<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-K

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

FOR THE FISCAL YEAR ENDED      December 31, 1999
                               -------------------------------------------------

Commission File Number:        0-18267
                               -------------------------------------------------

   NCT Group, Inc. (formerly known as Noise Cancellation Technologies, Inc.)
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S>                                                          <C>
Delaware                                                     59-2501025
--------------------------------------------------------------------------------
(State or other jurisdiction of                              (I.R.S. Employer or
incorporation organization)                                  Identification No.)

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

(410) 636-8700
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
</TABLE>

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

            [X] Yes     [  ]  No

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

The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant was $301.4 million as of March 31, 2000.

The number of shares outstanding of the Registrant's common stock is 275,068,921
as of March 31, 2000.


                       DOCUMENTS INCORPORATED BY REFERENCE

       Certain information contained in the Proxy Statement for the Annual
           Meeting of Stockholders of Registrant to be filed with the
                 Securities and Exchange Commission on or before
          April 29, 2000, is incorporated by reference into Part III of
                                 this Form 10-K.
<PAGE>   2
                                     PART I


ITEM 1.  BUSINESS

A.   GENERAL DEVELOPMENT OF BUSINESS

     NCT Group, Inc. ("NCT" or the "Company") is a leading technology developer
with an extensive portfolio of proprietary algorithms and a wide variety of
product offerings for consumer, commercial and industrial applications. The
Company specializes in the utilization of sound and signal waves to reduce
noise, improve signal-to-noise ratio and enhance sound quality. Commercial
application of the Company's technologies is comprised of a number of product
offerings, including NoiseBuster(R) consumer and communications active noise
reduction ("ANR") headsets; ProActive(R) ANR industrial earmuffs and headsets;
Gekko(TM) flat speakers; and ClearSpeech(R) microphones, speakers and other
products. In addition to products, NCT's innovative algorithms are available for
licensing to manufacturers for use in commercial and consumer products.

     During 1999, the Company focused its efforts on the development of
DistributedMedia.com, Inc. ("DMC"). DMC is a wholly-owned subsidiary of NCT
which was formed in November 1998. DMC is a new microbroadcasting media company
that delivers licensed CD-quality music as well as on-air and billboard
advertising to out-of-home commercial and professional venues via a digital
network of place-based micrbroadcasting stations, called Sight & Sound(TM). The
Sight & Sound(TM) system consists of a central control network that
communicates to a digital broadcast station, which plays music selections and
advertisements through flat panel speakers. The speaker grilles double as visual
billboards. The speakers will be provided by NCT Audio Products, Inc..

     As of December 31, 1999, the Company and its business units currently hold
503 patents and related rights worldwide and an extensive library of know-how
and other proprietary technology. These patents allow the Company to develop
major product lines, which include:

     -    NoiseBuster(R) ANR communications headsets

     -    NoiseBuster(R) ANR consumer headphones

     -    ProActive(R) industrial/commercial ANR headsets

     -    Gekko(TM) flat speakers, frames, prints and subwoofers

     -    ClearSpeech(R) microphones, speakers and other products

     -    ClearSpeech(R) corporate intranet telephone software

     The Company also markets its technologies through licensing to third
parties for fees and royalties. During 1999, the Company entered into a new
technology license agreement with Lernout & Hauspie Speech Products N.V.
("L&H"), has expanded its cross-license agreement with New Transducers Ltd.
("NXT" formerly known as Verity Group plc) and has received royalties pursuant
to several of its technology license agreements.

     The Company's operating revenues are comprised of technology licensing fees
and royalties, product sales and engineering and development services.
Historically, the Company derived the

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<PAGE>   3
majority of its revenues from engineering and development services and
technology licensing fees. As distribution channels are established and as
product sales, market acceptance and awareness of the commercial applications of
the Company's technologies build, revenues from technology licensing fees,
royalties and product sales are projected to fund an increasing share of the
Company's requirements. The revenues from these sources, if realized, will
reduce the Company's dependence on revenues from engineering and development
services. Total revenues for 1999 consisted of approximately 31% in product
sales, 19% in engineering and development services and 50% in technology
licensing fees and royalties.

     The Company has entered into a number of strategic supply, manufacturing
and marketing alliances with leading global companies to commercialize its
technology. These strategic alliances historically have funded a majority of the
Company's research and development and provided the Company with reliable
sources of components, manufacturing expertise and capacity, as well as
extensive marketing and distribution capabilities. NCT has continuing
relationships with Walker Manufacturing Company ("Walker") (a division of
Tennessee Gas Pipeline Company, a wholly owned subsidiary of Tenneco, Inc.), AB
Electrolux ("Electrolux"), Ultra Electronics Ltd. ("Ultra"), The Charles Stark
Draper Laboratory, Inc. ("Draper"), Oki Electric Industry Co., Ltd. ("Oki") and
New Transducers Ltd., among others, in order to penetrate major markets more
rapidly and efficiently, while minimizing the Company's own capital
expenditures. See G. "Strategic Alliances" and Note 3 - "Notes to Financial
Statements" for further discussion.

     An important factor for the Company's continuing development of its
technology is its ability to recruit and retain key personnel. As of December
31, 1999, the Company had 75 employees, including 37 engineers and associated
technical staff members.

     The Company was incorporated in Nevada on May 24, 1983. In April 1985, the
Company moved its corporate domicile to Florida and assumed its former name,
Noise Cancellation Technologies, Inc. In January 1987, following the assumption
of control of the Company by the present management, the Company's state of
incorporation was changed to Delaware. At the annual meeting of stockholders of
the Company on October 20, 1998, the stockholders approved changing the name of
the Company from Noise Cancellation Technologies, Inc. to NCT Group, Inc.
effective October 21, 1998.

     NCT's executive offices, research and product development facility are
located at 1025 West Nursery Road, Suite 120, Linthicum, Maryland 21090;
telephone number (410) 636-8700. NCT maintains sales and marketing offices at
One Dock Street, Suite 300, Stamford, Connecticut 06902; telephone number
(203) 961-0500. The Company's European operations are conducted through its
product development and marketing facility in Cambridge, England. NCT also
maintains a marketing facility in Tokyo, Japan. The Company's Advancel
operations are conducted in San Jose, California. The Company's DMC operations
are located in Stamford, Connecticut.

     The Company is organized into strategic business units, each of which is
targeted to the commercialization of its own products in specific markets. These
include its subsidiaries, NCT Audio Products, Inc. ("NCT Audio"), NCT Hearing
Products, Inc. ("NCT Hearing"), Advancel

                                       3
<PAGE>   4
Logic Corporation ("Advancel"), and DistributedMedia.com, Inc. The Company also
operates a division, NCT Communications. Refer to Note 17 - "Notes to Financial
Statements" for further information about the Company's business segments.


B.   BUSINESS STRATEGY

     The Company's strategy is to leverage off its existing base of proprietary
technology by expanding into areas outside of traditional active noise and
vibration control to reach markets having greater opportunities such as
communications, audio and microbroadcasting media. The acquisition of certain
assets and all of the intellectual property of Active Noise and Vibration
Technologies, Inc. ("ANVT") in 1994 broadened the Company's portfolio of
intellectual property and removed restrictions on the Company regarding
licensing a series of patents developed by Professor G.B.B. Chaplin relating to
active noise cancellation technology (the "Chaplin Patents") to unaffiliated
third parties (see C. "Technology"). The Company can license the Chaplin Patents
directly to unaffiliated third parties, which provides the Company with a
greater ability to earn technology licensing fees and royalties from such
patents. Thus, while the Company continues to focus on products that the Company
believes will generate near term revenue, it is increasing its emphasis on
technology licensing fees and royalties. Further, the Company is working
continuously to lower the cost of its products and improve their technological
performance.


C.   TECHNOLOGY

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

                                       4
<PAGE>   5

                             ACTIVE NOISE REDUCTION

                                 [WAVE GRAPHIC]

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

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

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

     ClearSpeech(R) Adaptive Speech Filter ("ClearSpeech(R)" and "ASF"). The
ClearSpeech(R) algorithm removes noise from voice transmissions. ClearSpeech(R)
parameters can be adjusted to optimize performance for a particular noise, or
can be set to provide noise reduction across a wide range of noises.
ClearSpeech(R) applications include teleconferencing systems, cellular
telephones and "airphones," telephone switches, echo cancellers, and
communications systems in which background noise is predominant. ClearSpeech(R)
is currently available for use on three hardware platforms. The Company has
added an acoustic echo cancellation algorithm, which runs on various platforms
including personal computers ("PCs") and fixed floating digital signal
processors ("DSP").

                                       5
<PAGE>   6
     ClearSpeech(R)-Acoustic Echo Cancellation ("AEC"). AEC removes acoustic
echoes in hands-free full duplex communication systems. AEC is an adaptive,
frequency-based algorithm that continuously tracks and updates the changes in
the acoustic path between the loudspeaker and the microphone to eliminate the
acoustic echo at the source. The algorithm can be changed to accommodate
different audio bandwidths and acoustic tail lengths for use in a variety of
applications such as cellular telephony, audio and video teleconferencing,
computer telephony, gaming and voice recognition.

     ClearSpeech(R)-Compression and TurboCompression ("CTC"). CTC maximizes
bandwidth efficiency in wireless, satellite and intra- and Internet
transmissions and creates smaller, more efficient voice files while maintaining
speech quality. The compression can be combined with ASF technology to further
improve the compression rate and voice quality. CTC comes in two versions and
can be implemented as either a fixed or variable-rate speech coder. CTC has many
applications such as: intranet and Internet telephony, audio and video
conferencing, PC voice and music, telephone answering devices, real-time
multimedia multitasking, toys and games, and playback devices such as personal
device assistants ("PDA") and global positioning satellite ("GPS") navigation
systems.

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

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

     Digital Broadcasting Station System ("DBSS") Software. DBSS software is
being utilized by DMC to deliver customized music programming to each site.
Advertising is scheduled and updated via a communications link such as the
Internet. The software also performs status checking, play log functions and
other diagnostic functions made available to the central control network.

                                       6
<PAGE>   7
D.   NCT PROPRIETARY RIGHTS AND PROTECTION

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

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

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

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

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

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<PAGE>   8
     In 1994, the Company obtained a license for the exclusive rights to the SMM
technology developed by Draper in Cambridge, Massachusetts. At this time, four
patents describing the basic technology have been issued.

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

     Since 1996, the Company has been granted 311 new patents.

     The Company holds or has rights to 313 inventions as of December 31, 1999,
including 113 United States patents and over 390 corresponding foreign patents
for a total of 503 patents and related rights. The Company has pending 166 U.S.
and foreign patent applications. NCT's engineers have made 151 invention
disclosures for which the Company is in the process of preparing patent
applications. The Company's patents have expiration dates ranging from 2000
through 2016, with the majority occurring during or after 2009.

     The Company has been granted the following trademarks:

<TABLE>
<CAPTION>
             MARK                           FIELD OF USE
             ----                           ------------
        <S>                                 <C>
        NCT logo                            Company logo
        NoiseBuster(R)                      headsets
        NoiseEater(R)                       HVAC systems
        ClearSpeech(R)                      adaptive speech filter products
        VariActive(R)                       headsets
        ProActive(R)                        headsets
</TABLE>

     The Company has also applied for 12 trademarks including:

<TABLE>
<CAPTION>
             MARK                           FIELD OF USE
             ----                           ------------
        <S>                                 <C>
        Gekko(TM)                           flat audio speakers
        ArtGekko(TM)                        flat audio speakers
        Sweet Space(TM)                     flat audio speakers
        Top Down Surround Sound(TM)         vehicular audio speakers
        Sight & Sound(TM)                   microbroadcasting
</TABLE>

     No assurance can be given as to the range or degree of protection any
patent or trademark issued to, or licensed by, the Company will afford or that
such patents, trademarks or licenses will provide protection that has commercial
significance or will provide competitive advantages for the Company's products.
No assurance can be given that the Company's owned or licensed patents or
trademarks will afford protection against competitors with similar patents,
products or trademarks. No assurance exists that the Company's owned or licensed
patents or trademarks will not be challenged by third parties, invalidated, or
rendered unenforceable. Furthermore, there can be no assurance that any pending
patent or trademark applications or applications filed in the future will result
in the issuance of a patent or trademark. The invalidation, abandonment or
expiration of patents or trademarks owned or licensed by the Company which the
Company

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<PAGE>   9
believes to be commercially significant could permit increased competition, with
potential adverse effects on the Company and its business prospects.

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

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

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


E.   EXISTING PRODUCTS

     NCT  HEARING PRODUCTS

     NoiseBuster(R). NCT is currently marketing its NoiseBuster(R) personal
active noise reduction headphone for consumers at a suggested retail price of
$49. This active headphone selectively reduces unwanted noise generated by
aircraft engines, lawnmowers, street traffic, household appliances and other
annoying noise sources, while permitting the user to hear desired sounds, such
as human conversation, warning signals or music. The product can also be used
with an aircraft's in-flight entertainment system or a portable audio device.
The Company is marketing the NoiseBuster(R) through distribution channels,
including electronics retail stores, specialty catalogues and directly through a
toll-free "800" number and on the Internet. Initial product shipments of the
original NoiseBuster(R) were made in September 1993. Product shipments of the
current NoiseBuster(R) began during the first quarter of 1997.

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

     ProActive(R). In 1995, the Company introduced its ProActive(R) line of
active noise reduction headsets for use in commercial and industrial settings.
The line includes a high performance earmuff and headset which combine NCT's
active noise cancellation technology for reduction of

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<PAGE>   10
low frequency noise with passive hearing protection. The ProActive(R) is the
first fully contained, cordless product of its kind, providing workers with the
utmost in mobility and comfort.

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


     NCT COMMUNICATIONS PRODUCTS

     ClearSpeech(R)-Mic. This is the first digital noise reduction microphone
system for use with hands-free car kits. The product substantially reduces
background road, tire, wind, engine and traffic noise from hands-free calls,
allowing the person receiving the call to hear voice more clearly and with less
frustration and anxiety.

     ClearSpeech(R)-Speaker. This product cleans background noise from the
incoming speech signal over a two-way or mobile radio for the utmost in
intelligibility. The system is suitable for use with mobile radios, fleet
communication systems, marine radios and many other communication systems.


     NCT AUDIO PRODUCTS

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

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<PAGE>   11
REVENUES

     PRODUCT REVENUES

     The following table sets forth the percentage contribution of the separate
classes of the Company's products to the Company's product revenues for the year
ended December 31, 1999 (in thousands).

<TABLE>
<CAPTION>
                                      YEAR ENDED
                                  DECEMBER 31, 1999
                                 --------------------
                                              AS A %
           PRODUCTS              AMOUNT      OF TOTAL
           --------              ------      --------
       <S>                       <C>         <C>
       Hearing Products          $   682         30.9%
       Communications                670         30.3%
       Audio Products                856         38.8%
                                 -------     --------
           Total                 $ 2,208        100.0%
                                 =======     ========
</TABLE>


     TECHNOLOGY LICENSING FEES AND ROYALTY REVENUES

     The following table sets forth the percentage contribution of the separate
classes of the Company's technology to the Company's technology licensing and
royalty revenue for the year ended December 31, 1999 (in thousands).

<TABLE>
<CAPTION>
                                     YEAR ENDED
                                 DECEMBER 31, 1999
                              --------------------------
                                                AS A %
             TECHNOLOGY        AMOUNT          OF TOTAL
             ----------        ------          ---------
         <S>                   <C>             <C>
         Audio                 $     506            14.2%
         Advancel                  1,100            31.0%
         Hearing                     157             4.4%
         Communications              906            25.5%
         DMC                         850            23.9%
         Other                        33             1.0%

                               ---------       ---------
             Total             $   3,552           100.0%
                               =========       =========
</TABLE>


F.   PRODUCTS UNDER DEVELOPMENT

     NCT HEARING PRODUCTS

     NCT is continually striving to develop lower cost, higher performance
headset products. There are currently advanced headset models under development
which utilize NCT's proprietary digital technology for both the consumer and
industrial markets.

                                       11
<PAGE>   12

     SMM

     Silicon Micromachined Microphone. The ability to integrate additional
circuitry on the SMM chip has proven attractive to potential users. The SMM's
low noise floor and adjustable sensitivity improve voice recognition in high
ambient noise environments. NCT is working with voice processing and computer
hardware companies to utilize the SMM to enhance the performance of their
systems. In the first quarter of 1996, NCT released initial prototypes of the
devices. In December 1997, the Company announced that Siemens Semiconductors of
Siemens AG ("Siemens") had licensed the Company's SMM technology and that
Siemens would develop, manufacture and market the SMM. Prototype samples were
received. Full production is scheduled to commence in the third quarter of 2000.


     NCT COMMUNICATIONS

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


     NCT AUDIO

     FPT-based products. NCT Audio is developing new, lower-cost products for
the consumer market by exploring new printing processes and alternatives to the
current electronics. NCT Audio will continue this development in 2000.


G.   STRATEGIC ALLIANCES

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

                                       12
<PAGE>   13
<TABLE>
<CAPTION>
                                           DATE INITIAL
                                           RELATIONSHIP
         KEY STRATEGIC ALLIANCES           ESTABLISHED           APPLICATIONS
         -----------------------           ------------          ------------
  <S>                                      <C>              <C>
  Walker Manufacturing Company (a           Nov. 1989       Mufflers, Industrial
   division of Tennessee Gas Pipeline                        Silencers and Other
   Company)                                                  Vehicular Applications

  AB Electrolux                             Oct. 1990       Consumer Appliances

  Ultra Electronics Ltd.                    June 1991       Aircraft Cabin Quieting
                                                             Systems

  The Charles Stark Draper Laboratory,      July 1994       Microphones
   Inc.

  New Transducers Ltd.                      Mar. 1997       Flat Panel Transducers

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

  Infineon Technologies AG I Gr.            Dec. 1997       Microphones
   (formerly Siemens AG)

  VLSI Technology, Inc.                     Feb. 1998       Communications

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

  Lernout & Hauspie Speech Products         Mar. 1999       Communications
   N.V.
  </TABLE>

     WALKER MANUFACTURING COMPANY (A DIVISION OF TENNESSEE GAS PIPELINE COMPANY,
A WHOLLY-OWNED SUBSIDIARY OF TENNECO, INC.) (U.S.) AND WALKER ELECTRONIC
MUFFLERS, INC. (A WHOLLY-OWNED SUBSIDIARY OF TENNESSEE GAS PIPELINE COMPANY, A
WHOLLY-OWNED SUBSIDIARY OF TENNECO, INC.) (U.S.) ("WEM")

     In November 1989, NCT signed its strategic alliance with Walker, a
world-leading manufacturer of automotive parts and mufflers. The alliance
consisted of a Joint Venture and Partnership Agreement with ownership in the
resulting joint venture, Walker Noise Cancellation Technologies ("WNCT"), shared
equally between NCT Muffler, Inc. and WEM. On November 15, 1995, the Company and
Walker executed a series of related agreements (the "Restructuring Agreements")
regarding the Company's commitment to help fund $4.0 million of product and
technology development work and the transfer of the Company's 50% interest in
WNCT to Walker. The Restructuring Agreements provided for the transfer of the
Company's interest in WNCT to Walker, the elimination of the Company's
previously expensed obligation to fund the

                                       13
<PAGE>   14
remaining $2.4 million of product and technology development work, the transfer
to Walker of certain Company owned tangible assets related to the business of
WNCT, the expansion of certain existing technology licenses and the Company's
performance of certain future research and development activities for Walker at
Walker's expense. WNCT is currently producing and selling industrial silencers
on which the Company receives a royalty.


     AB ELECTROLUX (SWEDEN) ("ELECTROLUX")

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


     ULTRA ELECTRONICS LTD. (U.K.) ("ULTRA")

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


     THE CHARLES STARK DRAPER LABORATORY, INC. (U.S.) ("DRAPER")

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


     NEW TRANSDUCERS LTD. (U.K.) ("NXT")

     NXT and the Company executed a cross licensing agreement (the "Cross
License") on March 28, 1997. Under the terms of the Cross License, the Company
licensed patents and patents pending which relate to FPT technology to NXT, and
NXT licensed patents and patents pending which relate to parallel technology to
the Company. In consideration of the license, during the first quarter 1997 NCT
recorded a $3.0 million license fee from NXT and the Company will receive
royalties on future NXT licensing and product revenue. On April 15, 1997, NXT
plc,

                                       14
<PAGE>   15
NXT and the Company executed several agreements and other documents (the "New
Agreements") which terminated the Cross License, and certain related agreements
and replaced them with a new cross license (the "New Cross License"), and new
related agreements. The material changes effected by the New Agreements included
the inclusion of NXT plc as a party along with its wholly-owned subsidiary NXT
and provided that the license fee payable to NCT could be paid in ordinary
shares of stock. The subject license fee was paid to the Company in ordinary
shares of NXT plc stock which were subsequently sold by the Company. On
September 27, 1997, NXT plc, NXT, NCT Audio and the Company executed several
agreements and other documents, terminating the New Cross License and a related
security deed and replacing them with new agreements (respectively, the "Cross
License Agreement dated September 27, 1997" and the "Master License Agreement").
The material changes effected by the most recent agreements included an
expansion of the fields of use applicable to the exclusive licenses granted to
NXT plc and NXT and an increase in the royalties payable on future licensing and
product revenues. On February 9, 1999, NCT Audio and NXT expanded the Cross
License Agreement dated September 27, 1997 to increase NXT's fields of use to
include aftermarket ground-based vehicles and aircraft sound systems. The
amendments also increased the royalties due NCT Audio from NXT to 10% from 6%
and increased the royalties due NXT from NCT Audio to 7% from 6%. In
consideration for granting these expanded licensing rights, each party received
a license fee. See Note 3 - "Notes to Financial Statements - Joint Ventures and
Other Strategic Alliances" for further discussion.


