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

                                   FORM 10-K/A
                                   -----------

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

For the fiscal year ended December 31, 2004

                                       or

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

For the transition period from ____________ to ____________


                         Commission file number: 0-18267


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


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

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

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

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

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

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

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

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

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

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

<PAGE>

                                EXPLANATORY NOTE

     NCT  Group,  Inc.  (also  referred  to as "we" or  "our")  is  filing  this
Amendment  No. 1 to its  Annual  Report on Form 10-K for the  fiscal  year ended
December 31, 2004,  originally filed with the Securities and Exchange Commission
on April 7, 2004,  solely for the purpose of correcting  certain  information in
(a) Note 2 of the Notes to the  Consolidated  Financial  Statements - Summary of
Significant Accounting Policies:  Goodwill and Intangible Assets with Indefinite
Useful  Lives  (paragraph  4) and (b) Note 22 of the  Notes to the  Consolidated
Financial   Statements  -  Litigation:   Production  Resource  Group  Litigation
(paragraph 6).

     Pursuant to Rule  12b-15  under the  Securities  Exchange  Act of 1934,  as
amended, the complete text of our Consolidated Financial Statements, as amended,
is set forth  below.  The  remainder  of the Form 10-K is  unchanged  and is not
reproduced in this  Amendment No. 1. This Amendment No. 1 speaks of the original
filing date of the Form 10-K and reflects only the changes  discussed above. The
changes discussed above had no impact on our consolidated  financial statements.
Updated  certifications  of our Chief  Executive  Officer  and  Chief  Financial
Officer are attached to this  Amendment No. 1 as exhibits,  as well as a consent
from Eisner LLP, our independent registered public accounting firm.

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
NCT Group, Inc.


We have audited the accompanying  consolidated balance sheets of NCT Group, Inc.
and  subsidiaries  (the  "Company")  as of December  31, 2003 and 2004,  and the
related  consolidated  statements of  operations,  comprehensive  loss,  capital
deficit and cash flows for each of the years ended  December 31, 2002,  2003 and
2004.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all
material  respects,  the consolidated  financial position of NCT Group, Inc. and
subsidiaries  as of December 31, 2003 and 2004 and the  consolidated  results of
their operations and their  consolidated  cash flows for each of the years ended
December 31, 2002,  2003 and 2004 in  conformity  with U.S.  generally  accepted
accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial  statements,  the  Company  has  negative  cash flows  from  operating
activities and it has recurring net losses,  has a working  capital  deficiency,
and is in default on certain  convertible  notes  payable.  These  factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 1. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

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


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


New York, New York
February 25, 2005

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

                                      F-1
<PAGE>

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

<TABLE>
<CAPTION>

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

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

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

Commitments and contingencies (Note 23)

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

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

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

                                      F-2
<PAGE>

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

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>

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

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

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

<PAGE>

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

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

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

<PAGE>

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

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

                                       F-4

<PAGE>

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

<TABLE>
<CAPTION>

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

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

                                      F-5
<PAGE>

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

1.   Background:

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

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

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

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that we will continue as a going concern, which contemplates continuity
of  operations,  realization  of assets and  satisfaction  of liabilities in the
ordinary  course of  business.  Our ability to  continue  as a going  concern is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  equity
and/or debt  financing and other funding  sources to meet our  obligations.  The
uncertainties  described in the preceding  paragraph raise  substantial doubt at
December  31,  2004  about our  ability  to  continue  as a going  concern.  The
accompanying  consolidated  financial  statements do not include any adjustments
relating to the  recoverability  and  classification  of the carrying  amount of
recorded  assets or the  amount and  classification  of  liabilities  that might
result should we be unable to continue as a going concern.

2.   Summary of Significant Accounting Policies:

Basis of Presentation:

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

                                      F-6
<PAGE>

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

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

Estimates:

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

Reclassifications:

     Some amounts in prior years' financial statements have been reclassified to
conform to the current year's presentation.

