit  10(d) to the  Company's
                  Quarterly  Report on Form 10-Q for the quarter ended September
                  30, 1997.
      10(y)       License Agreement dated July 15, 1998, between the Company and
                  NCT Hearing  Products,  Inc.,  incorporated  by  reference  to
                  Exhibit 10 of the Company's  Quarterly Report on Form 10-Q for
                  the period ended September 30, 1998.


<PAGE>


  *   21          Subsidiaries

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

  *   27          Financial Data Schedule.

  *   99(a)       Letter from Peters Elworthy & Moore,  Chartered Accountants,
                  to Noise Cancellation  Technologies,  Inc. regarding audited
                  financial statements of the Company's U.K.  subsidiaries and
                  reports of Peters Elworthy & Moore,  Chartered  Accountants,
                  on their audits of such financial  statements as at December
                  31, 1998 and for the year ended December 31, 1998.

      99(b)       Letter from Peters Elworthy & Moore, Chartered Accountants, to
                  Noise  Cancellation   Technologies,   Inc.  regarding  audited
                  financial  statements of the Company's U.K.  subsidiaries  and
                  reports of Peters Elworthy & Moore, Chartered Accountants,  on
                  their audits of such  financial  statements as at December 31,
                  1997 and for the year ended December 31, 1997, incorporated by
                  reference to Exhibit 99(a) to the  Company's  Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1997.

      99(c)       Letter from Peters Elworthy & Moore, Chartered Accountants, to
                  Noise  Cancellation   Technologies,   Inc.  regarding  audited
                  financial  statements of the Company's U.K.  subsidiaries  and
                  reports of Peters Elworthy & Moore, Chartered Accountants,  on
                  their audits of such  financial  statements as at December 31,
                  1996 and for the year ended December 31, 1996, incorporated by
                  reference to Exhibit 99(b) to the  Company's  Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1997.

  *   99(d)       Letter  from  Peters   Elworthy  &  Moore,   Chartered
                  Accountants,   to  Noise   Cancellation   Technologies,   Inc.
                  regarding  confirmation  that  the  accounts  for the year end
                  December  31,  1998  were  audited  under  auditing  standards
                  substantially   similar  to  US  General   Accepted   Auditing
                  Standards.

      99(e)       Letter from Peters Elworthy & Moore, Chartered Accountants, to
                  Noise Cancellation  Technologies,  Inc. regarding confirmation
                  that the  accounts  for the year end  December  31,  1997 were
                  audited under auditing standards  substantially  similar to US
                  General Accepted Auditing Standards, incorporated by reference
                  to Exhibit 99(d) to the  Company's  Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1997.

      99(f)       Employment  Agreement  by and  between the Company and Paul D.
                  Siomkos, dated February 26, 1998, incorporated by reference to
                  Exhibit 99 to the Company's  Quarterly Report on Form 10-Q for
                  the period ended June 30, 1998.

  *   99(g)       Letter  from  Peters   Elworthy  &  Moore,   Chartered
                  Accountants,   to  Noise   Cancellation   Technologies,   Inc.
                  regarding  confirmation  that  the  accounts  for the year end
                  December  31,  1995  were  audited  under  auditing  standards
                  substantially   similar  to  US  General   Accepted   Auditing
                  Standards.

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

   *  Filed herewith.

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

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


(b) The  following  report on Form 8-K was filed  during the last quarter of the
period covered by this Report:


      A  report  on Form  8-K was  filed  on  October  21,  1998  reporting  the
      stockholders approval on October 20, 1998 of an amendment to the Company's
      Restated Certificate of Incorporation  changing the name of the Company to
      "NCT Group, Inc.".



<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).


<PAGE>

   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.



<PAGE>

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.

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.



<PAGE>


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


   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").


<PAGE>

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.


<PAGE>

     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  Compmay'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
                                               ==============   ===========


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.



<PAGE>

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.

   Unaudited summarized financial information of TSA is as follows:


                                   For the Twelve
      (in thousands                 Months Ended
      (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


   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.