     OKI ELECTRIC INDUSTRY CO., LTD. (JAPAN) ("OKI")

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


     INFINEON TECHNOLOGIES AG I GR (FORMERLY SIEMENS SEMICONDUCTORS,
     SIEMENS AG (GERMANY) ("INFINEON")

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

                                       15
<PAGE>   16
     VLSI TECHNOLOGY, INC. (FRANCE) ("VLSI")

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


     STMICROELECTRONICS SA & STMICROELECTRONICS S.R.L (FRANCE AND ITALY) ("ST")

     In November 1998, Advancel and ST executed a license agreement. Under the
terms of the agreement, which included a license fee, a minimum royalty within
two years and future per unit royalties, ST licensed Advancel's tiny(2)J(TM) for
Java(TM) ("T(2)J-processor core") to combine it with its proven secure
architecture and advanced nonvolatile memory technology, to offer a new
generation of secure microcontrollers for smartcard applications. The
T(2)J-processor core is the ideal architecture to accelerate the execution of
Javacard(TM)-based smartcard applications such as electronic purse credit/debit
card functions, ID cards that provide authorized access to networks and
subscriber identification modules that secure certain PCS cellular phones
against fraud.


     LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. (BELGIUM) ("L&H")

     On March 31, 1999, the Company signed a license agreement with L&H. The
agreement provides the Company with a worldwide, non-exclusive, non-transferable
license to selected L&H technology for use in NCT's ClearSpeech(R) products. The
Company recorded a prepaid royalty of $0.9 million. On April 12, 1999, the
Company granted a worldwide non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's present and future noise and echo
cancellation algorithms for use in L&H's technology. In consideration of the
Company's grant of a license to L&H, the Company recognized a non-refundable
royalty fee of $0.8 million. During the third quarter of 1999, the Company and
L&H agreed to offset the balances owed each other.


H.   MARKETING AND SALES

     In addition to marketing its technology through its strategic alliances as
described above, as of December 31, 1999, the Company has an internal sales and
marketing force of 15 employees, 6 independent sales representatives and its
executive officers and directors. The independent sales representatives may earn
commissions of generally up to 6% of revenues generated from sales of NCT
products to customers the sales representatives introduced to NCT and up to 5%
of research and development funding revenues provided by such customers.

                                       16
<PAGE>   17
   Note 18 - "Notes to Financial Statements" sets forth financial information
relating to foreign and domestic operations and sales for the years ended
December 31, 1997, 1998 and 1999.

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


I.   CONCENTRATIONS OF CREDIT RISK

   The Company sells its products and services to OEMs, distributors and end
users in various industries worldwide. As outlined below, the Company's two
largest customers accounted for approximately 42% of revenues during 1999 and
10% of gross accounts receivable at December 31, 1999. The Company does not
require collateral or other security to support customer receivables.

 <TABLE>
 <CAPTION>
 (in thousands)
                                                   AS OF DECEMBER 31, 1999,
                                                 AND FOR THE YEAR THEN ENDED
                                                ------------------------------
                                                 ACCOUNTS
               CUSTOMER                         RECEIVABLE             REVENUE
               --------                         ----------             -------
<S>                                             <C>                    <C>
STMicroelectronics SA and
 STMicroelectronics S.r.l                          $    33             $ 2,156
Lernout & Hauspie Speech Products N.V.                  --                 800
All Other                                              204               4,107
                                                   -------             -------
    Total                                          $   237             $ 7,063
                                                   =======             =======
 </TABLE>

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

     Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company's cash equivalents consist of commercial
paper and other investments that are readily convertible into cash and have
original maturities of three months or less. The Company primarily maintains its
cash and cash equivalents in two banks.


J.   COMPETITION

     The Company is aware of a number of direct competitors. The Company's
principal competitors in active control systems include Bose Corporation, Lord
Corporation, Matsushita Electric Industrial Co., Ltd., Sennheiser Electronic
Corp. and Sony Corporation, among others. The Company's principal competitors in
speech applications include IBM Corporation, Lucent Technologies, Inc. and Texas
Instruments, Incorporated. To the Company's knowledge, each of such entities is
pursuing its own technology, either on its own or in collaboration with others,
and

                                       17
<PAGE>   18
has commenced attempts to commercially exploit such technology. NCT also
believes that a number of other large companies, such as the major domestic and
foreign communications, computer, automobile and appliance manufacturers, as
well as aircraft parts suppliers and manufacturers, have research and
development efforts underway that could be potentially competitive to NCT. These
companies are well established and have substantially greater management,
technical, financial, marketing and product development resources than NCT.


K.   GOVERNMENT CONTRACTS

     The Company has acted as a government subcontractor in connection with its
performance of certain engineering and development services. Government
contracts provide for cancellation at the government's sole discretion, in which
event the contractor or subcontractor may recover its actual costs up to the
date of cancellation, plus a specified profit percentage. Governmental
expenditures for defense are subject to the political process and to rapidly
changing world events, either or both of which may result in significant
reductions in such expenditures in the proximate future. Government contracts
are not viewed as a significant part of the Company's business. No such
contracts were in effect during 1999.


L.   RESEARCH AND DEVELOPMENT

     Company-sponsored research and development expenses aggregated $6.2
million, $7.2 million and $6.2 million for the fiscal years ended December 31,
1997, 1998 and 1999, respectively.


M.   ENVIRONMENTAL REGULATION COMPLIANCE

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

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


N.   EMPLOYEES

     The Company had 75 employees as of December 31, 1999. None of such
employees is represented by a labor union. The Company considers its
relationships with employees to be satisfactory.

                                       18
<PAGE>   19

O.   ACQUISITIONS AND PROPOSED TRANSACTIONS

     NCT Audio had actively pursued an acquisition strategy until the fourth
quarter of 1999. During 1998, NCT Audio had signed three letters of intent, an
agreement to purchase, and one definitive purchase agreement (now expired)
pursuant to which it would acquire 100% of the stock or assets of certain
companies. By acquiring companies that specialize in different segments of the
audio market in various locations around the world, management believed it could
improve profitability of the combined companies by sharing some resources,
eliminating redundant expenses and increasing revenue by leveraging each
company's distribution channels. Some of the synergistic opportunities that
wouldbe achieved with the acquisitions included the ability to (1) leverage the
extensive dealer networks; (2) gain access to worldwide consumer audio markets
and establish automotive audio aftermarket accounts; (3) increase product
distribution of all acquisition companies in world markets; (4) cross-sell the
acquisition companies' products among distribution channels; and (5) maximize
the warehousing and distribution facilities.

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

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

     NCT Audio had an exclusive right, as extended, to purchase the assets of
TSA through July 15, 1999. Under the terms of the original agreement, NCT Audio
was required to pay TST $6.5 million on or before March 31, 1999 to complete the
acquisition of TSA's assets. As consideration for an extension of such exclusive
right from March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of
$350,000, consisting of $20,685 in cash, $125,000 of NCT Audio's minority
interest in TSA earnings, and a $204,315 note payable due April 16, 1999. If NCT
Audio failed to pay the note by April 16, 1999, (a) the note would begin to
accrue interest on April 17, 1999 at the lower of the rate of two times prime
rate or the highest rate allowable by law; and (b) the $20,685 and $125,000
portion of the extension fee would no longer be credited toward the $6.5 million
purchase price due at closing. If NCT Audio failed to pay the note by April 30,
1999, the $204,315 portion of the extension fee would no longer be credited
toward the $6.5 million closing amount due. To date, NCT Audio has not paid the
note. Further, if NCT Audio failed to close the contemplated transaction by May
28, 1999, NCT Audio would forfeit its minority earnings in TSA for the period
June 1, 1999 through May 30, 2000. In

                                       19
<PAGE>   20
addition, due to NCT Audio's failure to close the transaction by March 31, 1999,
NCT Audio was required to pay a penalty premium of $100,000 of NCT Audio's
preferred stock. In exchange for an extension from May 28, 1999 to July 15,
1999, NCT Audio relinquished 25% of its minority equity ownership in TSA, or 5%
of TSA's outstanding stock. As a result, NCT Audio now has a 15% minority
interest in TSA.

     On or about July 15, 1999, NCT Audio determined it would not proceed with
the purchase of the assets of TSA, as structured, due primarily to its
difficulty in raising the requisite cash consideration. Consequently, NCT Audio
reduced its net investment in TSA to $1.2 million, representing its 15% minority
interest, net of the above noted penalties, and recorded a $2.4 million charge
in the quarter ended September 30, 1999 for the write-down of its investment to
its estimated net realizable value. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in TSA's operations. NCT Audio is due and seeks its pro rata share of the
consideration paid by Onkyo America, less the penalties described above. The
amount which TST owes NCT Audio is in dispute; consequently, receipt of the
funds is contingent on the outcome of the arbitration between the Company, TST
and TSA. See "Item 3 - Legal Proceedings."

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

     As noted, the transaction was contingent on NCT Audio obtaining outside
financing to retire the PPI debt. On January 6, 1999, the PPI members notified
NCT Audio that, while they remain willing to do the transaction, they may choose
at some point to abandon the transaction because NCT Audio had not obtained the
financing in a timely manner. They also notified NCT Audio that in lieu of the
$2,000,000 in NCT Audio common stock, they would insist that NCT Audio pay them
that amount in cash at any closing. PPI has experienced significant
organizational changes which has resulted in abandonment of the proposed
acquisition. During the third quarter of 1999, the Company fully reserved the
$1.5 million due from PPI plus interest thereon but continues to seek repayment
of the notes. During the fourth quarter of 1999, NCT Audio suspended activities
associated with execution of its acquisition strategy, including the previously
intended plan to acquire PPI.

                                       20
<PAGE>   21
     On January 28, 1999, NCT Audio entered into a letter of intent to purchase
100% of the common stock of another speaker manufacturer (the "Third
Acquisition"). As previously noted, NCT Audio suspended its acquisition strategy
and therefore, decided not to enter into binding agreements to consummate the
Third Acquisition.

     On June 22, 1999, NCT Hearing signed a letter of intent to acquire sixty
percent (60%) of the common stock of Pro Tech Communications, Inc. ("PCTU") in
exchange for rights to certain NCT Hearing technology, contingent upon obtaining
equity financing for PCTU. The Company is negotiating with accredited investors
for a $1.5 million investment in convertible preferred stock of PCTU,
convertible into shares of PCTU or exchangeable into NCT common stock at their
election.


P.   BUSINESS SEGMENTS

     For a full discussion of business segments and geographic areas, see
Note 17. - Notes to Financial Statements - "Business Segment Information" and
Note 18. - Notes to Financial Statements - "Geographical Information."


Q.   AVAILABLE INFORMATION

     We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission ("SEC"). You may read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's Website at
"http://www.sec.gov."



ITEM 2.  PROPERTIES

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

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

     The Company maintains a sales and marketing office in Stamford, Connecticut
where it leases approximately 6,400 square feet of space under a lease which
expires in February 2001 and provides for a current monthly rental of
approximately $9,000, subject to annual inflationary adjustments.

                                       21
<PAGE>   22
     In March 2000, the Company signed a lease for approximately 18,700 square
feet of space in Westport, Connecticut. The lease expires in March 2010 and
provides for monthly rental of approximately $28,000 for the first five years
and approximately $31,000 per month for the next five years.

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

     The Company maintains a sales and marketing office in Tokyo, Japan, where
it leases approximately 800 square feet of space under a lease which expires in
May 2000, and provides for a current monthly rental of approximately $3,000.



ITEM 3.  LEGAL PROCEEDINGS

     On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunale di Milano, Milano, Italy. The suit requests the Court to award
judgment in favor of Mr. Valerio as follows: (i) establish and declare that a
proposed independent sales representation agreement submitted to Mr. Valerio by
the Company and signed by Mr. Valerio but not executed by the Company was made
and entered into between Mr. Valerio and the Company on June 30, 1992; (ii)
declare that the Company is guilty of breach of contract and that the purported
agreement was terminated by unilateral and illegitimate withdrawal by the
Company; (iii) order the Company to pay Mr. Valerio $30,000 for certain amounts
alleged to be owing to Mr. Valerio by the Company; (iv) order the Company to pay
commissions to which Mr. Valerio would have been entitled if the Company had
followed up on certain alleged contacts made by Mr. Valerio for an amount to be
assessed by technicians and accountants from the Court Advisory Service; (v)
order the Company to pay damages for the harm and losses sustained by Mr.
Valerio in terms of loss of earnings and failure to receive due payment in an
amount such as shall be determined following preliminary investigations and the
assessment to be made by experts and accountants from the Court Advisory Service
and in any event no less than 3 billion Lira; and (vi) order the Company to pay
damages for the harm done to Mr. Valerio's image for an amount such as the judge
shall deem equitable. The Company retained the Italian law firm Verusio e
Cosmelli, Giovanni Verusio, Esq., a member of that firm, as special litigation
counsel to the Company in its defense of this suit. On March 6, 1996, the
Company, through its Italian counsel, filed a brief of reply with the Tribunal
of Milan setting forth the Company's position that: (i) the Civil Tribunal of
Milan is not the proper venue for the suit; (ii) Mr. Valerio's claim is
groundless since the parties never entered into an agreement; and (iii) because
Mr. Valerio is not enrolled in the official Register of Agents, under applicable
Italian law Mr. Valerio is not entitled to any compensation for his alleged
activities.

     A preliminary hearing before the Tribunal was held on May 30, 1996, certain
pretrial discovery has been completed and a hearing before a Discovery Judge was
held on October 17, 1996. Submission of the parties' final pleadings were to be
made in connection with the next hearing, which was scheduled for April 3, 1997.
On April 3, 1997, the Discovery Judge postponed this hearing to May 19, 1998,
due to a reorganization of all proceedings before the

                                       22
<PAGE>   23
Tribunal of Milan. At the hearing on May 19, 1998, the Discovery Judge
established dates for the parties to submit final pleadings and set September
22, 1998 as the date to send the case before the Tribunal of Milan sitting in
full bench. On May 4, 1999, the Company's Italian law firm informed the Company
that the Tribunal of Milan had granted the Company's objection to lack of venue
and had consequently rejected Mr. Valerio's claim and awarded the Company
expenses in the amount of approximately $7,000.

     By a letter dated September 9, 1997, outside counsel to Andrea Electronics
Corporation ("AECorp.") notified the Company that AECorp. believed the Company's
use of the term "ANR READY" constituted the use of a trademark owned by AECorp.
The Company has also been informed by representatives of existing and/or
potential customers that AECorp. made statements claiming the Company's
manufacture and/or sale of certain in-flight entertainment system products may
infringe a patent owned by AECorp. On March 25, 1998, the Company received from
AECorp.'s intellectual property counsel a letter dated March 24, 1998,
announcing and notifying the Company of the issuance of U.S. patent Number
5,732,143 to AECorp. and enclosing a copy of the patent. The subject letter
appears to be one of notice and information and did not contain any claim of
infringement. Following that date, additional correspondence was exchanged
between Company counsel and counsel to AECorp. The Company again was informed by
representatives of existing and/or potential customers that AECorp. was
continuing to make statements inferring that the Company's manufacture and/or
sale of certain in-flight entertainment system products may infringe patents
owned by AECorp.

     On October 9, 1998, the Board of Directors of the Company authorized the
commencement of litigation against AECorp. On November 17, 1998, the Company and
NCT Hearing filed a complaint in the United States District Court, Eastern
District of New York against AECorp. requesting that the Court enter judgment in
their favor as follows: (i) declare that the two subject AECorp. patents and all
claims thereof are invalid and unenforceable and that the Company's products do
not infringe any valid claim of the subject AECorp. patents; (ii) declare that
the subject AECorp. patents are unenforceable due to their misuse by AECorp.;
(iii) award compensatory damages in an amount of not less than $5,000,000 as
determined at trial and punitive damages of $50,000,000 for AECorp.'s tortious
interference with prospective contractual advantages of the Company; (iv) enjoin
AECorp. from stating in any manner that the Company's products, or the use of
the Company's products, infringe on any claims of the subject AECorp. patents;
and (v) award such other and further relief as the Court may deem just and
proper.

     On or about December 30, 1998, AECorp. filed its Answer and Counterclaims
against the Company and NCT Hearing. In its answer, AECorp. generally denies the
Company's and NCT Hearing's allegations, asserts certain procedural affirmative
defenses and brings counterclaims against the Company and NCT Hearing alleging
that the Company has: (i) infringed the two subject AECorp. patents and
AECorp.'s "ANR Ready" mark; (ii) violated the Lanham Act through the Company's
use of such mark; and (iii) unfairly competed with AECorp. through the use of
such mark. On or about January 26, 1999, the Company and NCT Hearing filed a
Reply to AECorp.'s counterclaims generally denying AECorp.'s counterclaims,
asserting certain affirmative defenses to AECorp.'s counterclaims and requesting
that: (i) the counterclaims be dismissed with prejudice; (ii) the Court enter
judgment that the term "ANR Ready" is not a valid

                                       23
<PAGE>   24
trademark; (iii) the Court enter judgment that the Company and NCT Hearing have
not infringed any trademark right of AECorp.; (iv) the Court enter judgment that
the Company and NCT Hearing have not engaged in any form of federal or state
statutory or common law unfair competition; (v) the Court enter judgment that
AECorp. is precluded from recovery of any claim of right to the term "ANR Ready"
by the equitable doctrine of estoppel; (vi) the Court enter judgment that
AECorp. is precluded from recovering any damages from the Company and NCT
Hearing by the equitable doctrine of laches; (vii) the Court award the Company
and NCT Hearing their costs and reasonable attorneys' fees; and (viii) the Court
enter judgment granting the relief requested in the Company's and NCT Hearing's
complaint as well as such other and further relief as the Court deems just and
proper. Discovery in this suit commenced in mid-1999 and is continuing, although
a trial date has not been set. In the opinion of management, after consultation
with outside counsel, resolution of this suit should not have a material adverse
effect on the Company's financial position or operations. However, in the event
that the lawsuit does result in a substantial final judgment against the
Company, said judgment could have a material effect on quarterly or annual
operating results.

     On June 10, 1998, Schwebel Capital Investments, Inc. filed suit against the
Company and Michael J. Parrella, President, Chief Executive Officer and a
Director of the Company, in the Circuit Court for Anne Arundel County, Maryland.
The summons and complaint alleged the Company breached, and Mr. Parrella
interfered with, a purported contract entered into "in 1996" between the Company
and SCI under which SCI was to be paid commissions by the Company when the
Company received capital from investors who purchased debentures or convertible
preferred stock of the Company during a period presumably commencing on the date
of the alleged contract and allegedly extending at least to May 1, 1998. In this
regard, the complaint alleged that SCI by virtue of a purported right of first
refusal that the Company did not honor, is entitled to commissions totaling
$1,500,000 in connection with the Company's sale of $13,300,000 of preferred
stock and a subsidiary of the Company's sale of $4,000,000 of stock convertible
into stock of the Company. In the complaint SCI demands judgment against the
Company for compensatory damages of $1,673,000, punitive damages of $50,000 and
attorneys' fees of $50,000 and demands judgment against Mr. Parrella for
compensatory damages of $150,000, punitive damages of $500,000 and attorneys'
fees of $50,000 as well as unspecified other appropriate relief. On July 23,
1998, the Company and Mr. Parrella filed a motion to strike the complaint or, in
the alternative, to dismiss the tortious interference with contract claim and
the punitive damages claim. On or about August 26, 1998 plaintiffs filed an
amended complaint and a response to the Company's and Mr. Parrella's motion to
strike. On September 15, 1998, the Company and Mr. Parrella filed a motion to
strike the amended complaint. On or about September 25, 1998, the Company and
Mr. Parrella served the plaintiff with their first request for the production of
documents. On November 12, 1998, the Court granted the Company's and
Mr. Parrella's motion to dismiss the tortious interference with contracts claim
and the punitive damages claim. On or about November 25, 1998, SCI filed a
second amended complaint, which abandoned the punitive damages claim and the
claim against Mr. Parrella. Since then, there have been no further developments
in this suit. In the opinion of management, after consultation with outside
counsel, resolution of this suit should not have a material adverse effect on
the Company's financial position or operations. However, in the event that the
lawsuit does result in a substantial final judgment against the Company, said
judgment could have a material effect on quarterly or annual operating results.