Income Taxes:

     Deferred  income  taxes  are  provided  for the  tax  effect  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes.

Cash and cash equivalents:

     Cash and cash  equivalents  include  all  highly  liquid  investments  with
original maturities of three months or less at date of acquisition.

Revenue Recognition:

     Revenue is recognized when earned. Revenue from product sales is recognized
when the product is shipped and title has passed. Revenue from advertising sales
is recognized when the advertisements are aired or displayed.  Artera recognizes
revenue  ratably over the period service is provided  known as the  subscription
period.  Revenue from  royalties is recognized  ratably over the royalty  period
based upon periodic reports submitted by the royalty obligor or based on minimum
royalty  requirements.  Revenue from  engineering  and  development  services is
generally recognized and billed as the services are performed. However, for some
engineering and development services contracts,  revenue is recognized using the
percentage of completion method after 10% of the total estimated costs have been
incurred.  Under the percentage of completion  method,  revenue and gross profit
are recognized as work is performed  based on the  relationship  of actual costs
incurred to total estimated costs at completion.  Estimated  losses are recorded
when  identified.  No revenue was recognized  under the percentage of completion
method for the years ended December 31, 2002, 2003 and 2004.

     For  technology  licensing  fees  paid by  joint  venturers,  co-venturers,
strategic partners or other licensees which are fixed and determinable, accepted
by the customer and  nonrefundable,  revenue is recognized upon execution of the
license agreement unless it is subject to completion of any performance criteria
specified  within  the  agreement,  in  which  case it is  deferred  until  such
performance  criteria is met.  Royalties  are  frequently  required  pursuant to
license  agreements  or  may be  the  subject  of  separately  executed  royalty
agreements. Revenue from royalties is recognized ratably over the royalty period
based upon periodic reports submitted by the royalty obligor or based on minimum
royalty requirements.

                                      F-7
<PAGE>

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

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

Marketable Securities:

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

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

Derivative Instruments:

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

Inventories:

     Inventories  are stated at the lower of cost or market.  Cost is determined
using the first-in, first-out (FIFO) method for Pro Tech and is determined using
the average cost method for all other  inventories.  We assess the realizability
of inventories by periodically conducting a physical inventory and reviewing the
movement of inventory  to determine  the value of items that are slow moving and
obsolete.  The  potential  for  near-term  product  engineering  changes  and/or
technological   obsolescence  and  current   realizability   are  considered  in
determining the adequacy of inventory  reserves.  At December 31, 2003 and 2004,
our inventory reserves were $0.3 million and $0.3 million, respectively.

Property and Equipment:

     Property and  equipment are stated at cost.  Depreciation  is computed over
the estimated  useful lives of the  depreciable  assets using the  straight-line
method.  Leasehold  improvements  are  amortized  over the shorter of the useful
lives or the related lease term.

Deferred Charges:

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

                                      F-8
<PAGE>

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

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

Software Costs:

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

Goodwill and Intangible Assets with Indefinite Useful Lives:

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

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

<TABLE>
<CAPTION>

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

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

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

                                      F-9
<PAGE>

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

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

Patent Rights and Other Intangible Assets with Finite Useful Lives:

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

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

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

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

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


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

                                      F-10
<PAGE>

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

Other Assets:

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

Advertising:

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

Comprehensive Loss:

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

Foreign Currency Translation:

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

Loss per Common Share:

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

     When  preferred  stock is  convertible  into common  stock at an  effective
conversion rate that represents a discount from the common stock market price at
the time of issuance, the discounted amount is an assured incremental yield, the
"preferred  stock dividend  requirement,"  to the preferred  stockholders and is
accounted for as an embedded  dividend to preferred  stockholders.  In addition,
when warrants are issued in conjunction  with such convertible  securities,  the
fair value of  warrants  is  determined  by applying  the  Black-Scholes  option
pricing model.