<PAGE>

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.




<PAGE>


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 NCT Group,  Inc. Stock  Incentive Plan ("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.

   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, 3.9 million shares of common stock for
the exercise of The New NXT, plc option, 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.




<PAGE>


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) 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.


<PAGE>

   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.

   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.

   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.



<PAGE>



   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>


                                  SIGNATURES

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

NCT GROUP, INC.
(formerly known as
Noise Cancellation Technologies, Inc.)

By:   /s/ MICHAEL J. PARRELLA                        Date: March 31, 1999
      -----------------------
      Michael J. Parrella, President

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

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


 /s/ MICHAEL J. PARRELLA        President, Chief         March 31, 1999
 -------------------------      Executive Officer
     Michael J. Parrella        and Director 
                                (Principal Executive
                                Officer)

 /s/ CY E. HAMMOND              Senior Vice President    March 31, 1999
 -------------------------      and Chief Financial 
     Cy E. Hammond              Chief Financial Officer
                                (Principal Financial and
                                Accounting Officer)


 /s/ JAY M. HAFT                Chairman of the Board    March 31, 1999
 -------------------------      of Directors and 
     Jay M. Haft                Director


 /s/ JOHN J. McCLOY II          Director                 March 31, 1999
 -------------------------
     John J. McCloy II


 /s/ SAMUEL A. OOLIE            Director                 March 31, 1999
 -------------------------
     Samuel A. Oolie


 /s/ STEPHAN CARLQUIST          Director                 March 31, 1999
 -------------------------
     Stephan Carlquist


<PAGE>


INDEPENDENT AUDITORS' REPORT ON SCHEDULE II

Board of Directors and Stockholders of
  NCT Group, Inc.

Our audits  were  conducted  for the  purpose of forming an opinion on the basic
consolidated   financial   statements  of  NCT  Group,   Inc.   (formerly  Noise
Cancellation  Technologies,  Inc.) as of December 31, 1997 and 1998 and for each
of the years in the three-year  period ended December 31, 1998 taken as a whole.
The information  included on Schedule II is presented for purposes of additional
analysis  and  is  not a  required  part  of the  basic  consolidated  financial
statements.  Such  information  has been  subjected to the  auditing  procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
consolidated financial statements taken as a whole. Also, such schedule presents
fairly the  information  set forth  therein in  compliance  with the  applicable
accounting regulations of the Securities and Exchange Commission.

Richard A. Eisner & Company, LLP

New York, New York
March 11, 1999



<PAGE>


<TABLE>
<CAPTION>

                                    SCHEDULE II
NCT GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands of
dollars)

------------------------------------------------------------------------------------
        Column A            Column B        Column C           Column D     Column E
------------------------------------------------------------------------------------
                                         (1)       (2)
                            Balance    Changed   Charged
                            at         in        to                         Balance
                            beginning  costs     other         Deductions-  at end
      Description           of         and       accounts-     Deductions-  of
                            period     expenses  describe      describe     period
-------------------------   --------   --------  ---------     --------     --------

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

Year ended December 31,
1997:                       
Allowance for doubtful        $123       $130      $ (65)   (2)  $150    (3)  $ 38
accounts
                            ========   ========  =========     ========     ========

Year ended December 31,
1998:                       
Allowance for doubtful        $ 38       $232      $ (42)   (2)  $   -        $228
accounts
                            ========   ========  =========     ========     ========

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

Year ended December 31,
1997:                       
Allowance for inventory       $262       $210      $   -         $   -        $472
obsolence
                            ========   ========  =========     ========     ========

Year ended December 31,
1998:                      
Allowance for inventory       $472       $365      $(329)   (1)  $   -        $508
obsolence
                            ========   ========  =========     ========     ========
</TABLE>


Attention  is  directed  to  the  foregoing  accountants'  reports  and  to  the
accompanying Notes to Financial Statements.

(1) To write off reserves applied to prior year-end inventory.

(2) To write off fully reserved accounts receivable deemed uncollectible.

(3) To reduce reserve for accounts collected.