                                       24
<PAGE>   25
     On June 25, 1998, Mellon Bank FSB filed suit against Alexander Wescott &
Co., Inc. and the Company in the United States District Court, Southern District
of New York. In the complaint, Mellon demands judgment against AWC and the
Company in the amount of $326,000 by reason of its having paid each of AWC and
the Company such sum when acting as escrow agent for the Company's private
placement of securities with certain institutional investors identified to the
Company by AWC. On or about July 27, 1998, AWC filed its Answer, Counterclaim
and Cross-claim requesting: (i) dismissal of Mellon's Amended Complaint against
AWC; (ii) commissions in the amount of $688,000 to be paid by the Company to
AWC; (iii) issuance to AWC of 784,905 shares of the Company's common stock
registered for resale under the Securities Act; (iv) a declaration that AWC is
entitled to retain the $326,000 sought by Mellon; and (v) delivery of a warrant
to purchase 461.13 shares of common stock of NCT Audio. On or about August 20,
1998, the Company filed its reply to AWC's cross-claims. Discovery is currently
scheduled to take place in this action. In the opinion of management, after
consultation with outside counsel, resolution of this suit should not have a
material adverse effect on the Company's financial position or operations.
However, in the event that the lawsuit does result in a substantial final
judgment against the Company, said judgment would not have a severe material
effect on quarterly operating results.

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

                                       25
<PAGE>   26
Southern District of New York and on January 22, 1999, NCT Audio and the Company
filed with that Court Defendants' Answer, Affirmative Defenses, Counterclaims
and Third-Party Complaint. On October 9, 1999, the Company, Balmore and Austost
agreed, in principle, on a mutual release and settlement, subject to court
approval, whereby all charges, claims and counterclaims which have been
individually or jointly asserted against the parties will be dropped. Court
approval is pending.

     On September 16, 1999, certain former shareholders and optionees of
Advancel filed a Demand for Arbitration against the Company with the American
Arbitration Association in San Francisco, California. The primary remedy the
claimants seek is recision of the Stock Purchase Agreement, the return of the
Advancel stock surrendered in conjunction with the purchase of Advancel by the
Company and damages to be determined by arbitration. The Company filed a
response and counterclaim on October 13, 1999. After consultation with outside
legal counsel, management recognizes that the Company may lose some or all of
its claims, encountering significant liability. In the event this Demand for
Arbitration does result in a substantial judgment against the Company, said
judgment could have a material effect on the Company's quarterly or annual
operating results. Outside legal counsel has indicated that it is impossible to
estimate a range of potential liability at this early stage with any degree of
certainty. The parties have agreed on an arbitrator who has scheduled late May
2000 for an arbitration hearing. Discovery is currently scheduled to take place
in the action.

     On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. Such court action was subsequently withdrawn by the
Company.

     On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay under the asset purchase agreement;
(iii) expenses associated with extending NCT Audio's time to close the
transaction; and (iv) certain legal expenses incurred by Respondents.

     Management believes its position has substantial merit. However, in the
event the Demand for Arbitration does result in a substantial judgment against
the Company, said judgment could have a material effect on the Company's
financial position and quarterly or annual operating results.

                                       26
<PAGE>   27
     The Company believes there are no other material patent infringement
claims, litigation matters or unasserted claims other than the matters discussed
above that could have a material adverse effect on the financial position and
results of operations of the Company.



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

     None.

                                       27
<PAGE>   28

                                     PART II


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

     Prior to the January 6, 1999 delisting of the Company's common stock from
NASDAQ's National Market System, the Company's common stock was listed on the
NASDAQ/NMS under the symbol "NCTI". The Company's common stock currently trades
on the NASDAQ OTC Bulletin Board under the symbol "NCTI". High and low last sale
information for the Company's common stock for specified quarterly periods is
set forth below:

<TABLE>
<CAPTION>
                            1999                       1998
                   ---------------------      ---------------------
                    HIGH            LOW        HIGH            LOW
                    ----            ---        ----            ---
  <S>              <C>            <C>         <C>            <C>
  1st Quarter      $0.440         $0.190      $0.938         $0.875
  2nd Quarter      $0.480         $0.230      $0.719         $0.656
  3rd Quarter      $0.290         $0.172      $0.563         $0.531
  4th Quarter      $0.197         $0.172      $0.344         $0.281
</TABLE>

     On March 30, 2000, the last reported sale of the Company's common stock as
reported by the NASDAQ OTC Bulletin Board was $1.10. As of March 30, 2000, there
were approximately 40,000 holders of record of the Company's common stock.

     The Company has neither declared nor paid any dividends on its shares of
common stock since inception. Any decisions as to the future payment of
dividends will depend on the earnings and financial position of the Company and
such other factors as the Board of Directors deems relevant. The Company
anticipates that it will retain earnings, if any, in order to finance expansion
of its operations, and has no intention of declaring dividends for the
foreseeable future.

     See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview" for a description of the Company's sales
of unregistered securities during the year ended December 31, 1999.

                                       28
<PAGE>   29

ITEM 6.  SELECTED FINANCIAL DATA.

   The selected consolidated financial data set forth below is derived from the
historical financial statements of the Company. The data set forth below is
qualified in its entirety by and should be read in conjunction with Item 8 -
"Financial Statements and Supplementary Data" and Item 7 -"Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
are included elsewhere in this document.

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                         ------------------------------------------------------
                                         1995         1996        1997        1998         1999
                                         ----         ----        ----        ----         ----
                                               (IN THOUSANDS OF DOLLARS AND SHARES, EXCEPT
                                                            PER SHARE AMOUNT)
<S>                                     <C>         <C>         <C>         <C>           <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
  Product sales, net                    $ 1,589     $  1,379    $  1,720    $  2,097      $   2,208
  Engineering and development
   services                               2,297          547         368         425          1,303
  Technology licensing fees and
   royalties                              6,580        1,238       3,630         802          3,552
                                        -------     --------    --------    --------      ---------
     Total revenues                     $10,466     $  3,164    $  5,718    $  3,324      $   7,063
                                        -------     --------    --------    --------      ---------

COSTS AND EXPENSES:
  Cost of product sales                 $ 1,579     $  1,586    $  2,271    $  2,235      $   2,767
  Cost of engineering and
   development services                   2,340          250         316         275          2,216
  Selling, general and
   administrative                         5,416        4,890       5,217      11,238         11,878
  Research and development                4,776        6,974       6,235       7,220          6,223
  Interest (income) expense, net            (49)          17       1,397(3)     (429)           552
  Equity in net (income) loss of
   unconsolidated Affiliates                (80)          80          --          --             --
  Other (income) expense, net               552          192         130      (3,032)(4)      7,198(5)
                                        -------     --------    --------    --------      ---------
    Total costs and expenses            $14,534     $ 13,989    $ 15,566    $ 17,507      $  30,834
                                        -------     --------    --------    --------      ---------
  Net loss                              $(4,068)    $(10,825)   $ (9,848)   $(14,183)     $ (23,771)
Less:
  Preferred stock dividend
   requirement                               --           --       1,623       3,200         10,567
  Accretion of difference between
   carrying
    Amount and redemption amount of
    Redeemable preferred stock               --           --         285         485            494
                                        -------     --------    --------    --------      ---------
Net (loss) attributable to common
stockholders                            $(4,068)    $(10,825)   $(11,756)   $(17,868)     $ (34,832)
                                        =======     ========    ========    ========      =========
  Weighted average number of common
   Shares outstanding(1) - basic
   and diluted                           87,921      101,191     124,101     143,855        190,384
                                        =======     ========    ========    ========      =========
  Basic and Diluted Net loss per
   share                                $ (0.05)    $  (0.11)   $  (0.09)   $  (0.12)     $   (0.18)
                                        =======     ========    ========    ========      =========
</TABLE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                       ----------------------------------------------------------
                                         1995         1996        1997        1998         1999
                                         ----         ----        ----        ----         ----
<S>                                    <C>          <C>         <C>        <C>          <C>

BALANCE SHEET DATA:
  Total assets                         $  9,583     $  5,881    $ 17,361   $  15,465    $  13,377

  Total current liabilities               2,699        3,271       2,984       5,937        7,728
  Long-term debt                            105           --          --          --        4,107
  Accumulated deficit                   (72,848)     (83,673)    (93,521)   (107,704)    (131,475)
  Stockholders' equity (deficit)(2)       6,884        2,610      14,377       3,426         (367)
  Working capital (deficiency)            1,734       (1,312)     11,696      (1,187)      (3,281)
</TABLE>

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

(2)  The Company has never declared nor paid cash dividends on its common stock.

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

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

(5)  Includes a $2.4 million charge in connection with the Company's write down
     of its investment in TSA to its estimated net realizable value; a $1.8
     million reserve for promissory note and pre-acquisition costs related to
     PPI; and a $3.1 million charge for the impairment of goodwill.

                                       29
<PAGE>   30

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

     The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included herein.


A.   FORWARD-LOOKING STATEMENTS

     Statements in this Annual Report on Form 10-K which are not historical
facts are forward-looking statements which involve risks and uncertainties. The
Company's actual results in fiscal 2000 and beyond may differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. Important factors that could cause actual results to differ materially
include but are not limited to the Company's ability to: achieve profitability;
achieve a competitive position in design, development, licensing, production and
distribution of technologies and electronic systems; produce a cost effective
product that will gain acceptance in relevant consumer and other product
markets; increase revenues from products; realize funding from technology
licensing fees, royalties, product sales, and engineering and development
services to sustain the Company's current level of operation; timely introduce
new products; continue its current level of operations to support the fees
associated with the Company's patent portfolio; maintain satisfactory relations
with its customers; attract and retain key personnel; prevent invalidation,
abandonment or expiration of patents owned or licensed by the Company and expand
its patent holdings to diminish reliance on core patents; have its products
utilized beyond noise attenuation and control; maintain and expand its strategic
alliances; and protect Company know-how, inventions and other secret or
unprotected intellectual property.


B.   OVERVIEW

     NCT Group, Inc. ("NCT" or the "Company") is a technology developer with an
extensive portfolio of proprietary algorithms and a variety of product offerings
for consumer, commercial and industrial applications. The Company specializes in
the utilization of sound and signal waves to reduce noise, improve
signal-to-noise ratio and enhance sound quality. Commercial application of the
Company's technologies is comprised of a number of product offerings, including
NoiseBuster(R) consumer and communications active noise reduction ("ANR")
headsets; ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM) flat
speakers; and ClearSpeech(R) microphones, speakers and other products. In
addition to products, NCT's algorithms are available for licensing to
manufacturers for use in commercial and consumer products.

     During 1999, the Company focused its efforts on the development of
DistributedMedia.com, Inc. ("DMC"), a wholly-owned subsidiary of NCT which was
formed in November 1998. DMC is a microbroadcasting media company that delivers
licensed CD-quality music as well as on-air and billboard advertising to
out-of-home commercial and professional venues via a digital network of
place-based micrbroadcasting stations, called Sight & Sound(TM). The Sight &
Sound(TM) system consists of a central control network that communicates to a
digital broadcast station, which plays music selections and advertisements
through flat panel speakers. The speaker grilles

                                       30
<PAGE>   31
double as visual billboards. The speakers will be provided by NCT Audio
Products, Inc. ("NCT Audio").

     The Company and its business units currently hold 503 patents and related
rights worldwide and an extensive portfolio of proprietary algorithms, library
of know-how and other unpatented technology. Management believes that its
intellectual property portfolio prevents other competitors and potential
competitors from participating in certain commercial areas without licenses from
the Company. Our intellectual property allows the Company to develop its major
product lines which include: NoiseBuster(R) consumer and communications ANR
headsets; ProActive(R) ANR industrial earmuffs and headsets; Gekko(TM) flat
speakers; and ClearSpeech(R) microphones, speakers and other products.

     The Company has continued to make substantial investments in its technology
and intellectual property and has incurred development costs for engineering
prototypes, pre-production models and field testing of several products.
Management believes that the Company's investment in its technology has resulted
in the expansion of the value of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.

     The Company's operating revenues are comprised of technology licensing fees
and royalties, product sales and engineering and development services. Operating
revenues in 1999 consisted of approximately 31% in product sales, 19% in
engineering and development services and 50% in technology licensing fees and
royalties. The Company continues its transition from a firm focused principally
on research and development of new technology to a firm focused on the
commercialization of its technology through technology licensing fees, royalties
and product sales. Historically, the Company derived the majority of its
revenues from engineering and development funding provided by established
companies willing to assist the Company in the development of its active noise
and vibration control technology, and from technology license fees paid by such
companies. Management expects that technology licensing fees, royalties and
product sales will become the principal source of the Company's revenue as the
commercialization of its technology proceeds. As distribution channels are
established and as product sales and market acceptance and awareness of the
commercial applications of the Company's technologies build as anticipated by
management, revenues from technology licensing fees, royalties and product sales
are forecasted to fund an increasing share of the Company's requirements. The
generation of cash from these revenue sources, if realized, will reduce the
Company's dependence on engineering and development funding.

     The Company continued its practice of marketing its technology through
licensing to third parties for fees, generally by obtaining technology license
fees when initiating joint ventures and alliances with new strategic partners,
and subsequent royalties. The Company has entered into a number of alliances and
strategic relationships with established firms for the integration of its
technology into products. The speed with which the Company can achieve the
commercialization of its technology depends in large part upon the time taken by
these firms and their customers for product testing and their assessment of how
best to integrate the Company's technology into their products and manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed.

                                       31
<PAGE>   32
     On February 9, 1999, NCT Audio and New Transducers Ltd. ("NXT") expanded
the Cross License Agreement dated September 27, 1997 to increase NXT's fields of
use to include aftermarket ground-based vehicles and aircraft sound systems and
increased the royalties due NCT Audio from NXT to 10% from 6% and increased the
royalties due NXT from NCT Audio to 7% from 6%. In consideration for granting
NXT these expanded licensing rights, NCT Audio received a $0.5 million license
fee. Also on February 9, 1999, NCT Audio and NXT amended the Master License
Agreement to include a minimum royalty payment of $160,000.

     On March 31, 1999, the Company signed a license agreement with Lernout &
Hauspie Speech Products N.V. ("L&H"). The agreement provides the Company with a
worldwide, non-exclusive, non-transferable license to selected L&H technology
for use in NCT's ClearSpeech(R) products. Further, on April 12, 1999, the
Company granted a worldwide, non-exclusive, non-transferable license to L&H. The
agreement provides L&H access to NCT's noise and echo cancellation algorithms
for use in L&H's technology.

     Presently, the Company is selling products through six of its alliances:
Walker is manufacturing and selling industrial silencers; Siemens is buying and
contracting with the Company to install quieting headsets for patient use in
Siemens' magnetic resonance imaging machines; Ultra is installing production
model aircraft cabin quieting systems in the SAAB 340 turboprop aircraft; OKI is
integrating ClearSpeech(R) algorithm into large scale integrated circuits for
communications applications; and BE Aerospace and Long Prosper are providing
NoiseBuster(R) components for United Airlines' and five other international
carriers' comprehensive in-flight entertainment and information systems.
Management believes these developments and others previously disclosed help
demonstrate the range of commercial potential for the Company's technology and
will contribute to the Company's transition from engineering and development to
technology licensing fees, royalties and product sales.

     The Company is certified under the International Standards Organization
product quality program known as "ISO 9000", and continues to successfully
maintain its certification. The availability of high-quality, low-cost
electronic components for integration into the Company's products also is
critical to the commercialization of the Company's technology. The Company is
working with its strategic partners and other suppliers to reduce the size and
cost of the Company's systems, so that the Company will be able to offer
low-cost electronics and other components suitable for high-volume production.

     Since its inception, the Company has incurred substantial losses from
operations which have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) technology licensing fees, (4) royalties, (5) product sales,
and (6) engineering and development funds received from strategic partners and
customers.

                                       32
<PAGE>   33
     The Company's internally generated funds in 1999 were not sufficient to
cover the operating costs of the Company. The Company was able to continue its
operations during 1999 by raising additional capital to fund its operations for
1999 and beyond. In addition, on August 16, 1999, the Company executed a plan to
outsource logistics and downsize its audio, hearing and product support groups,
thereby reducing its worldwide workforce by approximately 25%. Refer to
"Liquidity and Capital Resources" below and to Notes 1 and 11 - "Notes to the
Financial Statements." The Company's ability of its revenue sources, especially
its technology license fees, royalties and product sales, to generate
significant cash for the Company's operations is critical to the Company's long
term success. The Company cannot predict whether it will be successful in
obtaining market acceptance of its new products or in completing its current
negotiations with respect to licenses and royalty revenues.

     In 1999, the Company entered into certain transactions which provided
additional funding. These transactions included the issuance of secured
convertible notes; the Series E and Series F Convertible Preferred Stock private
placements; issuance of shares of common stock, in lieu of the cash owed to
suppliers and consultants, to settle certain obligations of the Company; and a
private placement of shares of common stock. All of these transactions are
described in greater detail below under "Liquidity and Capital Resources" and in
Note 11 in the "Notes to the Financial Statements."

     As of December 31, 1999, cash and cash equivalents amounted to $1.1 million
and working capital (deficit) was $(3.3) million. Management believes that
currently available funds will not be sufficient to sustain the Company for the
next 12 months. Such funds consist of available cash and cash from the exercise
of warrants and options, the funding derived from technology licensing fees and
royalties and product sales and engineering development revenue. Reducing
operating expenses and capital expenditures alone may not be sufficient, and
continuation as a going concern is dependent upon the level of realization of
funding from technology licensing fees and royalties and product sales and
engineering and development revenue, all of which are presently uncertain. In
the event that technology licensing fees, royalties and product sales, and
engineering and development revenue are not realized as planned, then management
believes additional working capital financing must be obtained through the
private placement of additional equity of the Company in the form of common
stock, convertible preferred stock and/or convertible debt. There is no
assurance any such financing is or would become available.

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

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the

                                       33
<PAGE>   34
achievement of future profitable operations and the ability to generate
sufficient cash from operations, public and private financings and other funding
sources to meet its obligations. The uncertainties described in the preceding
paragraphs raise substantial doubt at December 31, 1999 about the Company's
ability to continue as a going concern. The accompanying consolidated Financial
Statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result from the outcome of these uncertainties.


C.   RESULTS OF OPERATIONS

Year ended December 31, 1999 compared with year ended December 31, 1998.

     Total revenues in 1999 increased by 112% to $7.1 million from $3.3 million
in 1998 reflecting increases in each of the Company's revenue sources. Total
costs and expenses during the same period increased by 76% or $13.3 million,
primarily due to the write down of an investment in an unconsolidated affiliate
($2.4 million), the impairment of goodwill ($3.1 million) and a reserve for
promissory notes and pre-acquisition costs ($1.8 million). Further, 1998 other
income/expense included a $3.2 million gain from the sale of NXT stock.

     Technology licensing fees and royalties increased by 343% or $2.8 million
to $3.6 million from $0.8 million in 1998. The technology licensing fees and
royalties for 1999 were primarily due to the $0.2 million technology license fee
and $0.9 million prepaid royalty from STMicroelectronics S.A. ("ST"), an $0.8
million license fee from L&H and other technology licensing fees and royalties
aggregating $1.7 million. (See Note 3 - "Notes to Financial Statements").

   Product sales increased in 1999 by 5% to $2.2 million from $2.1 million in
1998 reflecting the increased sales of the Gekko(TM) flat speakers, the
NoiseBuster(R) product line and the ClearSpeech(R) product line.

     Revenue from engineering and development services increased in 1999 by 207%
to $1.3 million from $0.4 million in 1998 primarily due to the contract between
Advancel Logic Corporation ("Advancel") and ST. (See Note 3 - "Notes to the
Financial Statements".)

     Cost of product sales increased 24% to $2.8 million in 1999 from $2.2
million in 1998 and the product margin deteriorated to (25)% from (7)% in 1998.
The negative margin of $0.6 million in 1999 was primarily due to charges of $0.4
million for slow movement of inventory and tooling obsolescence related to the
NoiseBuster(R) product lines and NCT Audio's subwoofers, $0.4 million for
royalty expense and $0.2 million for the write down of NCT Audio's raw
materials. The negative margin of $0.1 million in 1998 was primarily due to
reserves for slow moving inventory and charges for tooling obsolescence in the
amount of $0.5 million related to the NoiseBuster(R) product lines.

     Cost of engineering and development services increased in 1999 by 706% to
$2.2 million primarily due to the contract between Advancel and ST. The gross
margin on engineering and

                                       34
<PAGE>   35
development service was a loss of (70%) for 1999 due to the recording of a
reserve for estimated expenses to complete the ST project.

     Selling, general and administrative expenses for the year increased by 5%
or $0.6 million to $11.8 million from $11.2 million in 1998 which was primarily
due to amortization of goodwill and increased legal expenses (please refer to
Item 3. "Legal Proceedings").

     Research and development expenditures in 1999 decreased by 14% to $6.2
million from $7.2 million in 1998, primarily due to decreased spending on
research and development and the reduction in force in August 1999 (please refer
to Item 3. "Legal Proceedings").

     Included in the Company's total expenses were non-cash expenditures for
depreciation and amortization of $2.0 million for 1999 and $1.0 million in 1998.

   The Company reduced its investment in an unconsolidated affiliate to 15% of
equity and recorded a $2.4 million charge for the write-down of its investment
to its estimated net realizable value.