                                      F-11
<PAGE>

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

In  accordance  with Emerging  Issues Task Force  ("EITF")  Issue No. 96-13,  as
codified  in  EITF  00-19,  these  warrants  are  considered   permanent  equity
instruments  since they may only be actually  settled  with the  issuance of our
common  stock.  The proceeds  received  from the  transaction  are  allocated in
accordance with EITF 98-05 and EITF 00-27. The allocated fair value is deemed to
be a "preferred stock beneficial  conversion  feature" and is accounted for as a
component of additional  paid-in  capital.  We have  reflected  such  beneficial
conversion feature and preferred stock dividend requirement as a preferred stock
dividend  and  as  an  adjustment  to  the  net  loss   attributable  to  common
stockholders.

Concentrations of Credit Risk:

     Financial  instruments,  which  potentially  subject us to concentration of
credit risk,  consist of cash and cash  equivalents  and trade  receivables.  We
maintain  cash  and  cash   equivalents  in  accounts  with  various   financial
institutions in amounts which, at times,  may be in excess of the FDIC insurance
limit. We have not experienced any losses on such accounts and do not believe we
are exposed to any significant risk with respect to cash and cash equivalents.

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

Significant Customers:

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

Fair Value of Financial Instruments:

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

Stock-Based Compensation:

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

                                      F-12
<PAGE>

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

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

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

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

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

Recent Accounting Pronouncements:

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

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

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

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

                                      F-13
<PAGE>

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

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

3.   Acquisitions:

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

     Our acquisition of DMC NY is summarized as follows:

<TABLE>
<CAPTION>

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

4.   Marketable Securities:

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

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

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

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

                                      F-14
<PAGE>

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

5.   Accounts Receivable:

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

6.   Inventories:

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

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

7.   Property and Equipment:

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

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

                                      F-15
<PAGE>

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

8.   Other Assets:

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


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

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

9.   Accrued Expenses:

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

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

                                      F-16
<PAGE>

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

10.  Notes Payable:

<TABLE>
<CAPTION>

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

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

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

                                      F-17
<PAGE>

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

11.  Convertible Notes Payable:

<TABLE>
<CAPTION>

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


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

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

                                      F-18
<PAGE>

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

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

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

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

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

                                      F-19
<PAGE>

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

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

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

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

12.  Deferred Revenue:

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

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

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

                                      F-20
<PAGE>

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

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

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

14.  Other Liabilities:

<TABLE>
<CAPTION>

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


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

</TABLE>

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

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

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

                                      F-21
<PAGE>

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

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

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

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

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

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

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

                                      F-22
<PAGE>

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

Java  Turbo-J  technology.  Advancel  also granted ITC  non-exclusive  rights to
Advancel's Java smartcard core. In consideration  for this license,  we received
1.2 million  shares of ITC's common  stock,  valued at $6.0  million  determined
using the quoted  price of the stock on the date the shares were  received,  and
on-going  unit  royalties.  With the  exception  of specific  rights  granted to
STMicroelectronics  in 1998, the license  granted ITC an exclusive,  irrevocable
worldwide license to design,  make, use, transfer,  market and sell products and
intellectual  property  incorporating  or  based  upon  Advancel's  TJ  and  t2J
technology.