     In 1999, the Company recorded $3.1 million for the impairment of goodwill.
The Company also recorded a reserve of $1.8 million for the PPI promissory notes
including interest expense and pre-acquisition costs. Interest expense includes
$0.3 million for a beneficial conversion feature and non-cash interest charges
related to the convertible notes. The 1998 other income consists of the gain the
Company realized upon the exercise of a stock option and the subsequent sale of
NXT plc ordinary shares. The option had been acquired by the Company in
connection with a cross license agreement among the Company, NXT plc and NXT.

     In 1999, interest income decreased to less than $0.1 million from $0.4
million in 1998 principally due to lower cash resources. Interest expense
increased to $0.4 million in 1999 from less than $0.1 million in 1998, primarily
due to the issuance of convertible notes during 1999.

     The Company has net operating loss carryforwards of $101.2 million and
research and development credit carryforwards of $1.7 million for federal income
tax purposes at December 31, 1999. No tax benefit for these operating losses has
been recorded in the Company's financial statements. The Company's ability to
utilize its net operating loss carryforwards may be subject to an annual
limitation.

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

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

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

                                       35
<PAGE>   36
     Product sales increased in 1998 by 22% to $2.1 million from $1.7 million in
1997 reflecting the introduction of the Gekko(TM) flat speakers and increased
sales in the NoiseBuster(R) product line and the ClearSpeech(R) product line.

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

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

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

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

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

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

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

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

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

                                       36
<PAGE>   37
D.   LIQUIDITY AND CAPITAL RESOURCES

     The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $131.5 million on a
cumulative basis through December 31, 1999. These losses, which include the
costs for development of products for commercial use, have been funded primarily
from (1) the sale of common stock, including the exercise of warrants or options
to purchase common stock, (2) the sale of preferred stock convertible into
common stock, (3) convertible debt, (4) technology licensing fees,
(5) royalties, (6) product sales, and (7) engineering and development funds
received from strategic partners and customers.

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

     As previously noted, on January 6, 1999, NASDAQ notified the Company that
the Company's securities were delisted from the NASDAQ National Market effective
with the close of business on January 6, 1999. The Company's common stock is now
reported on the OTC Bulletin Board. While delisting of the Company's common
stock has not had an adverse effect on the Company's operations, it may make it
more difficult for the Company to raise additional capital to fund future
operations.

     There can be no assurance that funding will be provided by technology
licensing fees, royalties, product sales, engineering and development services.
In that event, the Company would have to substantially cut back its level of
operations. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. Uncertainty exists with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise substantial doubt at December 31, 1999 about the
Company's ability to continue as a going concern.

     At December 31, 1999, cash and cash equivalents were $1.1 million. Such
balance was invested in interest bearing money market accounts. Restricted cash
of $0.7 million was attributed to the proceeds from the PRG Note, which is
restricted to rental and installation costs of DBSS Systems.

                                       37
<PAGE>   38
     The Company's working capital decreased to a deficit of $(3.3) million at
December 31, 1999, from a deficit of $(1.2) million at December 31, 1998. This
$2.1 million decrease was primarily due to the increase in accrued legal fees
and to fund operations for the period.

     During 1999, the net cash used in operating activities was $10.6 million,
compared to $12.8 million used in operating activities during 1998, a decrease
of $2.2 million. The $10.6 million net cash used in operating activities was
primarily due to the write down of the estimated net realizable investment in
TSA, the reserve recorded on the promissory note due from PPI, an increase in
accrued legal expenses and a charge for the impairment of goodwill.

     Net inventory decreased during 1999 by $1.0 million, primarily due to the
availability of inventory on hand in the beginning of 1999, resulting in little
or no purchases of finished goods during 1999.

     The net cash provided by financing activities was $11.9 million in 1999,
primarily due to the $4.0 million convertible notes (see Note 8 - "Notes to the
Financial Statements" for further details) and $7.4 million net proceeds from
the Series E and the Series F Preferred Stock financings (see Note 11 - "Notes
to the Financial Statements" for further details).

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

     Because the Company did not meet its revenue targets for 1999, it was
necessary for the Company to enter into certain transactions, which provided
additional funding as follows:


     FUNDING FROM THE SERIES E CONVERTIBLE PREFERRED STOCK

     In 1999, the Company received net proceeds of $3.5 million from the
Series E Preferred Stock placement. On December 30, 1998, the Company entered
into a series of subscription agreements to sell 8,145 shares of Series E
Preferred Stock, with a stated value of up to $8.2 million in consideration of
$2.1 million, to six accredited investors through one dealer. The sale of the
shares occurred in a private placement pursuant to Regulation D of the
Securities Act. The Company also issued and sold 1,700 shares of Series E
Preferred Stock, an aggregate amount of $1.7 million of Series E Preferred Stock
to three accredited investors through the same dealer in exchange for
$1.7 million of the Company's Series C Preferred Stock held by the three
investors. The Company also issued and sold 735 shares of Series E Preferred
Stock, an aggregate amount of $0.7 million of Series E Preferred Stock to four
accredited investors, in exchange and consideration for an aggregate 2.1 million
shares of the Company's common stock held by the four investors.

     In March 1999, the Company signed a license agreement to exchange 3,600
shares of Series E Preferred Stock for four DMC network affiliate licenses. The
Company, in accordance with its revenue recognition policy, realized only $0.9
million on the issuance of such licenses in consideration of receipt of 3,600
shares of Series E Convertible Preferred Stock.

                                       38
<PAGE>   39
     In April 1999, the Company entered into a subscription agreement to sell
1,874 shares of Series E Preferred Stock, with a stated value of up to $1.9
million in consideration of $1.9 million to four accredited investors through
one dealer.

     Each share of Series E Preferred Stock is convertible into common stock of
the Company according to the conversion formula described in the subscription
agreements. The conversion terms of the placement require the Company to file a
registration statement on either (1) a Form S-3 under certain conditions, or
(2) a Form S-1 under other specified conditions. The shares of the Series E
Preferred Stock become convertible into common stock of NCT at any time
beginning at the earlier of (1) ninety days after the closing date of the
placement, (2) five days after the Company receives a "no review" status from
the SEC in connection with filing one of the above registration statements, or
(3) the effective date of any registration statement.

     The conversion terms of the Series E Preferred Stock also provide that in
no event shall the Company be obligated to issue more than 30,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
10,580 shares of Series E Preferred Stock which have been designated. The
Company registered an aggregate of 26,648,696 shares of common stock for the
conversion and payment of accretion of the Series E. The conversion terms
further provide that the Company will be required to make certain payments if it
fails to effect a conversion in a timely manner and may have to redeem the
excess of the stated value over the amount permitted to be converted into common
stock. As of the date hereof, holders of 3,828 shares of Series E Preferred
Stock have elected to convert their shares into 26,608,942 shares of common
stock of the Company.

     In December 1999, holders of the remaining 5,026 shares of the Company's
Series E Preferred Stock and holders of 974 shares of the Company's Series F
Preferred Stock, an aggregate stated value of $6.0 million, exchanged such
shares for eight DMC network affiliate licenses. No shares of Series E Preferred
Stock are presently outstanding.


     SECURED CONVERTIBLE NOTES

     In 1999, the Company received proceeds aggregating $3.0 million from the
issuance of secured convertible notes as described herein. Carole Salkind
("Holder"), spouse of a former director and an accredited investor, subscribed
and agreed to purchase secured convertible notes of the Company in an aggregate
principal amount of $4.0 million. A secured convertible note (the "Note") for
$1.0 million was signed on January 26, 1999, and proceeds were received on
January 28, 1999. The Note is to mature on January 25, 2001 and earn interest at
the prime rate as published from time to time in The Wall Street Journal from
the issue date until the Note becomes due and payable. The Holder shall have the
right at any time on or prior to the day the Note is paid in full, to convert at
any time, all or from time to time, any part of the outstanding and unpaid
amount of the Note into fully paid and non-assessable shares of common stock of
the Company at the conversion price. The conversion price, as amended by the
parties on September 19, 1999, of the notes and any future notes, shall be the
lesser of (i) the lowest closing transaction price for the common stock on the
securities market on which the common stock is being traded, at any time during
September 1999; (ii) the average of the closing bid price for the common stock
on the securities market on which the common stock is being traded, for five (5)

                                       39
<PAGE>   40
consecutive trading days prior to the date of conversion; or (iii) the fixed
conversion price of $0.17. In no event will the conversion price be less than
$0.12 per share. The Holder shall purchase the remaining $3.0 million principal
amount of the secured convertible notes on or before June 30, 1999. The Company
has agreed to extend such date for the purchase of remaining installments of
secured convertible notes to April 15, 2000. On various dates, the Holder has
purchased additional installments of the remaining $3.0 million principal amount
of the secured convertible notes. As of March 27, 2000, the Company had received
proceeds aggregating $4.0 million from the Holder and had issued secured
convertible notes with the same terms and conditions of the Note described
above.


     THE SERIES F CONVERTIBLE PREFERRED STOCK

     The Company received $1.0 million for the sale of shares of its Series F
Convertible Preferred Stock as outlined herein. On August 10, 1999, the Company
entered into a subscription agreement (the "Series F Subscription Agreement") to
sell an aggregate stated value of up to $12.5 million (12,500 shares) of Series
F Preferred Stock, in a private placement pursuant to Regulation D of the
Securities Act, to five unrelated accredited investors through one dealer. The
Company received $1.0 million for the sale of 8,500 shares of Series F Preferred
Stock having an aggregate stated value of $8.5 million. At the Company's
election, the investors may invest up to an additional $4.0 million (4,000
shares) in cash or in kind, at a future date. Each share of the Series F
Preferred Stock has a par value of $.10 per share and a stated value of one
thousand dollars ($1,000) with an accretion rate of four percent (4%) per annum
on the stated value. Each share of Series F Preferred Stock is convertible into
fully paid and nonassessable shares of the Company's common stock, subject to
certain limitations. On September 10, 1999, the Company received subscription
agreements from four of the accredited investors in the amount of $4.0 million
for four DMC network affiliate licenses. While the investors agreed upon the
exchange of 8,500 shares of Series F Preferred Stock having aggregate stated
value of $8.5 million, for consideration of $1.0 million, current accounting
policy dictates that the additional $4.0 million for the DMC licenses is to be
considered as additional consideration for the Series F Preferred Stock.

     Under the terms of the Series F Subscription Agreement, the Company is
required to file a registration statement ("the Series F Registration
Statement") on Form S-1 on or prior to a date which is no more than forty-five
(45) days from the date that the Company has issued a total of 1,000 shares of
Series F Preferred Stock, covering the resale of all of the registrable
securities (the "Series F Closing Date"). The shares of Series F Preferred Stock
become convertible into shares of common stock at any time commencing after the
earlier of (i) forty-five (45) days after the Series F Closing Date; (ii) five
(5) days after the Company receives a "no review" status from the SEC in
connection with the Series F Registration Statement; or (iii) the effective date
of the Series F Registration Statement. Each share of Series F Preferred Stock
is convertible into a number of shares of common stock of the Company pursuant
to a predetermined conversion formula.

     The conversion terms of the Series F Preferred Stock also provided that in
no event shall the Company be obligated to issue more than 35,000,000 shares of
its common stock in the aggregate in connection with the conversion of the
12,500 shares of Series F Preferred Stock. In

                                       40
<PAGE>   41
the interest of investor relations of the Company, the maximum number of
conversion shares was increased to 77,000,000 shares of NCT common stock. The
pro rata portion of the shares of common stock issuable upon conversion of the
8,500 shares of Series F Preferred Stock issued and outstanding, or 23,800,000
shares of the Company's common stock, were registered together with 1,944,000
shares of common stock which may be issued, under Registration Statement No.
333-87757. The issuance of the additional 1,944,000 shares will enable the
Company to pay the 4% per annum accretion on the stated value of the issued and
outstanding shares of Series F Preferred Stock. The Company is given the right
to pay the accretion in either cash or common stock.

     The Series F Subscription Agreement also provides that the Company will be
required to make certain payments in the event of its failure to effect
conversion in a timely manner. In connection with the Series F Preferred Stock,
the Company may be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts will
be treated as obligations of the Company. In December 1999, 974 shares of the
Company's Series F Preferred Stock, together with 5,026 shares of the Company's
Series E Preferred Stock, were exchanged for eight DMC network affiliate
licenses. As of January 10, 2000, 4,016 shares of Series F Preferred Stock have
been converted into 36.1 million shares of the Company's common stock. There are
3,510 shares of Series F Preferred Stock outstanding as of the date hereof.

     On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to seventy-seven
million shares of its common stock upon the conversion of the 12,500 designated
shares of Series F Preferred Stock, as noted above. Such increase in the number
of shares of common stock was made in the interest of investor relations of the
Company. This registration statement and prospectus includes 28,560,000 shares
of common stock for the conversion of the amended Series F Preferred Stock
Certificate of Designations.


     SUPPLIER AND CONSULTANT SHARES

     In 1999, the Company issued 13,154,820 shares of common stock of the
Company to settle certain of its obligations to certain suppliers and
consultants, of which 12,759,778 shares were registered under Registration
Statement No. 333-87757. The issuance of these shares of common stock of the
Company represented $2.5 million of obligations for which the Company did not
need to use its cash resources.


     PRIVATE PLACEMENT OF COMMON STOCK

     In 1999, the Company issued shares of its common stock for a total purchase
price of $500,000 in a private placement pursuant to Regulation D of the
Securities Exchange Act of 1933. The Company has certain contingent obligations
under a securities purchase agreement, dated as of December 27, 1999 (the
"Purchase Agreement"), among the Company, Austost, Balmore and Nesher, Inc.
("Nesher"). Based on an offer as of November 9, 1999, the Company, Austost,
Balmore and Nesher entered into the Purchase Agreement whereby the Company, on
December 28, 1999, issued a total of 3,846,155 shares (the "SPA Shares") to
Austost, Balmore

                                       41
<PAGE>   42
and Nesher for a total purchase price of $500,000. The price of the SPA Shares
was $0.13 per share, which was $0.03, or 19%, less than the closing bid price
of the Company's common stock as reported by the OTC Bulletin Board on
November 8, 1999, and $0.015, or 10%, less than the closing bid price of the
Company's common stock as reported by the OTC Bulletin Board on
December 27, 1999. This per share price may be subject to decrease upon the
application of a reset provision contained in the Purchase Agreement as
described below.

     Under the reset provision, on June 26, 2000, and again on September 25,
2000, the Company may be required to issue additional shares to one or more of
Austost, Balmore or Nesher if the sum of certain items on those dates is less
than 120% of the total purchase price paid by Austost, Balmore and Nesher for
the SPA Shares. Those items are: (i) the aggregate market value of the SPA
Shares held by Austost, Balmore and Nesher (based on the per share closing bid
price on those dates); (ii) the market value of any SPA Shares transferred by
Austost, Balmore and Nesher as permitted under the Purchase Agreement (based on
the per share closing bid price on the date of transfer); and (iii) any amounts
realized by Austost, Balmore and Nesher from sales of any such shares prior to
June 26, 2000 or September 25, 2000, as the case may be. The number of
additional shares of common stock that the Company would be obligated to issue
in such case would be a number of shares having an aggregate market value (based
on the per share closing bid price on such date) that, when added to the sum of
items (i), (ii) and (iii) set forth above, would equal 120% of the total
purchase price paid for the SPA Shares.

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

     The Company believes that the level of financial resources available to it
may be a critical component in the Company's ability to continue as a going
concern. The Company may elect to

                                       42
<PAGE>   43
raise additional capital, from time to time, through equity or debt financing in
order to capitalize on business opportunities and market conditions.

     The accompanying Financial Statements have been prepared assuming that the
Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described in the preceding paragraphs raise substantial doubt at
December 31, 1999 about the Company's ability to continue as a going concern.
The accompanying Financial Statements do not include any adjustments relating to
the recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.


E.   CAPITAL EXPENDITURES

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

     In March 2000, the Company signed a lease for approximately 18,700 square
feet of space in Westport, Connecticut. The lease expires in March 2010 and
provides for monthly rental of approximately $28,000 for the first five years
and approximately $31,000 per month for the next five years.

     There were no material commitments for capital expenditures as of
December 31, 1999, and other than the matter discussed above, no material
commitments are anticipated in the near future.


F.   YEAR 2000 COMPLIANCE

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to identify the applicable year and is an issue
which exists for all companies that rely on computers. The failure to correct
any such programs may result in incorrect results when computers perform
arithmetic operations, comparisons of data or field sorting and some
non-information systems functions that rely on computers making calculations.

     The Company's cost of administering its Year 2000 Compliance Program was
minimal (less than $100,000) and did not have a material adverse impact on its
business. There has been no indication, to date, that the Year 2000 issue will
have a material impact on future earnings. Yet, the Company can make no
assurances that our customers and suppliers have in place adequate

                                       43
<PAGE>   44
systems to resolve their own Year 2000 problems. Such potential problems remain
a possibility and could have an adverse impact on our future results.



ITEM 8.  FINANCIAL STATEMENTS.

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

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Independent Auditors' Report                                               F-1

Consolidated Balance Sheets as of December 31, 1998 and 1999               F-2

Consolidated Statements of Operations and Consolidated Statements of
 Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999   F-3

Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1997, 1998 and 1999                                          F-4

Consolidated Statements of Cash Flows for the years ended December 31,
 1997, 1998 and 1999                                                       F-7

Notes to Financial Statements                                              F-8
</TABLE>



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

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

                                       44
<PAGE>   45

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth the names, ages, positions and the offices
held by each of the executive officers and directors of the Company as of
March 31, 2000.

<TABLE>
<CAPTION>
       NAME                        AGE                   POSITIONS AND OFFICES
       ----                        ---                   ---------------------

       <S>                         <C>         <C>
       Jay M. Haft                  64         Chairman of the Board of Directors
       Michael J. Parrella          52         President, Chief Executive Officer and Director
       John J. McCloy II            62         Director
       Samuel A. Oolie              63         Director
       Irene Lebovics               47         Executive Vice President, Marketing
       Cy E. Hammond                45         Senior Vice President, Chief Financial Officer
       Paul Siomkos, P.E.           53         Senior Vice President, Operations
       Michael A. Hayes, Ph.D.      47         Senior Vice President, Chief Technical Officer
       Irving M. Lebovics           49         Senior Vice President, Global Sales
       James A. McManus             60         President and Chief Executive Officer of
                                                DistributedMedia.com, Inc.
</TABLE>

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

     MICHAEL J. PARRELLA currently serves as President, Chief Executive Officer
and Director of the Company. He was elected President and Chief Operating
Officer of the Company in February 1988 and served in that capacity until
November 1994. From November 1994 to July 1995 Mr. Parrella served as Executive
Vice President of the Company. He initially became a Director in 1986 after
evaluating the application potential of the Company's noise cancellation
technology. At that time, he formed an investment group to acquire control of
the Board and to raise new

                                       45
<PAGE>   46
capital to restructure the Company and its research and development efforts.
Mr.Parrella serves as Chief Executive Officer and Acting President of NCT Audio,
a position to which he was elected on September 4, 1997, and was appointed a
Director on August 25, 1998. On January 5, 2000, Mr. Parrella was elected Acting
Chief Executive Officer of Advancel. He was also Chairman of the Board of
Environmental Research Information, Inc., an environmental consulting firm, from
December 1987 to March 1991.

     IRENE LEBOVICS currently serves as Executive Vice President and Secretary,
NCT Group, Inc., and President of NCT Hearing, a wholly-owned subsidiary of the
Company. On January 5, 2000, Ms. Lebovics was elected Acting Chief Marketing
Officer and Secretary of Advancel. She joined the Company as Vice President of
NCT and President of NCT Medical Systems (NCTM) in July 1989. In March 1990,
NCTM became part of NCT Personal Quieting and Ms. Lebovics served as President.
In January 1993, she was appointed Senior Vice President of the Company. In
November 1994, Ms. Lebovics became President of NCT Hearing. From August 1,
1995, to May 1, 1996, she also served as Secretary of the Company. Ms. Lebovics
has held various positions in product marketing with Bristol-Myers, a consumer
products company, and in advertising with McCaffrey and McCall.

     CY E. HAMMOND currently serves as Senior Vice President, Chief Financial
Officer of the Company. He joined the Company as Controller in January 1990 and
was appointed a Vice President in February 1994. Mr. Hammond also serves as
Acting Chief Financial Officer and Treasurer of NCT Audio, a position to which
he was elected on September 4, 1997, and Acting Chief Financial Officer,
Treasurer and Assistant Secretary for Advancel, a position to which he was
elected on January 5, 2000. During 1989, he was Treasurer and Director of
Finance for Alcolac, Inc., a multinational specialty chemical producer. Prior to
1989 and from 1973, Mr. Hammond served in several senior finance positions at
the Research Division of W.R. Grace & Co., the last of which included management
of the division's worldwide financial operations.