     Effective June 30, 2000, in conjunction with this license  agreement,  NCT,
Advancel and ITC entered into a strategic  alliance and  technology  development
amendment pursuant to which NCT would fund research and engineering  development
related to microprocessor  and  semiconductor  chips for which NCT would pay ITC
$2.5 million.  NCT issued  9,523,810  shares of its common stock having a market
value of $3.0 million to ITC as prepaid  research and engineering  costs. In the
event ITC did not  receive  $2.5  million in  proceeds  from the sale of the NCT
shares,  NCT was  required to make up any  shortfall  in cash or return to ITC a
sufficient  number of ITC shares of common  stock  received  by NCT as  outlined
above.  The value NCT would  receive  upon return of the ITC shares would be the
agreed  value of $5.00 per share,  the market  value of the ITC shares  when NCT
received  them.  Conversely,  if ITC received  $2.5 million in proceeds from the
sale of NCT shares and there were NCT shares remaining, ITC would have to return
the unsold  share  excess to NCT.  At each of December  31,  2003 and 2004,  the
shortfall  based  upon  the  sales of NCT  common  stock  reported  to us by ITC
amounted to $1.4 million,  included in other  liabilities.  Although the license
agreement and the strategic alliance and technology development amendment,  both
with ITC,  are  separate  and  unrelated,  we  determined  that  they  should be
accounted for as a single  transaction,  thus,  both agreements are combined for
financial reporting  purposes.  Prepaid research and engineering costs have been
recognized in expense as these  services are performed by ITC.  These costs were
billed by ITC based on the  number of hours  spent by ITC  personnel  developing
this chip during each period. In addition,  we recognized license fee revenue in
amounts to match the research and engineering expense recognized.  The strategic
alliance  and  technology  development  amendment  does  not  have a  definitive
expiration  date. For each of the years ended December 31, 2002,  2003 and 2004,
we did not recognize  license fee revenue or research and  engineering  expenses
related to ITC.

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

15.  Capital Stock:

Authorized Capital Stock:

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

Common shares available for future issuance

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

                                      F-23
<PAGE>

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

<TABLE>
<CAPTION>

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

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

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

Transactions with Crammer Road LLC:

2002 Exchange Agreement

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

DMC New York, Inc.

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

Private Equity Credit Agreements

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

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

                                      F-24
<PAGE>

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

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

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

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

Settlement with Crammer Road

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

Shares Issued for Acquisitions:

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

Private Placement and Issuance of NCT Common Stock:

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

                                      F-25
<PAGE>

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

Shares Issued upon Conversion or Exchange of Indebtedness:

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

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

Shares Issued for Settlement of Legal Claims:

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

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

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

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

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

Shares Issued to Vendors and Others:

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

ConnectClearly.com, Inc. Initial Financing:

     On August 10,  2000,  we entered into an  agreement  with three  accredited
investors    for   the    financing    of   our    majority-owned    subsidiary,
ConnectClearly.com,   Inc.   In   connection   with  the   initial   funding  of
ConnectClearly,  we issued 1,000 shares of ConnectClearly  common stock to these
investors in consideration for $0.5 million in cash and conversion of promissory
notes payable,  due to two of the investors,  totaling $0.5 million.  During the
years ended December 31, 2002, 2003 and 2004, no shares of  ConnectClearly  were
exchanged  for shares of our common  stock.

                                      F-26
<PAGE>

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

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

Distributed Media Corporation:

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

NCT Audio Products, Inc.:

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

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

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

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

NCT Group, Inc. Preferred Stock:

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

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

                                      F-27
<PAGE>

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

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

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

Artera Group, Inc. Preferred Stock:

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

     We entered into an exchange  rights  agreement in 2001 with ten  accredited
investors  who hold $4.3  million in aggregate  stated value of Artera  series A
preferred  stock.  Each of the ten holders of Artera series A preferred stock is
entitled  to  exchange  the Artera  series A  preferred  stock for shares of NCT
common stock at an exchange  price per share of 100% of the average  closing bid
price of NCT common stock for the five  trading days prior to the exchange  date
and may not convert  into Artera  common  stock.  NCT is  obligated  to register
shares of its common stock for the exchange of Artera series A preferred  stock.
For the years ended  December 31, 2002,  2003 and 2004,  we incurred  charges of
$2.1 million, $1.9 million and $0.6 million,  respectively, for non-registration
of the  underlying  shares of NCT common  stock.  These  amounts are included in
preferred stock dividends on the  consolidated  statements of operations for the
years then ended. Pursuant to the exchange rights agreement,  NCT has the option
at any time to redeem any outstanding  Artera series A preferred stock by paying
the holders  cash equal to the  aggregate  stated  value of the Artera  series A
preferred stock being redeemed (together with accrued and unpaid dividends).  As
a result of a  settlement  of a legal  action,  which  included  $3.3 million of
accrued  non-registration fees payable relating to our inability to register the
shares,  we recorded a gain of $2.0  million in 2003  included in  non-operating
other  (income)  expense,  and we are no longer  accruing  these  fees for three
holders of Artera series A preferred  stock.  Pursuant to an exchange rights and
release  agreement dated April 10, 2003,  three holders of an aggregate of 3,154
shares of Artera  series A  preferred  stock  received  an  additional  right to
exchange their shares into a to be designated series of NCT preferred stock upon
thirty days prior  written  notice.  As of December  31,  2004,  8,299 shares of
Artera series A preferred stock are issued and  outstanding,  and no shares have
been converted or exchanged.

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

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

                                      F-28
<PAGE>

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

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

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

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

Treasury Stock:

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

16.  Common Stock Options and Warrants:

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

Stock Options:

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

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

                                      F-29
<PAGE>

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

<TABLE>
<CAPTION>

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

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

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

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

1987 Plan

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

1992 Plan

     On October 6,  1992,  we adopted  the 1992 Plan for the grant of shares and
options to purchase up to 10.0 million  shares of common stock to our  officers,
employees,  consultants  and directors.  The exercise  price of options  granted
under the 1992 Plan was  required to be at least equal to the fair market  value
of such  shares  on the date of the  grant,  and  such  options  were  generally
exercisable over a five to ten-year period with vesting  schedules as determined
by the Board of Directors.  On October 20, 1998,  the  stockholders  approved an
amendment to the 1992 Plan to increase the aggregate  number of shares of common
stock available there under to 30.0 million.  On July 13, 2000, the stockholders
approved an  amendment  to the 1992 Plan to  increase  the  aggregate  number of
shares of our common stock under the 1992 Plan from 30.0 million to 50.0 million
shares.

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

                                      F-30
<PAGE>

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

     1992 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

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

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

Directors Plan

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

2001 Plan

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

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

                                      F-31
<PAGE>

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

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

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

     2001 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

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

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

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

Non-Plan

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

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

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

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

Warrants:

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

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

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

                                      F-33
<PAGE>

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

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

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

     Warrant activity is summarized as follows:

<TABLE>
<CAPTION>

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

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

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

<TABLE>
<CAPTION>

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

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

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

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

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

17.  Other (Income) Expense:

     Other operating income consisted of the following:

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

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

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

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

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

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

18.  Costs of Exiting Activities:

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

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

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

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

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

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

20.  Related Parties:

Convertible Notes and Warrants Issued to Carole Salkind:

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

Consulting Agreements with Affiliates of Carole Salkind:

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

                                      F-37
<PAGE>

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

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

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

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

                               (In thousands of dollars, except share data)

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

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

                                      F-38
<PAGE>

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

SpringerRun, Inc.:

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

Spyder Technologies Group, LLC:

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

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

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

                                      F-39
<PAGE>

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

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

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

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

Incentive Compensation of Management:

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

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

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

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

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

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

                                      F-40
<PAGE>

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

Indebtedness of Management:

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

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

Kambrium, AB:

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

Manatt Jones Global Strategies, LLC:

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

LightSpeed Networks, Inc.:

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

                                      F-41
<PAGE>

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

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

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

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

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

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

Crammer Road LLC:

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

                                      F-42
<PAGE>

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

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

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

21.  Income Taxes:

     We provide for income taxes in  accordance  with SFAS No. 109,  "Accounting
for  Income  Taxes."  Accordingly,  deferred  tax  assets  and  liabilities  are
established for temporary  differences between tax and financial reporting bases
of  assets  and  liabilities.  A  valuation  allowance  is  established  when we
determined that it is more likely than not that a deferred tax asset will not be
realized.  Our  temporary  differences  primarily  result  from  the  losses  on
available-for-sale   securities  and  stock  compensation  expenses  related  to
warrants and options.