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

     MICHAEL A. HAYES, PH.D., currently serves as Senior Vice President, Chief
Technical Officer after joining the Company in 1996. On January 5, 2000, he was
appointed Acting Chief Technical Officer of Advancel. During 1995 and 1994,
Dr. Hayes served as Deputy Project Director, Research Support for Antarctic
Support Associates, with operations in Chile, New Zealand, Australia, and
Antarctica. From 1991 to 1994, he served as Deputy Program Manager, Special
Payloads, for Martin Marietta Government Services (formerly General Electric
Government Services) while directly managing critical spacecraft sub-system and
instrument development for Goddard Space Flight Center. Prior to 1991, Dr. Hayes
served as a research faculty member at Georgia Institute of Technology, and as a
Senior Process Engineer at Texas Instruments.

                                       46
<PAGE>   47
     JOHN J. MCCLOY II currently serves as a Director of the Company. He served
as Chief Executive Officer of the Company from September 1987 to November 1994
and as its Chairman of the Board from September 1986 to November 1994.
Additionally, he served as Chief Financial Officer from November 1990 to
February 1993 and as its Secretary-Treasurer from October 1986 to September
1987. Mr. McCloy was appointed a Director of the Company's subsidiary, NCT
Audio, on November 14, 1997. Since 1981, he has been a private investor
concentrating on venture capital and early stage investment projects in a
variety of industries. Mr. McCloy is the Chairman of Mondial Ltd. and Unified
Waste Services, and is also a director of American University in Cairo and the
Sound Shore Fund, Inc.

     SAM OOLIE currently serves as a Director of the Company. Mr. Oolie also
serves as a Director of the Company's subsidiary, NCT Audio, a position to which
he was appointed on September 4, 1997. He is Chairman of NoFire Technologies,
Inc., a manufacturer of high performance fire retardant products, and has held
that position since August 1995. He is also Chairman of Oolie Enterprises, an
investment company, and has held that position since July 1985. Mr. Oolie
currently serves as a director of Avesis, Inc. and Comverse Technology, Inc. He
has also served as a director of CFC Associates, a venture capital partnership,
from January 1984 to December 1999.

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

     JAMES MCMANUS currently serves as President and Chief Executive Officer of
DMC, a position he has held since March 1999. Prior to that and from April,
1998, he served as a consultant to DMC. He started his career as a Certified
Public Accountant in California. During the 10 years he spent with the Disney
Company in the financial area, the company's activities included the development
of Audio-Animatronics, Walt Disney World, Disney Theme Hotels, the City Planning
Board for Lake Buena Vista, Florida, and Disney's joint venture with Florida
Telephone. Subsequent to Disney, he designed and executed a financial turnaround
plan for Great Adventure Park in New Jersey. Later, Mr. McManus ran his own
computer consulting firm for several years providing customized computer systems
for small and medium size businesses. He was a member of the Radio City Music
Hall management team that revitalized New York's famous landmark, first as Chief
Financial Officer and then for 10 years as President and CEO. Mr. McManus has
always been active in the business community with involvement as Director, New
York Council of the Boy Scouts of America; Director, Hugh O'Brian Youth
Organization; Director, Association to Help Retarded Children; The Mayor's
Summer Youth Jobs Program and many others.

                                       47
<PAGE>   48
     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by regulations of the Securities and Exchange Commission to furnish the
Company with copies of all such reports. Based solely on its review of the
copies of such reports received by it, or written representations from certain
reporting persons that no reports were required for those persons, the Company
believes that, during the period from January 1, 1999 to December 31, 1999, all
filing requirements applicable to its officers, directors, and greater than 10%
stockholders were complied with.



ITEM 11.  EXECUTIVE COMPENSATION.

     Information required under this item is contained in a definitive proxy
statement that the Registrant will file on or before April 29, 2000, and is
incorporated herein by reference.



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

     Information required under this item is contained in a definitive proxy
statement that the Registrant will file on or before April 29, 2000, and is
incorporated herein by reference.



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Between 1993 and 1994, the Company entered into five agreements with Quiet
Power Systems, Inc. ("QSI"). Environmental Research Information, Inc. ("ERI")
owns 33% of QSI, and Jay M. Haft, Chairman of the Board of Directors of the
Company, owns another 2% of QSI. Michael J. Parrella, President of the Company,
owns 12% of the outstanding capital of ERI and shares investment control over an
additional 24% of its outstanding capital. In March 1995, the Company entered
into a master agreement with QSI which granted QSI an exclusive worldwide
license to market, sell and distribute various quieting products in the utility
industry. Subsequently, the Company and QSI executed four letter agreements,
primarily revising payment terms. On December 24, 1999, the Company executed a
final agreement with QSI in which the Company agreed to write-off $239,000 of
indebtedness owed by QSI in exchange for the return by QSI to the Company of its
exclusive license to use NCT technology in various quieting products in the
utility industry. Such amount, originally due on January 1, 1998, had been fully
reserved by the Company.

     On January 26, 1999, Carole Salkind, an accredited investor and spouse of a
former director, subscribed and agreed to purchase secured convertible notes of
the Company in an aggregate principal amount of $4.0 million. A secured
convertible note (the "Note") for $1.0 million was signed on January 26, 1999,
and the Company received the proceeds on January 28, 1999. The Note matures on
January 25, 2001 and earns interest at the prime rate as published from time to

                                       48
<PAGE>   49
time in The Wall Street Journal from the issue date until the Note becomes due
and payable. The Holder has the right at any time on or prior to the day the
Note is paid in full, to convert at any time, all or from time to time, any part
of the outstanding and unpaid amount of the Note into fully paid and
non-assessable shares of common stock of the Company at the conversion price.
The conversion price, as amended by the parties on September 19, 1999, of the
Note and any future notes, is the lesser of (i) the lowest closing transaction
price for the common stock on the securities market on which the common stock is
being traded, at any time during September 1999; (ii) the average of the closing
bid price for the common stock on the securities market on which the common
stock is being traded for five (5) consecutive trading days prior to the date of
conversion; or (iii) the fixed conversion price of $0.17. In no event will the
conversion price be less than $0.12 per share. The Holder agreed to purchase the
remaining $3.0 million principal amount of the secured convertible notes on or
before June 30, 1999. The Company has agreed to extend such date for the
purchase of remaining installments of secured convertible notes to April 15,
2000. On various dates, the Holder has purchased additional installments of the
remaining $3.0 million principal amount of the secured convertible notes to the
Holder. As of March 27, 2000, the Company had received proceeds aggregating $4.0
million from the Holder and had issued secured convertible notes with the same
terms and conditions of the Note described above.

                                       49
<PAGE>   50
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
          REPORTS ON FORM 8-K.

(a)  (1)   Financial Statements. The following financial statements are filed
as part of this Form 10-K.

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999.

Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Loss for the years ended December 31, 1997, 1998 and 1999.

Consolidated Statements of Stockholders' Equity for the years ended December 31,
1997, 1998 and 1999.

Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999.

Notes to Financial Statements.

(a)  (2)   Financial Statement Schedules.

Report of Independent Auditors with Respect to Schedule.

Schedule II.  Valuation and Qualifying Accounts.

Other schedules have been omitted as they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.

(a)  (3)   Exhibits. The exhibits listed on the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.


(b)  No report on Form 8-K was filed during the last quarter of the year covered
by this Annual Report on Form 10-K.

                                       50
<PAGE>   51
                                 NCT GROUP, INC.
                                INDEX TO EXHIBITS
                                  ITEM 14(a)(3)
<TABLE>
<CAPTION>

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

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

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

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

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

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

                                       51
<PAGE>   52
<TABLE>
<S>   <C>      <C>
        3(f)   Certificate of Designations, Preferences and Rights of Series D
               Convertible Preferred Stock of the Company filed in the Office of
               the Secretary of State of the State of Delaware on July 24, 1998,
               incorporated by reference to Exhibit 4 of the Company's
               Registration Statement on Form S-3 (Registration No. 333-64967)
               filed on September 30, 1998, as amended by Amendment No. 1
               thereto filed on October 20, 1998.

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

        3(h)   Certificate of Amendment of the Restated Certificate of
               Incorporation of the Company filed in the Office of the Secretary
               of the State of Delaware on July 29, 1999, incorporated herein by
               reference to Exhibit 3(h) to the Company's Quarterly Report on
               Form 10-Q for the period ended June 30, 1999.

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

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

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

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

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

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

                                       52
<PAGE>   53
<TABLE>
<S>   <C>      <C>
        4(g)   Warrant Agreement, dated as of January 20, 1988, between the
               Company and American Stock Transfer Company, as Warrant Agent,
               relating to certain warrants to purchase common stock of the
               Company at a price of $.40 per share issued to Sam Oolie, Oolie
               Enterprises, John J. McCloy II, and Michael J. Parrella,
               incorporated herein by reference to Exhibit 4(g) to Amendment
               No. 1 to the Company's Annual Report on Form 10-K for the fiscal
               year ended December 31, 1991.

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

        4(i)   Certificate of Designations, Preferences and Rights of Series F
               Convertible Preferred Stock of the Company filed in the Office of
               the Secretary of the State of Delaware on September 8, 1999.

        4(j)   Certificate of Amendment of Certificate of Designations,
               Preferences and Rights of Series F Convertible Preferred Stock of
               the Company filed in the Office of the Secretary of the State of
               Delaware on January 27, 2000.

        4(k)   Certificate of Designations, Preferences and Rights of Series G
               Convertible Preferred Stock of the Company filed in the Office of
               the Secretary of the State of Delaware on March 6, 2000.

        4(l)   Corrected Certificate of Designations, Preferences and Rights of
               Series G Convertible Preferred Stock of the Company filed in the
               Office of the Secretary of the State of Delaware on March 10,
               2000.

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

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

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

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

                                       53
<PAGE>   54
<TABLE>
<S>   <C>      <C>
**    10(e)    Stock Option Agreement, dated as of June 17, 1987, between the
               Company and John J. McCloy II, incorporated herein by reference
               to Exhibit 10(f) to Amendment No. 1 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1991.

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

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

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

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

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

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

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

                                       54
<PAGE>   55
<TABLE>
<S>   <C>      <C>
      10(l)(1) Letter Agreement between Tenneco Automotive, a division of
               Tennessee Gas Pipeline Company, and the Company dated November
               22, 1993, incorporated herein by reference to Exhibit 10(a) to
               the Company's Current Report on Form 8-K dated November 22, 1993.

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

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

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

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

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

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

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

                                       55
<PAGE>   56
<TABLE>
<S>   <C>      <C>
      10(m)(1) Amendment, dated April 16, 1991, to Technical Assistance and
               License Agreement, dated March 25, 1991, among the Company,
               Foster Electric Co., Ltd. and Foster/NCT Headsets International
               Ltd., incorporated herein by reference to Exhibit 10(nn)(1) to
               Amendment No. 5 to the Company's Annual Report on Form 10-K for
               the fiscal year ended December 31, 1991.

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

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

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

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

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

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

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

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

                                       56
<PAGE>   57
<TABLE>
<S>   <C>      <C>
      10(q)    Master Agreement between Noise Cancellation Technologies, Inc.
               and Quiet Power Systems, Inc. dated March 27, 1995, incorporated
               herein by reference to Exhibit 10(a) of the Company's Current
               Report on Form 8-K filed with the Securities and Exchange
               commission on August 4, 1995.

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

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

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

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

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

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

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

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

                                       57
<PAGE>   58
<TABLE>
<S>   <C>      <C>
      10(t)(3) License Agreement between Chaplin Patents Holding Co., Inc. and
               Ultra Electronics Limited dated April 6, 1995, incorporated
               herein by reference to Exhibit 10(f) of the Company's Current
               Report on Form 8-K filed August 4, 1995.

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

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

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

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

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

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

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

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

                                       58
<PAGE>   59
<TABLE>
<S>   <C>      <C>
      10(w)(3) Common Stock Purchase Option dated April 15, 1997, from Noise
               Cancellation Technologies, Inc. to Verity Group plc, incorporated
               by reference to Exhibit 10(c) to the Company's Quarterly Report
               on Form 10-Q for the quarter ended June 30, 1997.

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

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

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

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

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

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

      10(z)    License Agreement dated January 25, 1999, between NCT Group, Inc.
               and DistributedMedia.com, Inc., incorporated by reference to
               Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
               quarter ended September 30, 1999.

      10(aa)   Securities Exchange Agreement, dated as of October 9, 1999, among
               the Company, Austost Anstalt Schaan and Balmore Funds, S.A.
               incorporated by reference to Exhibit 10(a) of the Company's
               Current Report on Form 8-K filed on January 12, 2000.

      10(ab)   Registration Rights Agreement, dated as of October 9, 1999, among
               the Company, Austost Anstalt Schaan and Balmore Funds, S.A.
               incorporated by reference to Exhibit 10(b) of the Company's
               Current Report on Form 8-K filed on January 12, 2000.
</TABLE>

                                       59
<PAGE>   60
<TABLE>
<S>   <C>      <C>
      10(ac)   Securities Purchase Agreement, dated as of December 27, 1999,
               among the Company, Austost Anstalt Schaan, Balmore Funds, S.A.
               and Nesher, Inc. incorporated by reference to Exhibit 10(c) of
               the Company's Current Report on Form 8-K filed on January 12,
               2000.

      10(ad)   Registration Rights Agreement, dated as of December 27, 1999,
               among the Company, Austost Anstalt Schaan, Balmore Funds, S.A..
               Nesher, Inc. and Libra Finance S.A. incorporated by reference to
               Exhibit 10(d) of the Company's Current Report on Form 8-K filed
               on January 12, 2000.

      10(ae)   Amendment No. 1 to the Securities Exchange Agreement, dated as of
               March 7, 2000, among the Company, Austost Anstalt Schaan and
               Balmore Funds, S.A.

*     21       Subsidiaries

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

      23(b)    Consent of Peters Elworthy & Moore, Chartered Accountants.

*     27       Financial Data Schedule.

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

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

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

*     99(d)    Letter from Peters Elworthy & Moore, Chartered Accountants, to
               Noise Cancellation Technologies, Inc. regarding confirmation that
               the accounts of the
</TABLE>

                                       60
<PAGE>   61
<TABLE>
<S>   <C>      <C>
               Company's U.K. subsidiaries for the year ended December 31, 1998
               were audited under auditing standards substantially similar to
               US General Accepted Auditing Standards.

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

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

*     99(g)    Letter from Peters Elworthy & Moore, Chartered
               Accountants, to Noise Cancellation Technologies, Inc. regarding
               confirmation that the accounts for the year ended December 31,
               1996 were audited under auditing standards substantially similar
               to US General Accepted Auditing Standards.

      99(h)    Term Sheet Litigation Settlement dated as of October 9, 1999, by
               and among NCT Group, Inc., NCT Audio Products, Inc., Austost
               Anstalt Schaan, Balmore Funds, S.A. and LH Financial.

      99(i)    Term Sheet dated as of March 6, 2000, among NCT Group, Inc.,
               NCT Hearing Products, Inc. and Pro Tech Communications, Inc.
</TABLE>

----------

*    Filed with the Company's Annual Report on form 10-K for its fiscal
     year ended December 31, 1998.

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

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


                                       61
<PAGE>   62
                          INDEPENDENT AUDITORS' REPORT


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, 1998 and 1999, and the
related consolidated statements of operations, comprehensive loss, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1997, 1998 and
1999 financial statements of the Company's two foreign subsidiaries. These
subsidiaries accounted for revenues of approximately $67,000, $28,000 and $4,000
for the years ended December 31, 1997, 1998 and 1999, respectively, and assets
of approximately $301,000, $218,000 and $164,000 as of December 31, 1997, 1998
and 1999, respectively. These statements were audited by other auditors whose
reports have been furnished to us, one of which contained a paragraph on the
subsidiary's dependence on NCT Group, Inc. for continued financial support. Our
opinion, insofar as it relates to the amounts included for these entities, is
based solely on the reports of the other auditors.

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

In our opinion, based on our audits and the reports of the other auditors, the
financial statements enumerated above present fairly, in all material respects,
the consolidated financial position of NCT Group, Inc. and subsidiaries as of
December 31, 1998 and 1999 and the consolidated results of their operations and
their consolidated cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.

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


/s/ RICHARD A. EISNER & COMPANY, LLP
New York, New York
February 25, 2000

With respect to Note 11
March 7, 2000


                                      F-1
<PAGE>   63
                        NCT GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                     --------------------------
                                                                                        1998             1999
                                                                                     ---------        ---------
                                 ASSETS (Note 8)
<S>                                                                                  <C>              <C>
Current assets:
  Cash and cash equivalents                                                          $     529        $   1,126
  Restricted cash                                                                           --              667
  Accounts receivable, net                                                                 716              237
  Inventories, net of reserves                                                           3,320            2,265
  Other current assets                                                                     185              152
                                                                                     ---------        ---------
    Total current assets                                                             $   4,750        $   4,447
Property and equipment, net                                                                997              449
Goodwill, net                                                                            1,506            3,497
Patent rights and other intangibles, net                                                 2,881            2,296
Other assets                                                                             5,331            2,688
                                                                                     ---------        ---------
                                                                                     $  15,465        $  13,377
                                                                                     =========        =========

                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                   $   3,226        $   3,647
  Accrued expenses                                                                       1,714            3,189
  Accrued payroll, taxes and related expenses                                              241               64
  Customers' advances                                                                       --               21
  Other liabilities                                                                        756              807
                                                                                     ---------        ---------
    Total current liabilities                                                        $   5,937        $   7,728
                                                                                     ---------        ---------
Convertible notes and accrued interest                                               $      --        $   4,107
                                                                                     ---------        ---------
Commitments and contingencies

Minority interest in consolidated subsidiary
  Preferred stock, $.10 par value, 1,000 shares authorized; 60 and 3 shares
   issued and outstanding, respectively
   (redemption amount $6,102,110 and $317,162, respectively)                         $   6,102            $ 317
                                                                                     ---------          -------
Common stock subject to resale guarantee                                             $      --          $ 1,592
                                                                                     ---------          -------
Stockholders' equity:
  Preferred stock, $.10 par value, 10,000,000 shares authorized
   Series C issued and outstanding 700 and 0 shares, respectively
   (redemption amount $731,222 and $0, respectively)                                 $     702        $      --
   Series D issued and outstanding 6,000 and 0 shares, respectively
   (redemption amount $6,102,110 and $0, respectively)                                   5,240               --
   Series E issued and outstanding 10,580 and 0 shares, respectively
   (redemption amount $10,582,319 and $0, respectively)                                  3,298               --
   Series F issued and outstanding 0 and 4,715 shares respectively
   (redemption amount $0 and $4,789,407, respectively)                                      --            2,790
Common stock, $.01 par value, authorized: 255,000,000 and 325,000,000 shares,
respectively; issued: 156,337,316 and 268,770,739 shares, respectively                   1,563            2,688
Additional paid-in-capital                                                             107,483          130,865
Accumulated deficit                                                                   (107,704)        (131,475)
Other comprehensive loss:
  Cumulative translation adjustment                                                         45               65
Stock subscriptions receivable                                                          (4,000)          (1,000)
Unearned portion of compensatory stock, warrants and options                              (238)             (55)
Expenses to be paid with common stock                                                       --           (1,282)
Treasury stock (6,078,065 shares of common stock)                                       (2,963)          (2,963)
                                                                                     ---------        ---------
    Total stockholders' equity                                                       $   3,426        $    (367)
                                                                                     ---------        ---------
                                                                                     $  15,465        $  13,377
                                                                                     =========        =========

See notes to Financial Statements.
</TABLE>

                                      F-2
<PAGE>   64
                        NCT GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                          ----------------------------------------
                                                                           1997             1998            1999
                                                                          --------        --------        --------
<S>                                                                       <C>             <C>             <C>
REVENUES:
  Technology licensing fees and royalties                                 $  3,630        $    802        $  3,552
  Product sales, net                                                         1,720           2,097           2,208
  Engineering and development services                                         368             425           1,303
                                                                          --------        --------        --------
    Total revenues                                                        $  5,718        $  3,324        $  7,063
                                                                          --------        --------        --------

COSTS AND EXPENSES:
  Costs of product sales                                                  $  2,271        $  2,235        $  2,767
  Costs of engineering and development services                                316             275           2,216
  Selling, general and administrative                                        5,217          11,238          11,801
  Research and development                                                   6,235           7,220           6,223
  Write down of investment in unconsolidated affiliate                          --              --           2,385
  Reserve for promissory notes and pre-acquisition costs                        --              --           1,788
  Impairment of goodwill                                                        --              --           3,125
  Provision for doubtful accounts                                              130             232              77
  Other (income) expense                                                         -          (3,264)           (100)
  Interest expense (includes $1,420 and $204 of discounts on
   beneficial conversion feature on convertible debt
   in 1997 and 1999)                                                         1,514               9             578
  Interest income                                                             (117)           (438)            (26)
                                                                          --------        --------        --------
    Total costs and expenses                                              $ 15,566        $ 17,507        $ 30,834
                                                                          --------        --------        --------

NET (LOSS)                                                                $ (9,848)      $ (14,183)       $(23,771)