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

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

<TABLE>
<CAPTION>

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

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation  of future  taxable  income during the period in
which those temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities,  projected future taxable

                                      F-43
<PAGE>

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

income and tax planning strategies in making this assessment.

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
our deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>

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

22.  Litigation:

Theater Radio Network - InsiderStreet (Neometrix) Litigation:

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

Production Resource Group Litigation:

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

                                      F-44
<PAGE>

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

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

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

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

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

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

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

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

Founding Midcore Shareholder Litigation:

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

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

                                      F-45
<PAGE>

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

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

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

Artera Trademark Oppositions:

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

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

23.  Commitments and Contingencies:

     We are obligated for minimum  annual  rentals  under  operating  leases for
offices,  warehouse space and laboratory space, expiring through March 2010 with
various renewal options, as follows

                                      F-46
<PAGE>

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

Leases:

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

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

Benefit Plan Liability:

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

Advertising Commitments:

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

Contingencies:

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

24.      Segment Information:

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

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

                                      F-47
<PAGE>

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

<TABLE>
<CAPTION>

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


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


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

</TABLE>

Communications:

Artera Group, Inc.:

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

Pro Tech Communications, Inc.:

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

Noise Cancellation Technologies (Europe) Ltd.:

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

                                      F-48
<PAGE>

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

ConnectClearly.com, Inc.:

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

Media:

Distributed Media Corporation:

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

Technology:

Advancel Logic Corporation:

     Advancel  participates in the native Java embedded  microprocessor  market.
Advancel's  objective  is to simplify  application  development  by  providing a
platform for the same software to run on many  different  kinds of computers and
other smart devices. Advancel has developed a family of processor cores that can
execute  instructions  written  both in Java byte  code and the  C/C++  computer
language, significantly enhancing the rate of instruction execution, which opens
up many potential new  applications,  including next generation home appliances,
automotive applications, smart cards for a variety of applications, hearing aids
and mobile communications devices.

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

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

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

                                      F-49
<PAGE>

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

26.  Selected Quarterly Financial Data (Unaudited):

     The following  tables contain  selected  quarterly  financial data for each
quarter of 2004 and 2003. We believe that the following information reflects all
normal  recurring   adjustments   necessary  for  a  fair  presentation  of  the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future periods.

<TABLE>
<CAPTION>

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


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

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

</TABLE>

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

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

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

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

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

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

27.  Subsequent Events:

Transactions with Carole Salkind and Affiliates:

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

                                      F-50
<PAGE>

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

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

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

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

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

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

     On  February  21,  2005,  we  refinanced  an 8%  convertible  note  that we
defaulted on by  non-payment  dated August 10, 2004 by issuing Ms. Salkind an 8%
convertible note in the principal amount of $457,762, representing the principal
rolled over  ($400,000),  default  penalty (10% of the principal in default) and
accrued interest.  The note matures on August 21, 2005 and may be converted into
shares of our  common  stock at a  conversion  price per  share of  $0.0195  and
exchanged for shares of common stock of any of our subsidiaries  (other than Pro
Tech) that makes a public  offering of its common stock (at the public  offering
price).  In connection  with the issuance of this note, we issued Ms.  Salkind a
five-year  warrant  to  purchase  7,750,000  shares  of our  common  stock at an
exercise price per share of $0.019.

     On March 8, 2005,  we issued  Ms.  Salkind  an 8%  convertible  note in the
principal  amount of $390,000,  for which Ms.  Salkind paid us $390,000 in cash.
The note is due September 8, 2005 and may be converted into shares of our common
stock at a  conversion  price per share of $0.018  and  exchanged  for shares of
common  stock of any of our  subsidiaries  (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
7,000,000 shares of our common stock at an exercise price per share of $0.018.

                                      F-51
<PAGE>

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

     On March 11, 2005, we refinanced an 8%  convertible  note that we defaulted
on by  non-payment  dated  September  2,  2004  by  issuing  Ms.  Salkind  an 8%
convertible note in the principal amount of $457,201, representing the principal
rolled over  ($400,000),  default  penalty (10% of the principal in default) and
accrued  interest.  The note matures on September  11, 2005 and may be converted
into shares of our common  stock at a  conversion  price per share of $0.018 and
exchanged for shares of common stock of any of our subsidiaries  (other than Pro
Tech) that makes a public  offering of its common stock (at the public  offering
price).  In connection  with the issuance of this note, we issued Ms.  Salkind a
five-year  warrant  to  purchase  7,750,000  shares  of our  common  stock at an
exercise price per share of $0.018.

     On March 23 2005, we refinanced an 8% convertible note that we defaulted on
by non-payment  dated September 2, 2004 by issuing Ms. Salkind an 8% convertible
note in the principal amount of $2,001,439.22, representing the principal rolled
over  ($1,751,034.50),  default  penalty  (10% of the  principal in default) and
accrued  interest.  The note matures on September  23, 2005 and may be converted
into shares of our common stock at a  conversion  price per share of $0.0183 and
exchanged for shares of common stock of any of our subsidiaries  (other than Pro
Tech) that makes a public  offering of its common stock (at the public  offering
price).  In connection  with the issuance of this note, we issued Ms.  Salkind a
five-year  warrant  to  purchase  33,000,000  shares of our  common  stock at an
exercise price per share of $0.0183.

     On March 29,  2005,  we issued Ms.  Salkind an 8%  convertible  note in the
principal  amount of $390,000,  for which Ms.  Salkind paid us $390,000 in cash.
The note is due  September  29,  2005 and may be  converted  into  shares of our
common stock at a conversion  price per share of $0.018 and exchanged for shares
of common stock of any of our subsidiaries (except Pro Tech) that makes a public
offering of its common stock (at the public offering price).  In connection with
the issuance of this note, we issued Ms. Salkind a five-year warrant to purchase
7,000,000 shares of our common stock at an exercise price per share of $0.018.

Series I Preferred Stock:

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

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

<TABLE>
<CAPTION>

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

                                      F-52
<PAGE>

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

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

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

Incentive Compensation of Management:

     On March 31,  2005  three  executives  agreed  to waive a portion  of their
incentive  bonus  (see  Note 20)  earned  in 2004.  These  amounts  waived  were
$326,000,  107,000 and $158,000 for the Chief Executive  Officer,  President and
Chief  Financial  Officer,  respectively.  Further,  the payment of a portion of
these bonus amounts are subject to certain limitations..  In addition, effective
January 1, 2005 this bonus  arrangement  has been  revised and  bonuses  will be
calculated on certain actual cash inflows.  Bonuses based on equity or financing
cash inflows will cease effective June 30, 2005.

                                      F-53
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II


Board of Directors and Stockholders of
NCT Group, Inc.

Our audits  were  conducted  for the  purpose of forming an opinion on the basic
consolidated  financial  statements of NCT Group,  Inc. and  subsidiaries  as of
December  31, 2003 and 2004 and for each of the years ended  December  31, 2002,
2003 and 2004 taken as a whole. The 2002, 2003 and 2004 information  included on
Schedule II is  presented  for  purposes  of  additional  analysis  and is not a
required part of the basic consolidated  financial statements.  Such information
has been subjected to the auditing procedures applied in the audits of the basic
consolidated  financial  statements and, in our opinion, is fairly stated in all
material  respects in relation to the basic  consolidated  financial  statements
taken as a whole.