  Preferred stock beneficial conversion feature                              1,623           3,200          10,567
  Accretion of difference between carrying amounts and
   Redemption amount of redeemable preferred stock                             285             485             494
                                                                          --------        --------        --------
NET (LOSS) ATTRIBUTABLE TO
 COMMON STOCKHOLDERS                                                      $(11,756)       $(17,868)       $(34,832)
                                                                          ========        ========        ========
Weighted average number of common shares outstanding                       124,101         143,855         190,384
                                                                          ========        ========        ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE                               $  (0.09)       $  (0.12)       $  (0.18)
                                                                          ========        ========        ========

See notes to Financial Statements.
</TABLE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                    ---------------------------------------
                                                    1997            1998            1999
                                                   --------       ----------      ---------
<S>                                                <C>            <C>             <C>

NET (LOSS)                                         $ (9,848)      $(14,183)       $(23,771)

Other comprehensive income/(loss)
 Currency translation adjustment                        (23)           (74)             20
                                                   --------       --------        --------
COMPREHENSIVE (LOSS)                               $ (9,871)      $(14,257)       $(23,751)
                                                   ========       ========        ========

See notes to Financial Statements.
</TABLE>

                                      F-3
<PAGE>   65
                        NCT GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (In thousands of dollars and shares)

<TABLE>
<CAPTION>
                                                                  SERIES C               SERIES D               SERIES E
                                                                 CONVERTIBLE           CONVERTIBLE             CONVERTIBLE
                                                               PREFERRED STOCK       PREFERRED STOCK         PREFERRED STOCK
                                                             -------------------   --------------------    -------------------
                                                             SHARES      AMOUNT    SHARES        AMOUNT    SHARES      AMOUNT
                                                             ------      -------   ------        ------    ------      -------
<S>                                                          <C>         <C>       <C>           <C>       <C>         <C>

Balance at December 31, 1996                                     --      $    --       --        $   --        --      $    --

Sale of common stock                                             --           --       --            --        --           --
Shares issued upon exercise of warrants & options                --           --       --            --        --           --
Sale of Series C preferred stock, less expenses of $1,387        13       11,863       --            --        --           --
Discount on beneficial conversion price to preferred
 shareholders                                                    --       (3,313)      --            --        --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --        1,908       --            --        --           --
Sale of subsidiary common stock, less expenses of $65            --           --       --            --        --           --
Common stock issued upon conversion of convertible debt
 less expenses of $168                                           --           --       --            --        --           --
Net loss                                                         --           --       --            --        --           --
Currency translation adjustment                                  --           --       --            --        --           --
Restricted shares issued for Directors' compensation             --           --       --            --        --           --
Warrant issued in conjunction with convertible debt              --           --       --            --        --           --
Compensatory stock options and warrants                          --           --       --            --        --           --
                                                             ------      -------   ------        ------    ------       ------
Balance at December 31, 1997                                     13      $10,458       --        $   --        --      $    --
Shares issued in consideration for patent rights                 --           --       --            --        --           --
Return of shares for subscription receivable                     --           --       --            --        --           --
Conversion of Series C preferred stock, less expenses of $53    (12)     (11,726)      --            --         2        1,577
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --        1,970       --            --        --           --
Offering of Series A preferred stock in subsidiary               --           --       --            --        --           --
  Discount on beneficial conversion price to preferred
   shareholders                                                  --           --       --            --        --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --            --        --           --
Sale of Series D preferred stock, less expenses of $862          --           --        6         5,138        --           --
  Discount on beneficial conversion price to preferred
   shareholders                                                  --           --       --          (673)       --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --           775        --           --
Sale of Series E preferred stock                                 --           --       --            --         9        4,735
  Discount on beneficial conversion price to preferred           --           --       --            --        --       (3,179)
   shareholders
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --            --        --          165
Exchange of subsidiary common stock for parent common stock      --           --       --            --        --           --
Payment of stock subscription receivable                         --           --       --            --        --           --
Repurchase of common shares                                      --           --       --            --        --           --
Acquisition of Advancel, less expenses of $24                    --           --       --            --        --           --
Other                                                            --           --       --            --        --           --
Net Loss                                                         --           --       --            --        --           --
Currency translation adjustment                                  --           --       --            --        --           --
Restricted shares issued for compensation                        --           --       --            --        --           --
Compensatory stock options and warrants                          --           --       --            --        --           --
                                                             ------      -------   ------        ------    ------      -------
Balance at December 31, 1998                                      1      $   702        6       $ 5,240        11      $ 3,298

Sale of common stock, less expenses of $17                       --           --       --            --        --           --
  Less common stock subject to resale                            --           --       --            --        --           --
Conversion of Series C preferred stock                           (1)        (730)      --            --        --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           28       --            --        --           --
Exchange of Series A preferred stock in subsidiary               --           --       --            --        --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --            --        --           --
Conversion of Series D preferred stock                           --           --       (6)       (5,273)       --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --            33        --           --
Sale of Series E preferred stock, less expenses of $487          --           --       --            --         2         (487)
  Conversion of Series E preferred stock                         --           --       --            --        (4)      (2,443)
  Exchange of Series E preferred stock for license fees          --           --       --            --        (9)      (3,631)
  Discount on beneficial conversion price to preferred
   shareholders                                                  --           --       --            --        --       (2,666)
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --            --        --        5,929
Sale of Series F preferred stock, less expenses of $104          --           --       --            --        --           --
  Conversion of Series F preferred stock                         --           --       --            --        --           --
  Exchange of Series F preferred stock for license fees          --           --       --            --        --           --
  Discount on beneficial conversion price to preferred
   shareholders                                                  --           --       --            --        --           --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                    --           --       --            --        --           --
Exchange of subsidiary common stock for parent common stock      --           --       --            --        --           --
Shares issued in consideration for patent rights                 --           --       --            --        --           --
Shares issued for settlement obligations/prepayments             --           --       --            --        --           --
  Less common stock subject to resale                            --           --       --            --        --           --
Warrant issued in conjunction with convertible debt              --           --       --            --        --           --
Beneficial conversion feature on convertible note                --           --       --            --        --           --
Net loss                                                         --           --       --            --        --           --
Currency translation adjustment                                  --           --       --            --        --           --
Shares issued upon exercise of warrants & options                --           --       --            --        --           --
Compensatory stock options and warrants                          --           --       --            --        --           --
                                                             ------      -------   ------       -------    ------      -------
Balance at December 31, 1999                                     --      $    --       --       $    --        --      $    --
                                                             ======      =======   ======       =======    ======      =======
See notes to Financial Statements.
</TABLE>

                                      F-4
<PAGE>   66
                        NCT GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (In thousands of dollars and shares)
<TABLE>
<CAPTION>
                                                              SERIES F
                                                            CONVERTIBLE
                                                           PREFERRED STOCK          COMMON STOCK          ADDITIONAL
                                                         ------------------         ------------           PAID-IN    ACCUMULATED
                                                         SHARES    AMOUNT        SHARES        AMOUNT      CAPITAL      DEFICIT
                                                         ------   ---------      -------       ------     ---------   -----------
<S>                                                      <C>       <C>           <C>           <C>        <C>         <C>

Balance at December 31, 1996                                 --     $    --       111,615      $1,116      $ 85,025     $ (83,673)

Sale of common stock                                         --          --         2,857          29           471            --
Shares issued upon exercise of warrants & options            --          --         1,996          20         1,115            --
Sale of Series C preferred stock, less expenses of $1,387    --          --            --          --            --            --
Discount on beneficial conversion price to preferred
 shareholders                                                --          --            --          --         3,313            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --        (1,908)           --
Sale of subsidiary common stock, less expenses of $65        --          --            --          --         3,573            --
Common stock issued upon conversion of convertible debt
 less expenses of $168                                       --          --        16,683         167         4,714            --
Net loss                                                     --          --            --          --            --        (9,848)
Currency translation adjustment                              --          --            --          --            --            --
Restricted shares issued for Directors' compensation         --          --            10          --             2            --
Warrant issued in conjunction with convertible debt          --          --            --          --            34            --
Compensatory stock options and warrants                      --          --            --          --            40            --
                                                            ---     -------       -------      ------      --------     ---------
Balance at December 31, 1997                                 --     $    --       133,161      $1,332      $ 96,379     $ (93,521)

Shares issued in consideration for patent rights             --          --         1,250          12           494            --
Return of shares for subscription receivable                 --          --            --          --            --            --
Conversion of Series C preferred stock, less expenses        --          --        20,665         207         9,889            --
 of $53
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --        (1,970)           --
Offering of Series A preferred stock in subsidiary           --          --            --          --          (862)           --
  Discount on beneficial conversion price to preferred
   shareholders                                              --          --            --          --           673            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --          (775)           --
Sale of Series D preferred stock, less expenses of $862      --          --            --          --            --            --
  Discount on beneficial conversion price to preferred
   shareholders                                              --          --            --          --           673            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --          (775)           --
Sale of Series E preferred stock                             --          --            --          --            --            --
  Discount on beneficial conversion price to preferred
   shareholders                                              --          --            --          --         3,179            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --          (165)           --
Exchange of subsidiary common stock for parent common
 stock                                                       --          --         1,135          11           545            --
Payment of stock subscription receivable                     --          --            --          --            --            --
Repurchase of common shares                                  --          --            --          --            --            --
Acquisition of Advancel, less expenses of $24                --          --            --          --          (151)           --
Other                                                        --          --             1          --           (48)           --
Net Loss                                                     --          --            --          --            --       (14,183)
Currency translation adjustment                              --          --            --          --            --            --
Restricted shares issued for compensation                    --          --           125           1            96            --
Compensatory stock options and warrants                      --          --            --          --           301            --
                                                            ---     -------       -------      ------      --------     ---------
Balance at December 31, 1998                                 --     $    --       156,337      $1,563      $107,483     $(107,704)

Sale of common stock, less expenses of $17                   --          --         4,135          41           442            --
  Less common stock subject to resale                        --          --            --          --          (600)           --
Conversion of Series C preferred stock                       --          --         1,512          15           715            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --           (28)           --
 Exchange of Series A preferred stock in subsidiary          --          --        11,700         117         9,189            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --           (68)           --
  Conversion of Series D preferred stock                     --          --        12,274         123         5,150            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --           (33)           --
  Sale of Series E preferred stock, less expenses of $487    --          --            --          --            --            --
  Conversion of Series E preferred stock                     --          --        26,609         266         2,177            --
  Exchange of Series E preferred stock for license fees      --          --            --          --         2,781            --
   Discount on beneficial conversion price to preferred
    shareholders                                             --          --            --          --         2,666            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --          --            --          --       (5,929)            --
   Sale of Series F preferred stock, less expenses of $104    9       4,896            --          --            --            --
   Conversion of Series F preferred stock                    (3)     (1,652)       25,306         253         1,399            --
   Exchange of Series F preferred stock for license fees     (1)       (574)           --          --           574            --
  Discount on beneficial conversion price to preferred
   shareholders                                              --      (4,884)           --          --         4,884            --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                --       5,004            --          --        (5,004)           --
  Exchange of subsidiary common stock for parent common      --          --        17,738         178         2,454            --
   stock Shares issued in consideration for patent rights    --          --            --          --            88            --
Shares issued for settlement obligations/prepayments         --          --        13,155         132         2,371            --
  Less common stock subject to resale                        --          --            --          --          (537)           --
Warrant issued in conjunction with convertible debt          --          --            --          --           446            --
Beneficial conversion feature on convertible note            --          --            --          --           204            --
Net loss                                                     --          --            --          --            --       (23,771)
Currency translation adjustment                              --          --            --          --            --            --
Shares issued upon exercise of warrants & options            --          --             5          --            --            --
Compensatory stock options and warrants                      --          --            --          --            41            --
                                                            ---     -------       -------      ------      --------     ---------
Balance at December 31, 1999                                  5     $ 2,790       268,771      $2,688      $130,865     $(131,475)
                                                            ===     =======       =======      ======      ========     =========
See notes to Financial Statements.
</TABLE>

                                      F-5
<PAGE>   67
                        NCT GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (In thousands of dollars and shares)
<TABLE>
<CAPTION>
                                                                                     UNEARNED
                                                                                    PORTION OF  EXPENSES
                                                                         STOCK       COMPEN-   TO BE PAID
                                                          CUMULATIVE   SUBSCRIP-     SATORY       WITH      TREASURY STOCK
                                                          TRANSLATION    TION        OPTION/    COMMON     ---------------
                                                          ADJUSTMENT   RECEIVABLE    WARRANT     STOCK     SHARES  AMOUNT   TOTAL
                                                          -----------  ----------   ---------- ----------  ------  ------  -------
<S>                                                       <C>          <C>          <C>        <C>         <C>     <C>     <C>
Balance at December 31, 1996                                  $142      $    --      $  --     $    --       --    $   --  $  2,610

Sale of common stock                                            --           --         --          --       --        --       500
Shares issued upon exercise of warrants & options               --          (64)        --          --       --        --     1,071
Sale of Series C preferred stock, less expenses
 of $1,387                                                      --           --         --          --       --              11,863
Discount on beneficial conversion price to preferred
 shareholders                                                   --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Sale of subsidiary common stock, less expenses of $65           --         (326)        --          --       --        --     3,247
Common stock issued upon conversion of convertible debt
  less expenses of $168                                         --           --         --          --       --        --     4,881
Net loss                                                        --           --         --          --       --        --    (9,848)
Currency translation adjustment                                (23)          --         --          --       --        --       (23)
Restricted shares issued for Directors' compensation            --           --         --          --       --        --         2
Warrant issued in conjunction with convertible debt             --           --         --          --       --        --        34
Compensatory stock options and warrants                         --           --         --          --       --        --        40
                                                              ----      -------      -----     -------    -----   -------  --------
Balance at December 31, 1997                                  $119      $  (390)     $  --     $    --       --        --  $ 14,377

Shares issued in consideration for patent rights                --           --         --          --       --        --       506
Return of shares for subscription receivable                    --           64         --          --      158       (64)       --
Conversion of Series C preferred stock, less expenses
 of $53                                                         --           --         --          --       --        --       (53)
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Offering of Series A preferred stock in subsidiary              --           --         --          --       --        --      (862)
  Discount on beneficial conversion price to preferred
   shareholders                                                 --           --         --          --       --        --       673
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --      (775)
Sale of Series D preferred stock, less expenses of $862         --           --         --          --       --        --     5,138
  Discount on beneficial conversion price to preferred
   shareholders                                                 --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Sale of Series E preferred stock                                --       (4,000)        --          --    2,100      (735)       --
  Discount on beneficial conversion price to preferred
   shareholders                                                 --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Exchange of subsidiary common stock for parent common
 stock                                                          --           --         --          --       --        --       556
Payment of stock subscription receivable                        --          326         --          --       --        --       326
Repurchase of common shares                                     --           --         --          --    5,607    (3,292)   (3,292)
Acquisition of Advancel, less expenses of $24                   --           --        (94)         --   (1,787)    1,128       883
Other                                                           --           --         --          --       --        --       (48)
Net Loss                                                        --           --         --          --       --        --   (14,183)
Currency translation adjustment                                (74)          --         --          --       --        --       (74)
Restricted shares issued for compensation                       --           --         --          --       --        --        97
Compensatory stock options and warrants                         --           --       (144)         --       --        --       157
                                                              ----      -------      -----     -------    -----   -------  --------
Balance at December 31, 1998                                  $ 45      $(4,000)     $(238)    $    --    6,078   $(2,963)  $ 3,426

Sale of common stock, less expenses of $17                      --           --         --          --       --        --       483
 Less common stock subject to resale                            --           --         --          --       --        --      (600)
Conversion of Series C preferred stock                          --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --
Exchange of Series A preferred stock in subsidiary              --           --         --          --       --        --     9,306
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --       (68)
Conversion of Series D preferred stock                          --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Sale of Series E preferred stock, less expenses of $487         --        4,000         --          --       --        --     3,513
  Conversion of Series E preferred stock                        --           --         --          --       --        --        --
   Exchange of Series E preferred stock for license
    fees                                                        --           --         --          --       --        --      (850)
  Discount on beneficial conversion price to preferred
   shareholders                                                 --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Sale of Series F preferred stock, less expenses of $104         --       (1,000)        --          --       --        --     3,896
  Conversion of Series F preferred stock                        --           --         --          --       --        --        --
  Exchange of Series F preferred stock for license fees         --           --         --          --       --        --        --
  Discount on beneficial conversion price to preferred
   shareholders                                                 --           --         --          --       --        --        --
  Accretion and amortization of discount on beneficial
   conversion price to preferred shareholders                   --           --         --          --       --        --        --
Exchange of subsidiary common stock for parent common
 stock                                                          --           --         --          --       --        --     2,632
Shares issued in consideration for patent rights                --           --         --          --       --        --        88
Shares issued for settlement obligations/prepayments            --           --         --      (2,503)      --        --        --
  Less common stock subject to resale                           --           --         --       1,221       --        --       684
Warrant issued in conjunction with convertible debt             --           --         --          --       --        --       446
Beneficial conversion feature on convertible note               --           --         --          --       --        --       204
Net loss                                                        --           --         --          --       --             (23,771)
Currency translation adjustment                                 20           --         --          --       --        --        20
Shares issued upon exercise of warrants & options               --           --         --          --       --        --        --
Compensatory stock options and warrants                         --           --        183          --       --        --       224
                                                              ----      -------      -----     -------    -----   -------  --------
Balance at December 31, 1999                                  $ 65      $(1,000)     $ (55)    $(1,282)   6,078   $(2,963) $   (367)
                                                              ====      =======      =====     =======    =====   =======  ========
See notes to Financial Statements.
</TABLE>

                                      F-6
<PAGE>   68
                        NCT GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (in thousands of dollars)
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                                 ------------------------------------------
                                                                                  1997              1998             1999
                                                                                 -------          --------         --------
<S>                                                                              <C>              <C>              <C>
Cash flows from operating activities
  Net loss                                                                       $(9,848)         $(14,183)        $(23,771)
  Adjustments to reconcile net loss to net cash used in operating
    activities:
    Depreciation and amortization                                                    899             1,030            1,970
    Common stock options and warrants issued as consideration for:
      Compensation                                                                    42               301              224
      Interest on debentures                                                          51                --               --
      Convertible debt                                                                34                --               --
      Operating expenses                                                              --                --              401
    Costs incurred related to convertible debt                                       211                --              102
    Write down of investment in unconsolidated affiliate                              --                --            2,385
    Discount on beneficial conversion feature on convertible debt                  1,420                --              204
    Provision for tooling costs and write off                                        515               151              180
    Provision for inventory                                                           --                --              199
    Provision for doubtful accounts                                                  130               232               77
    Impairment of goodwill                                                            --                --            3,125
    Reserve for promissory note and pre-acquisition costs                             --                --            1,788
    Preferred stock received for license fee                                          --                --             (850)
    (Gain) loss on disposition of fixed assets                                        (4)               34               --
    Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable                                    (127)             (193)             209
      (Increase) decrease in license fees receivable                                 (50)                8              192
      (Increase) decrease in inventories, net of reserves                           (433)           (1,986)             858
      (Increase) in other assets                                                     (12)              (12)          (1,168)
      Increase in accounts payable and accrued expenses                              135             1,816            2,851
      Increase (decrease) in other liabilities                                      (414)               48              427
                                                                                 -------          --------         --------
    Net cash used in operating activities                                        $(7,451)         $(12,754)        $(10,597)
                                                                                 -------          --------         --------
Cash flows from investing activities:

  Capital expenditures                                                           $  (244)         $   (548)        $    (51)
  Increase in restricted cash                                                         --                --             (667)
  Acquisition of patent rights                                                        --              (822)              --
  Acquisition of Advancel (net of $100 cash acquired)                                 --                40               --
  Acquisition and advances, including $135 of costs                                   --            (5,134)              --
  Sale of capital equipment                                                           67                46               --
                                                                                 -------          --------         --------
    Net cash used in investing activities                                        $  (177)         $ (6,418)        $   (718)
                                                                                 -------          --------         --------

Cash flows from financing activities:
  Proceeds from:
     Convertible notes (net)                                                     $ 3,199          $     --         $  4,000
     Sale of common stock (net)                                                      500               (51)             483
     Sale of Series C preferred stock (net)                                       11,863               (53)              --
     Sale of Series D preferred stock (net)                                           --             5,138               --
     Sale of Series E preferred stock (net)                                           --                --            3,513
     Sale of Series F preferred stock (net)                                           --                --            3,896
     Sale of subsidiary Series A preferred stock (net)                                --             5,138               --
     Sale of subsidiary common stock (net)                                         3,247               (21)              --
     Exercise of stock purchase warrants and options                               1,071                --               --
     Collections on subscriptions receivable                                          --               326               --
     Purchase of treasury stock                                                       --            (3,292)              --
                                                                                 -------          --------         --------
     Net cash provided by financing activities                                   $19,880          $  7,185         $ 11,892
                                                                                 -------          --------         --------


Effect of exchange rate changes on cash                                          $   (16)         $    (88)        $     20

Net increase (decrease) in cash and cash equivalents                             $12,236          $(12,075)        $    597
Cash and cash equivalents - beginning of period                                      368            12,604              529
                                                                                 -------        ----------         --------
Cash and cash equivalents - end of period                                        $12,604          $    529         $  1,126
                                                                                 =======        ==========         ========

Cash paid for interest                                                           $     8          $      9         $      4
                                                                                 =======        ==========         ========

See Note 9 for issuance of common stock for patents and acquisitions.
See Note 12 with respect to issuance of securities for compensation.
See notes to Financial Statements.
</TABLE>

                                      F-7
<PAGE>   69


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

1.   BACKGROUND:

     NCT Group, Inc. ("NCT" or the "Company") designs, develops, licenses,
produces and distributes technologies and products based upon its extensive
portfolio of proprietary algorithms. The Company specializes in the utilization
of sound and signal waves to electronically reduce or eliminate noise and
vibration, improve signal-to-noise ratio and enhance sound quality. The Company
develops its technologies for integration into a wide range of products for
applications serving major markets in the transportation, manufacturing,
commercial, consumer products and communications industries. The Company designs
some of its applications so that other firms can integrate them with their own
inventions and technologies to develop such technology into commercial
applications, to integrate the applications into existing products and to
distribute such technologies and products into various industrial, commercial
and consumer markets. The Company also markets its technologies through
licensing to third parties for fees and royalties. Commercial application of the
Company's technologies is comprised of a number of product lines, including
NoiseBuster(R) communications headsets and NoiseBuster Extreme!(TM) consumer
headsets; Gekko(TM) flat speakers; flat panel transducers ("FPT");
ClearSpeech(R) microphones, speakers and other products; adaptive speech
filters; the ProActive(R) line of industrial/commercial active noise reduction
headsets; an aviation headset for pilots; an industrial muffler or "silencer"
for use with large vacuums and blowers; quieting headsets for patient use in
magnetic resonance imaging machines; and an aircraft cabin quieting system.

     The Company has incurred substantial losses from operations since its
inception, which have amounted to $131.5 million on a cumulative basis through
December 31, 1999. These losses, which include the costs for development of
products for commercial use, have been funded primarily from the sale of
preferred stock and common stock, including the exercise of warrants or options
to purchase common stock, and by technology licensing fees and royalties and
engineering and development funds received from joint venture and other
strategic partners.

     Cash and cash equivalents amounted to $1.1 million at December 31, 1999. In
addition, the Company had $3.3 million negative working capital at December 31,
1999. Management believes that currently available funds will not be sufficient
to sustain the Company at present levels for the next 12 months. The Company's
ability to continue as a going concern is dependent on funding from several
sources, including available cash, cash from the exercise of warrants and
options, and cash inflows generated from the Company's revenue sources:
technology licensing fees and royalties, product sales, and engineering and
development services. The level of realization of funding from the Company's
revenue sources is presently uncertain. In the event that anticipated technology
licensing fees and royalties, product sales, and engineering and development
services do not generate sufficient cash, management believes additional working
capital financing must be obtained. There is no assurance any such financing is
or would become available.

                                      F-8
<PAGE>   70
     In the event that funding from internal sources is insufficient, the
Company would have to substantially cut back its level of spending which could
substantially curtail the Company's operations. These reductions could have an
adverse effect on the Company's relations with its strategic partners and
customers. Uncertainty exists about the adequacy of current funds to support the
Company's activities until positive cash flow from operations can be achieved,
and uncertainty exists about the availability of financing from other sources to
fund any cash deficiencies. See Note 11 with respect to recent financing.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and satisfaction of liabilities
in the ordinary course of business. The propriety of using the going concern
basis is dependent upon, among other things, the achievement of future
profitable operations and the ability to generate sufficient cash from
operations, public and private financings and other funding sources to meet its
obligations. The uncertainties described in the preceding paragraphs raise
substantial doubt at December 31, 1999 about the Company's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of the
carrying amount of recorded assets or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


PRINCIPLES OF CONSOLIDATION:

     The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries after elimination of all material
inter-company transactions and accounts. Investments in affiliates in which the
Company maintains significant influence, but not control, (20% to 50% ownership)
are accounted for by the equity method. All other investments in affiliates are
carried at cost.


REVENUE RECOGNITION:

    Revenue is recognized when earned. Revenue from product sales is recognized
when the product is shipped. Revenue from engineering and development services
is generally recognized and billed as the services are performed. However, for
certain 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, revenues 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. Revenues recognized under the percentage of
completion method amounted to $0, $0.1 million and $1.3 million for the years
ended December 31, 1997, 1998 and 1999, respectively.

                                      F-9
<PAGE>   71
     For technology licensing fees paid by joint venturers, co-venturers,
strategic partners or other licensees which are 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.


ADVERTISING:

     Advertising costs are expensed as incurred. Advertising expense for years
ended December 31, 1997, 1998 and 1999 was $0.5 million, $1.7 million and $1.2
million, respectively.


CASH AND CASH EQUIVALENTS:

     Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash and have original maturities of three months or
less. Restricted cash consists of the balance of an escrow account established
in conjunction with the issuance of a convertible promissory note (see Note 8).


INVENTORIES:

     Inventories are stated at the lower of cost or market. Cost is determined
on an average cost basis. The Company assesses the realizability of inventories
by periodically conducting a complete physical inventory and reviewing the
movement of inventory on an item-by-item basis to determine the value of items
which 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, 1998 and 1999, the Company's inventory reserves were $0.5 million.


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.


GOODWILL, PATENT RIGHTS AND OTHER INTANGIBLE ASSETS:

     The excess of the cost over the fair value of net assets of purchased
businesses is recorded as goodwill. Goodwill is also recorded by the Company on
the acquisition of minority interests of a subsidiary of the Company for shares
of the Company's common stock. Goodwill is amortized on a straight-line basis
over five years. Goodwill amortization expense was $0, less than $0.1 million
and $1.0 million for 1997, 1998 and 1999, respectively. Accumulated goodwill
amortization was less than $0.1 million and $4.2 million at December 31, 1998
and 1999, respectively.

                                      F-10
<PAGE>   72

     Patent rights and other intangible assets are stated at cost and are
amortized on a straight-line basis over the remaining useful lives, ranging from
one to fifteen years. Amortization expense was $0.3 million, $0.5 million and
$0.6 million for 1997, 1998 and 1999, respectively. Accumulated amortization was
$2.3 million and $2.9 million at December 31, 1998 and 1999, respectively.

     The Company examines the carrying value of goodwill, patent rights and
other intangible assets to determine whether there are any impairment losses. If
indicators of impairment were present in intangible assets used in operations,
and future undiscounted cash flows were not expected to be sufficient to recover
the assets' carrying amount, an impairment loss would be charged to expense in
the period identified.

    The Company recognized an impairment loss from goodwill of $3.1 million in
1999. No other events have been identified that would indicate an impairment of
the value of material intangible assets recorded in the accompanying
consolidated financial statements.


FOREIGN CURRENCY TRANSLATION:

     The currency effects of translating the financial statements of the
Company's foreign entities that operate in local currency environments, notably
the United Kingdom operations, are included in the "cumulative translation
adjustment" component of stockholders' equity. The currency transaction gains
and losses are included in the consolidated statements of operations and were
not material for any periods presented.


LOSS PER COMMON SHARE:

     The Company reports loss per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
Generally, the per share effects of potential common shares such as warrants,
options, convertible debt and convertible preferred stock have not been
included, as the effect would be antidilutive (see Notes 11 and 12). However,
when preferred stock will be convertible to common stock at a conversion rate
that is at a discount from the common stock market price at the time of
issuance, the discounted amount is an assured incremental yield, the "beneficial
conversion feature," to the preferred shareholders and is accounted for as an
embedded dividend to preferred shareholders. The Company has reflected such
beneficial conversion feature as a preferred stock dividend and as an adjustment
to the net loss attributable to common stockholders.


CONCENTRATIONS OF CREDIT RISK:

     The Company's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents and trade receivables. The
Company maintains its cash and cash equivalents in two banks. The total cash
balances are insured by the F.D.I.C. up to $100,000 per bank. Deposits in excess
of federally insured limits were $1.6 million at December 31, 1999. The
Company's trade accounts receivable result primarily from sales of products and
services to original equipment manufacturers ("OEMs"), distributors and end
users in various industries

                                      F-11
<PAGE>   73
worldwide. During 1999, two customers each had 10% or greater of the total
revenue recognized, an aggregate of 42% of the 1999 total revenue. These same
two customers accounted for approximately 10% of accounts receivable before
allowances at December 31, 1999. The Company does not require collateral or
other security to support customer receivables.

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


USE OF ESTIMATES:

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


STOCK-BASED COMPENSATION:

     The Company reports stock-based compensation in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The provisions of SFAS No. 123 allow the Company
to either expense the estimated fair value of stock options and warrants or to
continue to follow the intrinsic value method set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net income (loss) had the fair value of the options or warrants been
expensed. The Company has elected to continue to apply APB 25 in accounting for
its employee options and warrants. (See Note 12.)


COMPREHENSIVE LOSS:

     The Company reports comprehensive loss in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). The provisions for SFAS No. 130 require the Company to report the
changes in stockholders' equity from all sources during the period other than
those resulting from investments by and distributions to shareholders.
Accordingly, the consolidated statements of comprehensive loss are presented,
while accumulated other comprehensive loss is included on the balance sheet as a
component of stockholders' equity. Due to availability of net operating losses,
there is no tax effect associated with any component of other comprehensive
loss. Comprehensive loss includes gains and losses on foreign currency
translation adjustments.

                                      F-12
<PAGE>   74

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION:

     The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires the Company to disclose the following
information for each reporting segment: general information about factors used
to identify reportable segments; the basis of organization, and the sources of
revenues; information about reported profit or loss and segment assets; and
reconciliations of certain reported segment information to consolidated amounts.
(See Note 17.)


3.   JOINT VENTURES AND OTHER STRATEGIC ALLIANCES:

     The Company and certain of its majority-owned subsidiaries have entered
into agreements to establish joint ventures and other strategic alliances
related to the design, development, manufacture, marketing and distribution of
its technologies and products containing such technologies. These agreements
generally provide that the Company license technology and contribute a nominal
amount of initial capital and that the other parties provide substantially all
of the funding to support the venture or alliance. This support funding often
includes amounts paid or services rendered for engineering and development. In
exchange for this funding, the other parties generally receive a preference in
the distribution of cash and/or profits from the joint ventures or royalties
from these alliances until such time that the support funding (plus an
"interest" factor in some instances) is recovered. At December 31, 1999, there
were no preferred distributions due to joint venture partners from future
profits of the joint ventures.

     When the Company's share of cumulative losses equals its investment and the
Company has no obligation or intention to fund such additional losses, the
Company suspends the equity method of accounting. The Company will not resume
the equity method of accounting until its share of future profits is sufficient
to recover any cumulative losses that have not previously been recorded. At
December 31, 1999, the aggregate amount of the Company's share of losses in
these joint ventures in excess of the Company's investments which has not been
recorded was zero.

     Certain of the joint ventures become suppliers to the Company and to other
of the joint ventures and transfer products to the related entities based upon
pricing formulas established in the agreements. Such formulas are generally
based upon fully burdened cost, as defined in the agreements.

     Technology licensing fees and engineering and development services paid by
joint ventures to the Company are recorded as revenue when there is no recourse
to the Company for these amounts or any commitment by the Company to fund the
obligations of the venture. Total revenues recorded by the Company relating to
the joint ventures and alliances, or their principals, for technology licensing
fees and royalties, engineering and development services and product sales were
as follows (in thousands):

                                      F-13
<PAGE>   75
<TABLE>
<CAPTION>

                                                                        YEARS ENDED DECEMBER 31,
                                                                      ----------------------------
JOINT VENTURE/ALLIANCE                                                 1997       1998       1999
----------------------                                                ------      ----      ------
<S>                                                                   <C>         <C>       <C>
Walker Noise Cancellation Technologies                                $   61      $ --      $   --
Ultra Electronics, Ltd.                                                   --        68          40
Siemens Medical Systems, Inc.                                            172       102          14
AB Electrolux                                                             34        --          --
Oki Electric Industry Co., Ltd.                                           --         8          80
VLSI Technology, Inc.                                                     --       285          --
STMicroelectronics S.A. &
  STMicroelectronics S.r.l                                                --       246       2,156
Lernout & Hauspie Speech Products N.V.                                                         800
New Transducers Ltd.                                                   3,000        --         500
                                                                      ------      ----      ------
    Total                                                             $3,267      $709      $3,590
                                                                      ======      ====      ======

</TABLE>

     Outlined below is a summary of the nature and terms of selected joint
ventures and other strategic alliances:

     Ultra Electronics Ltd. ("Ultra") (formerly Dowty Maritime Limited) and the
Company entered into a teaming agreement in May 1993 to collaborate on the
design, manufacture and installation of products to reduce noise in the cabins
of various types of aircraft. In accordance with the agreement, the Company
provided informational and technical assistance relating to the aircraft
quieting system and Ultra reimbursed the Company for expenses incurred in
connection with such assistance. Ultra was responsible for the marketing and
sales of the products. The Company was to supply Ultra with electronic
components required for the aircraft quieting system, at a defined cost, to be
paid by Ultra. In March 1995, the Company and Ultra amended the teaming
agreement and concluded a licensing and royalty agreement for $2.6 million and a
future royalty of 1.5% of sales commencing in 1998. Such $2.6 million technology
license fee was recognized as revenue in 1995. Under the agreement, Ultra also
acquired the Company's active aircraft quieting business based in Cambridge,
England, leased a portion of the Cambridge facility and employed certain of the
Company's employees. The Company recognized $68,000 and $40,000 in royalty
revenue in 1998 and 1999, respectively.

     New Transducers Ltd. ("NXT"), a wholly-owned subsidiary of NXT plc
(formerly, Verity Group plc) and the Company executed a cross licensing
agreement (the "Cross License") on March 28, 1997. Under the terms of the Cross
License, the Company licensed patents and patents pending which relate to FPTTM
technology to NXT, and NXT licensed patents and patents pending which relate to
parallel technology to the Company. In consideration of the license, during the
first quarter 1997, NCT recorded a $3.0 million license fee receivable from NXT
and royalties on future licensing and product revenue. The Company also executed
a security deed (the "Security Deed") in favor of NXT granting NXT a conditional
assignment in the patents and patents pending licensed to NXT under the Cross
License in the event a default in a certain payment to be made by the Company
under the Cross License continued beyond fifteen days. Concurrently with the
Cross License, the Company and NXT plc executed agreements granting each an
option for a four year period commencing on March 28, 1998, to acquire a

                                      F-14
<PAGE>   76
specified number of shares of common stock of the other, subject to certain
conditions and restrictions. With respect to the Company's option to NXT plc
(the "NXT plc Option"), 3.8 million shares of common stock (approximately 3.4%
of the then issued and outstanding common stock) of the Company were covered by
such option and the Company executed a registration rights agreement (the
"Registration Rights Agreement") covering such shares. Five million ordinary
shares (approximately 2.0% of the then issued and outstanding ordinary shares)
of NXT plc were covered by the option granted by NXT plc to the Company. The
exercise price under each option was the fair value of a share of the applicable
stock on March 28, 1997, the date of grant. On April 15, 1997, NXT plc, NXT and
the Company executed several agreements and other documents (the "New
Agreements") terminating the Cross License, the Security Deed, the NXT plc
Option and the Registration Rights Agreement and replacing them with new
agreements (respectively, the "New Cross License," the "New Security Deed," the
"New NXT plc Option" and the "New Registration Rights Agreement"). The material
changes effected by the New Agreements were the inclusion of NXT plc as a party
along with its wholly-owned subsidiary NXT; providing that the license fee
payable to NCT could be paid in ordinary shares of NXT plc stock; and reducing
the exercise price under the option granted to NXT plc to purchase shares of the
Company's common stock to $0.30 per share. The subject license fee was paid to
the Company in ordinary shares of NXT plc stock which were subsequently sold by
the Company. On September 27, 1997, NXT plc, NXT, NCT Audio and the Company
executed several agreements and other documents, terminating the New Cross
License and the New Security Deed and replacing them with other agreements
(respectively, the "Cross License Agreement dated September 27, 1997" and the
"Master License Agreement"). The material changes effected by these replacement
agreements were an expansion of the fields of use applicable to the exclusive
licenses granted to NXT plc and NXT, an increase in the royalties payable on
future licensing and product revenues, cancellation of the New Security Deed
covering the patents licensed by the Company, and the acceleration of the date
on which the parties could exercise their respective stock purchase option to
September 27, 1997.

     On April 30, 1998, the Company completed the sale of five million ordinary
shares of NXT plc acquired upon the Company's exercise on April 7, 1998 of the
option (described above) it held to purchase such shares at a price of 50 pence
per share. The Company realized a $3.2 million gain from the exercise and sale
of the shares under such option, which is included in other income in 1998.

     On February 9, 1999, NCT Audio and NXT expanded the Cross License Agreement
dated September 27, 1997 to increase NXT's fields of use to include aftermarket
ground-based vehicles and aircraft sound systems and increased the royalties due
NCT Audio from NXT to 10% from 6% and increased the royalties due NXT from NCT
Audio to 7% from 6%. In consideration for granting NXT these expanded licensing
rights, NCT Audio received a $0.5 million license fee. Also on February 9, 1999,
NCT Audio and NXT amended the Master License Agreement to include a minimum
royalty payment of $160,000. NCT Audio recorded royalty expense of $160,000 in
1999, and a liability of $64,000 ($160,000 royalty expense less patent expense
reimbursement of $96,000) at December 31, 1999.

     VLSI Technology, Inc. ("VLSI"). On February 5, 1998, the Company entered
into a license, engineering and royalty agreement with VLSI. Under the terms of
the agreement, the Company

                                      F-15
<PAGE>   77
has granted a non-exclusive license to VLSI for certain patents and patents
pending which relate to the Company's ClearSpeech(R) technologies. In 1998, the
Company recorded $0.3 million in related engineering services. The Company will
recognize royalties on future products sold by VLSI incorporating the
ClearSpeech(R) technology. The Company recognized no royalty revenue in 1999.

     STMicroelectronics SA & STMicroelectronics S.r.l ("ST"). On November 16,
1998, Advancel Logic Corporation ("Advancel"), a majority-owned subsidiary
acquired by the Company in September 1998, and ST executed a license agreement.
Under the terms of the agreement, which included a license fee, a minimum
royalty within two years and future per unit royalties, ST licensed Advancel's
tiny(2)J(TM) for Java(TM) ("t(2)J-Processor Core") to combine it with its proven
secure architecture and advanced nonvolatile memory technology. Advancel
recorded a $0.2 million license fee in 1998. In 1999, Advancel recorded an
additional $0.2 million license fee, $0.9 million non-refundable royalty and
$1.1 million engineering and development services funding.

     Lernout & Hauspie Speech Products N.V. ("L&H"). On March 31, 1999, the
Company signed a license agreement with L&H. The agreement provides the Company
with a worldwide, non-exclusive, non-transferable license to selected L&H
technology for use in NCT's ClearSpeech(R) products. The Company recorded a
prepaid royalty of $0.9 million. On April 12, 1999, the Company granted a
worldwide non-exclusive, non-transferable license to L&H. The agreement provides
L&H access to NCT's present and future noise and echo cancellation algorithms
for use in L&H's technology. In consideration of the Company's grant of a
license to L&H, the Company recognized a non-refundable royalty fee of $0.8
million. During the third quarter of 1999, the Company and L&H agreed to offset
the balances owed each other. Consequently, the Company's balance due L&H at
December 31, 1999 is $0.1 million.

     Oki Electric Industry Co., Ltd. ("Oki"). In October 1997, the Company and
Oki executed a license agreement. Under the terms of the agreement, which
included an up-front license fee and future per unit royalties, Oki licensed the
Company's ClearSpeech(R) noise cancellation algorithm for integration into
large-scale integrated circuits for communications applications. The Company has
granted Oki the right to manufacture, use and sell products incorporating the
algorithm. The algorithm is specifically designed to remove background noise
from speech and other transmitted signals, greatly improving intelligibility and
clarity of communications. The Company recognized $0.1 million in royalty
revenue in 1999.

                                      F-16
<PAGE>   78

4.   ACCOUNTS RECEIVABLE:

     Accounts receivable comprise the following (in thousands):

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                      ------------------
                                                                       1998        1999
                                                                      -----        ----
   <S>                                                                <C>          <C>
   Technology license fees and royalties                              $ 192        $ --
   Joint ventures and affiliates                                                     33
   Other trade receivables                                              691         287
   Unbilled receivables                                                  61          --
                                                                      -----        ----
                                                                      $ 944        $320
   Allowance for doubtful accounts                                     (228)        (83)
                                                                      -----        ----
   Accounts receivable, net                                           $ 716        $237
                                                                      =====        ====
</TABLE>


5.   INVENTORIES:

     Inventories comprise the following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                           ---------------------------
                                                            1998                 1999
                                                           ------               ------
   <S>                                                     <C>                  <C>
   Components                                              $  745               $  360
   Finished goods                                           3,083                2,434
                                                           ------               ------
                                                           $3,828               $2,794
   Reserve for obsolete & slow moving inventory              (508)                (529)
                                                           ------               ------
   Inventories, net of reserves                            $3,320               $2,265
                                                           ======               ======
</TABLE>


6.   PROPERTY AND EQUIPMENT:

     Property and equipment comprise the following (in thousands):

<TABLE>
<CAPTION>
                                              ESTIMATED          DECEMBER 31,
                                             USEFUL LIFE      ------------------
                                               (YEARS)          1998        1999
                                             -----------      -------      -------
     <S>                                     <C>              <C>          <C>
     Machinery and equipment                     3-5          $ 1,935      $ 1,965
     Furniture and fixtures                      3-5            1,057        1,070
     Leasehold improvements                     7-10            1,038        1,038
     Tooling                                     1-3              181           --
     Other                                      5-10               60           60
                                                              -------      -------
                                                              $ 4,271      $ 4,133
     Accumulated depreciation                                  (3,274)      (3,684)
                                                              -------      -------
     Property and equipment, net                              $   997      $   449
                                                              =======      =======
     </TABLE>

                                      F-17
<PAGE>   79

    Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $0.6 million, $0.5 million and $0.4 million, respectively.