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


New York, New York
February 25, 2005

                                      F-54
<PAGE>

<TABLE>
<CAPTION>

                                                              SCHEDULE II

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


------------------------------------------------------------------------------------------------------------------------------------
               Column A                                 Column B              Column C                   Column D       Column E
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Charged      Charged to
                                                        Balance at      to costs        other                           Balance at
                                                        beginning          and        accounts -       Deductions -       end of
              Description                                of year        expenses      Describe          Describe           year
---------------------------------------
<S>                       <C> <C>                       <C>             <C>         <C>                <C>               <C>
Allowance for doubtful accounts:
      Year ended December 31, 2002                      $    298        $    77     $   (29) (a)       $   (6) (b)       $    340
      Year ended December 31, 2003                           340              8          (7) (a)            -                 341
      Year ended December 31, 2004                           341             42         (30) (a)            -                 353

Reserve for uncollectible amounts:
      Year ended December 31, 2002                         1,000              -           -                 -               1,000
      Year ended December 31, 2003                         1,000              -           -                 -               1,000
      Year ended December 31, 2004                         1,000            102           -                 -               1,102

Allowance for inventory obsolescence:
      Year ended December 31, 2002                           791            239           -              (626) (b)            404
      Year ended December 31, 2003                           404              -           -              (122) (b)            282
      Year ended December 31, 2004                           282            114           -               (54) (b)            342

Accumulated depreciation:
      Year ended December 31, 2002                         4,594            852         186  (c)       (1,836) (b)          3,796
      Year ended December 31, 2003                         3,796            429          25  (c)       (1,606) (b)          2,644
      Year ended December 31, 2004                         2,644            249          20  (c)         (193) (b)          2,720

Accumulated goodwill amortization:
      Year ended December 31, 2002                         1,124              -           -                 -               1,124
      Year ended December 31, 2003                         1,124              -           -                 -               1,124
      Year ended December 31, 2004                         1,124              -           -              (424) (d)            700

Accumulated patent and other intangibles amortization:
      Year ended December 31, 2002                         3,886            453       2,116  (e)       (2,495) (f)          3,960
      Year ended December 31, 2003                         3,960            296           -                 -               4,256
      Year ended December 31, 2004                         4,256            140           -                (4) (f)          4,392
</TABLE>

Attention  is  directed  to  the  foregoing  report  of  independent  registered
accounting firm and to the notes to our consolidated financial statements.

Footnotes:
---------
(a) Accounts written off directly to expense.
(b) Accounts previously reserved for, written off in current year.
(c) Currency translation adjustments.
(d) Impairment of goodwill.
(e) Write-down intangibles to estimated fair value.
(f) Write-off fully amortized intangibles.

                                      F-55
<PAGE>

                                   SIGNATURES

Pursuant to the  requirement of Section 13 or 15(d) of the  Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 14, 2005.


                                         NCT GROUP, INC.

                                         By:  /s/ MICHAEL J. PARRELLA
                                              ----------------------------------
                                              Michael J. Parrella
                                              Chief Executive Officer and
                                              Chairman of the Board of Directors


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


         Signature                          Title                      Date
--------------------------------------------------------------------------------


/s/ MICHAEL J. PARRELLA         Chief Executive Officer and       April 14, 2005
-------------------------   Chairman of the Board of Directors
   Michael J. Parrella         (Principal Executive Officer)


/s/ IRENE LEBOVICS                President and Director          April 14, 2005
-------------------------
   Irene Lebovics

/s/ CY E. HAMMOND              Senior Vice President, Chief       April 14, 2005
-------------------------     Financial Officer and Director
   Cy E. Hammond               (Principal Financial Officer)


/s/ JOHN J. MCCLOY                       Director                 April 14, 2005
-------------------------
   John J. McCloy II


/s/ SAMUEL A. OOLIE                      Director                 April 14, 2005
-------------------------
   Samuel A. Oolie

                                       S-1