7    OTHER ASSETS:

     Other assets primarily comprise the Company's investment in affiliates and
notes receivable and interest thereon, as described herein.

     On August 14, 1998, NCT Audio agreed to acquire substantially all of the
assets of Top Source Automotive, Inc. ("TSA"), an automotive audio system
supplier. Earlier on June 11, 1998, NCT Audio had paid a non-refundable deposit
of $1,450,000 towards the purchase price. The total purchase price was
$10,000,000 and up to an additional $6,000,000 in possible future cash
contingent payments. NCT Audio then paid Top Source Technologies, Inc. ("TST")
$2,050,000 on July 31, 1998. The money was held in escrow with all of the
necessary securities and documents to evidence ownership of 20% of the total
equity rights and interests in TSA. When the shareholders of TST approved the
transaction on December 15, 1998, the $2,050,000 was delivered to TSA and NCT
Audio took ownership of the documentation and securities held in escrow. NCT
Audio had an exclusive right, as extended, to purchase the assets of TSA through
July 15, 1999. Under the terms of the original agreement, NCT Audio was required
to pay TST $6.5 million on or before March 31, 1999 to complete the acquisition
of TSA's assets. As consideration for an extension of such exclusive right from
March 31, 1999 to May 28, 1999, NCT Audio agreed to pay TST a fee of $350,000,
consisting of $20,685 in cash, $125,000 of NCT Audio's minority interest in TSA
earnings, and a $204,315 note payable due April 16, 1999. Due to the non-payment
of the note by April 30, 1999, (a) the note would begin to accrue interest on
April 17, 1999 at the lower of the rate of two times prime rate or the highest
rate allowable by law; (b) the $20,685 and $125,000 portion of the extension fee
would no longer be credited toward the $6.5 million purchase price due at
closing; and (c) the $204,315 portion of the extension fee would no longer be
credited toward the $6.5 million closing amount due. To date, NCT Audio has not
paid the note. In addition, due to NCT Audio's failure to close the transaction
by March 31, 1999, NCT Audio was required to pay a penalty premium of $100,000
of NCT Audio's preferred stock. Since NCT Audio failed to close the contemplated
transaction by May 28, 1999, NCT Audio has forfeited its minority earnings in
TSA for the period June 1, 1999 through May 30, 2000. In exchange for an
extension from May 28, 1999 to July 15, 1999, NCT Audio relinquished 25% of its
minority equity ownership in TSA. As a result, NCT Audio now has a 15% minority
interest in TSA. On or about July 15, 1999, NCT Audio determined it would not
proceed with the purchase of the assets of TSA, as structured, due primarily to
its difficulty in raising the requisite cash consideration. Consequently, NCT
Audio reduced its net investment in TSA to $1.2 million, representing its 15%
minority interest, net of the above noted penalties, and recorded a $2.4 million
charge in the quarter ended June 30, 1999 for the write-down of its investment
to its estimated net realizable value. On September 30, 1999, Onkyo America
purchased substantially all of the assets of TSA and certain assets of TST used
in TSA's operations. NCT Audio is claiming and seeks its pro rata share of the
consideration paid by Onkyo America, less the penalties described above. The
amount which TST owes NCT Audio is in dispute; consequently, receipt of the
funds is contingent on the outcome of the arbitration between the Company, TST
and TSA. (See Note 15.)

                                      F-18
<PAGE>   80

     On August 17, 1998, NCT Audio agreed to acquire all of the members'
interest in Phase Audio LLC (doing business as Precision Power, Inc. or "PPI"),
a supplier of custom-made automotive audio systems. NCT Audio intended to
acquire such interest in exchange for shares of its common stock having an
aggregate value of $2,000,000. NCT Audio also agreed to retire $8.5 million of
PPI debt, but NCT Audio needed to obtain adequate financing before the
transaction could be completed. NCT Audio provided PPI a working capital loan on
June 17, 1998 in the amount of $500,000, evidenced by a demand promissory note.
On August 18, 1998, NCT Audio provided PPI a second working capital loan in the
amount of $1,000,000, also evidenced by a demand promissory note. The unpaid
principal balance of these notes bears interest at a rate equal to the prime
lending rate plus one percent (1.0%). As noted, the transaction was contingent
on NCT Audio obtaining outside financing to retire the PPI debt. On January 6,
1999, the PPI members notified NCT Audio that, while they remained willing to do
the transaction, they may choose at some point to abandon the transaction
because NCT Audio had not obtained the financing in a timely manner. The Company
has not been able to obtain the financing to consummate this transaction, and
PPI has experienced significant organizational changes which has resulted in
abandonment of the proposed acquisition. During the third quarter of 1999, the
Company fully reserved the $1.5 million due from PPI plus interest and
pre-acquisition costs thereon amounting to $0.3 million. The Company continues
to seek repayment of the notes. During the fourth quarter of 1999, NCT Audio
suspended its acquisition strategy.


8.   CONVERTIBLE NOTES:

     On January 26, 1999, Carole Salkind, spouse of a former director and an
accredited investor (the "Holder"), subscribed and agreed to purchase secured
convertible notes of the Company in an aggregate principal amount of $4.0
million. The secured convertible notes are collateralized by the Company's
inventory, machinery, equipment, stocks, bonds, notes, accounts receivable, any
rights or claims that they may have against any other person, firm, or
corporation for monies, choses in action, any bank accounts, checking accounts,
certificates of deposit or any financial instrument, patents and intellectual
property rights or any other assets owned by Borrower as of the date of the
agreement, or hereafter acquired. A secured convertible note (the " Note") for
$1.0 million was signed on January 26, 1999, and proceeds were received on
January 28, 1999. The Note is to mature on January 25, 2001 and earn interest at
the prime rate as published from day to day in The Wall Street Journal from the
issue date until the Note becomes due and payable. The Holder shall have the
right at any time on or prior to the day the Note is paid in full, to convert at
any time, all or from time to time, any part of the outstanding and unpaid
amount of the Note into fully paid and non-assessable shares of common stock of
the Company at the conversion price. The conversion price, as amended by the
parties on September 19, 1999, on the Note and any other notes, shall be the
lesser of (i) the lowest closing transaction price for the common stock on the
securities market on which the common stock is being traded, at any time during
September 1999; (ii) the average of the closing bid prices for the common stock
on the securities market on which the common stock is being traded for
five (5) consecutive trading days prior to the date of conversion; or (iii) the
fixed conversion price of $0.17. In no event will the conversion price be less
than $0.12 per share. The Company and Holder have agreed to extend the date for
the purchase of the remaining installments of secured convertible notes to

                                      F-19
<PAGE>   81
April 15, 2000. On each of June 4, 1999, June 11, 1999, July 2, 1999, July 23,
1999, August 25, 1999 and September 19, 1999, the Company received proceeds of
$250,000, $250,000, $500,000, $250,000, $500,000 and $250,000, respectively,
from the Holder for other secured convertible notes with the same terms and
conditions of the Note described above. At December 31, 1999, the Company has an
aggregate of $3.0 million of secured convertible notes. The Company recorded a
beneficial conversion feature of $0.2 million in connection with the convertible
notes in 1999.

     On July 19, 1999, DistributedMedia.com ("DMC"), a wholly-owned subsidiary
of the Company, signed a convertible guaranteed term promissory note ("PRG
Note") with Production Resource Group ("PRG") in the amount of $1.0 million. PRG
will provide lease financing to DMC for its Sight and Sound(TM) systems (the
"Systems") and will provide integration, installation and maintenance services
to DMC. DMC received a portion of the PRG Note ($125,000) on July 22, 1999. Of
the $1,000,000 note proceeds, $750,000 was deposited into an escrow account and
be used to pay rental and installation costs due from DMC with respect to the
Systems. Further, DMC may draw an additional $125,000 provided that PRG
continues to have a good faith belief that the Systems are functioning properly
and that DMC has obtained at least one network-wide advertising client providing
annual advertising revenues of at least $250,000. At December 31, 1999, the
balance in the escrow account and classified as restricted cash was $667,000.
The PRG Note matures on July 19, 2001 and earns interest at ten percent (10%)
per annum. PRG may convert the PRG Note in whole or in part at its election into
shares of DMC's common stock, without par value, at any time during the period
commencing on the date of issuance and ending on the maturity date. DMC also has
the right to lease from PRG additional Systems with an aggregate value of up to
$9.5 million, provided that PRG is reasonably satisfied with the success of the
DMC business, including the technology and economics thereof and its likelihood
of the continued success. In connection with the PRG Note, PRG was granted a
common stock warrant (see Note 12). In accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation", the Company estimated the fair value of this
warrant to be $0.8 million, using the following assumptions in applying the
Black-Scholes valuation method: risk-free interest rates of 5.61%, volatility of
1%, and a term of three years. Such amount is being amortized to interest
expense over the two-year period of the related promissory note. Amortization
amounted to $0.1 million during the year ended December 31, 1999. Unamortized
discount of $0.3 million has been reflected as a reduction of the notes payable
amount in the accompanying December 31, 1999 financial statements.


9.     OTHER LIABILITIES:

    On June 5, 1998, Interactive Products, Inc. ("IPI") entered into an
agreement with the Company granting the Company a license to, and an option to
purchase a joint ownership interest in, patents and patents pending which relate
to IPI's speech recognition technologies, speech compression technologies and
speech identification and verification technology. The aggregate value of the
patented technology is $1,250,000, which was paid by a $150,000 cash payment and
delivery of 1,250,000 shares of the Company's common stock valued at $0.65625
per share on June 5, 1998. At such time as IPI sells any of such shares, the
proceeds thereof will be allocated towards a fully paid-up license fee for the
technology rights noted above. In the event that the

                                      F-20
<PAGE>   82
proceeds from the sale of shares are less than the $1,100,000, the Company will
record a liability representing the cash payment due. On July 5, 1998, the
Company paid IPI $50,000, which was held in escrow as security for the
fulfillment of the Company's obligations, towards the liability. The Company
recorded a liability representing the difference between the Company's payment
obligations and the IPI net proceeds from its sale of shares of the Company's
common stock. Such liability was $0.5 million at December 31, 1998 and 1999.

     On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel, a Silicon Valley-based developer of microprocessor
cores that execute Sun Microsystems' Java(TM) code. The acquisition was pursuant
to a stock purchase agreement dated as of August 21, 1998 (the "Stock Purchase
Agreement") among the Company, Advancel and certain shareholders of Advancel
(the "Advancel Shareholders"). The consideration for the acquisition of the
Advancel common stock consisted of an initial payment of $1.0 million payable by
the delivery of 1,786,991 shares of the Company's treasury stock (see Note 10)
together with future payments, payable in cash or in common stock of the Company
at the election of the Advancel Shareholders (individually, an "earnout payment"
and collectively, the "earnout payments") based on Advancel's earnings before
interest, taxes, depreciation and amortization, as defined in the Stock Purchase
Agreement, for each of the calendar years 1999, 2000, 2001 and 2002
(individually, an "earnout year" and collectively, the "earnout years"). While
each earnout payment may not be less than $250,000 in any earnout year, there is
no maximum earnout payment for any earnout year or for all earnout years in the
aggregate. In connection therewith the Company's liabilities include an earnout
obligation of $0.1 million and $0.2 million at December 31, 1998 and 1999 (see
Note 15). In addition, the Company's liabilities include a $100,000 note payable
to a former employee of Advancel at December 31, 1998 and 1999. The note bears
interest at a rate of 8.25%, compounded annually and was due in two equal
installments on December 1, 1998 and March 1, 1999. The note has not been paid.


10.  COMMON STOCK SUBJECT TO RESALE GUARANTEE:

     On September 24, 1999, the Company issued 12,005,847 shares of common stock
to suppliers and consultants to settle current obligations of $1.8 million and
future or anticipated obligations of $0.5 million. On October 27, 1999, the
Company issued an additional 1,148,973 shares of common stock to suppliers and
consultants to settle obligations of $0.2 million. On October 28, 1999, the
Company filed a pre-effective amendment to the Form S-1 resale registration
statement to include such additional shares. The registration statement (File
No. 333-87757) was declared effective by the SEC on November 2, 1999 (see Note
11). During the fourth quarter, suppliers and vendors traded $1.5 million of
such shares and as a result the Company recorded $1.0 million common stock
subject to resale guarantee.

     The Company has certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost, Balmore and Nesher, Inc. ("Nesher"). Based on an offer as of
November 9, 1999, the Company, Austost, Balmore and Nesher entered into the
Purchase Agreement whereby the Company, on December 28, 1999, issued a total of
3,846,155 shares (the "SPA Shares") to Austost, Balmore and Nesher for a total
purchase price of $500,000. The price of the SPA Shares was $0.13 per share,
which

                                      F-21
<PAGE>   83
was $0.03, or 19%, less than the closing bid price of the Company's common stock
as reported by the OTC Bulletin Board on November 8, 1999, and $0.015, or 10%,
less than the closing bid price of the Company's common stock as reported by the
OTC Bulletin Board on December 27, 1999. This per share price may be subject to
decrease upon the application of a reset provision contained in the Purchase
Agreement (see Note 11). Due to the provision, the Company recorded the purchase
price ($500,000) plus the guaranteed return on investment of 20% ($100,000) as
common stock subject to resale.

     Common stock subject to resale guarantee was $1.6 million at December 31,
1999, which represented the outstanding shares of common stock valued at the
date of issuance to suppliers and consultants ($1.0 million) and the purchase
price plus guaranteed return on investment related to the Purchase Agreement
($0.6 million).


11.  COMMON STOCK:

PRIVATE PLACEMENTS AND STOCK ISSUANCES:

     Between January 15, 1997 and March 25, 1997, the Company issued and sold an
aggregate amount of $3.4 million of non-voting subordinated convertible
debentures (the "Debentures") in a private placement pursuant to Regulation S of
the Securities Act of 1933, as amended, (the "Securities Act") to five unrelated
investors (the "Investors") through multiple dealers from which the Company
realized $3.2 million of net proceeds. The Debentures were to mature between
January 15, 2000 and March 25, 2000 and earn 8% interest per annum, payable
quarterly in either cash or the Company's common stock at the Company's option.
Subject to certain common stock resale restrictions, the Investors, at their
discretion, had the right to convert the principal due on the Debentures into
the Company's common stock at any time after the 45th day following the date of
the sale of the Debentures to the Investors. In the event of such a conversion,
the conversion price was the lesser of 85% of the closing bid price of the
Company's common stock on the closing date of the Debentures' sale or between
75% to 60% (depending on the Investor and other conditions) of the average
closing bid price for the five trading days immediately preceding the
conversion. The Company reserved 15 million shares of the Company's common stock
for issuance upon such conversion and payment of interest. Subject to certain
conditions, the Company also had the right to require the Investors to convert
all or part of the Debentures under the above noted conversion price conditions
after February 15, 1998. As of June 6, 1997, the Investors had converted all
$3.4 million of the Debentures into 16.5 million shares of the Company's common
stock. At the Company's election, interest due through the conversion dates of
the Debentures was paid through the issuance of an additional 0.2 million shares
of the Company's common stock. In conjunction with the Debentures, the Company
granted a warrant to purchase 75,000 shares of common stock to one investor.
During the year ended December 31, 1997, the Company valued this warrant, using
the Black-Scholes pricing model at $34,000, which was expensed as debt discount.
The Company recorded a $1.4 million non-cash interest expense attributable to
the conversions of the Debentures in 1997. If shares of common stock had been
issued in lieu of debt at the respective issuance dates of the debt,
supplementary basic and diluted net loss per share for the year ended December
31, 1997 would have been a loss of $0.08 per share.

                                      F-22
<PAGE>   84
     On July 30, 1997 the Company sold 2.9 million shares, in the aggregate, of
its common stock at a price of $0.175 per share in a private placement that
provided net proceeds to the Company of $0.5 million.

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

     Between October 10, 1997 and December 4, 1997, NCT Audio issued 2,145
shares of its common stock (including 533 shares issued to NXT plc) for an
aggregate purchase price of $4.0 million in a private placement pursuant to
Regulation D under the Securities Act. NCT Audio has not met certain conditions
regarding the filing of a registration statement for NCT Audio common stock. As
such, holders of NCT Audio common stock have a right to exchange their NCT Audio
common stock into a sufficient number of restricted shares of NCT common stock
to equal their original cash investment in NCT Audio, plus a 20% discount to
market price at date of conversion. During 1998, two NCT Audio shareholders
exercised their right to exchange 296 shares of NCT Audio common stock into
1,135,542 shares of NCT common stock. During 1999, three NCT Audio shareholders
exercised their right to exchange 559 shares of NCT Audio common stock into 17.7
million shares of NCT common stock. In connection therewith the Company recorded
goodwill of $0.6 million and $6.1 million during 1998 and 1999, respectively.
The Company recorded a non-cash charge of $3.1 million in 1999 to write down
goodwill to its estimated realizable value.

     Between October 28, 1997 and December 11, 1997, the Company entered into a
series of subscription agreements (the "Series C Subscription Agreements") to
sell an aggregate amount of $13.3 million of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") in a private placement, pursuant to
Regulation D of the Securities Act, to 32 unrelated accredited investors through
two dealers (the "1997 Series C Preferred Stock Private Placement"). The total
1997 Series C Preferred Stock Private Placement was completed on December 11,
1997. The aggregate net proceeds to the Company of the 1997 Series C Preferred
Stock Private Placement were $11.9 million. Each share of the Series C Preferred
Stock has a par value of $.10 per share and a stated value of one thousand
dollars ($1,000) with an accretion rate of four

                                      F-23
<PAGE>   85
percent (4%) per annum on the stated value. Each share of Series C Preferred
Stock is convertible into fully paid and non-assessable shares of the Company's
common stock subject to certain limitations. The shares of Series C Preferred
Stock become convertible into shares of common stock at any time commencing
after the earlier of (i) the effective date of the Series C registration
statement; or (ii) ninety (90) days after the date of filing of the Series C
registration statement. Each share of Series C Preferred Stock is convertible
into a number of shares of common stock of the Company as determined in
accordance with the Series C Conversion Formula as set forth in the agreement
using a conversion price equal to the lesser of (x) 120% of the five (5) day
average closing bid price of common stock immediately prior to the closing date
of the Series C Preferred Stock being converted or (y) 20% below the
five (5) day average closing bid price of common stock immediately prior to the
conversion date thereof. The conversion terms of the Series C Preferred Stock
also provide that in no event shall the average closing bid price referred to in
the Series C Conversion Formula be less than $0.625 per share and in no event
shall the Company be obligated to issue more than 26.0 million shares of its
common stock in the aggregate in connection with the conversion of the Series C
Preferred Stock. Accordingly, 26.0 million shares of common stock have been
registered by the Company. Under the terms of the Series C Subscription
Agreements, the Company may be subject to a penalty if the Series C registration
statement is not declared effective within one hundred twenty (120) days after
the first closing of any incremental portion of the offering of Series C
Preferred Stock, such penalty to be in an amount equal to one and one half
percent (1.5%) per month of the aggregate amount of Series C Preferred Stock
sold in the offering up to a maximum of ten percent (10%) of such aggregate
amount. The Series C Subscription Agreements also provide that for a period
commencing on the date of the signing of the Series C Subscription Agreements
and ending ninety (90) days after the closing of the offering the Company will
be prohibited from issuing any debt or equity securities other than Series C
Preferred Stock, and that the Corporation will be required to make certain
payments in the event of its failure to effect conversion in a timely manner or
in the event it fails to reserve sufficient authorized but unissued common stock
for issuance upon conversion of the Series C Preferred Stock. On December 30,
1998, 1,700 shares of the Series C Preferred Stock were exchanged for the
Company's Series E Preferred Stock. At December 31, 1998, 10,850 shares of
Series C Preferred Stock had been converted into 20,665,000 shares of NCT common
stock. The 700 remaining Series C Preferred Stock shares were subject to
mandatory conversion as of November 30, 1999. As such, on November 30, 1999,
these 700 shares were converted to 1,512,000 shares of common stock of the
Company. At December 31, 1999, there were no outstanding shares of Series C
Preferred Stock.

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

    On July 15, 1998 the Company transferred $5,000 and all of the business and
assets of its Hearing Products Division as then conducted by the Company and as
reflected on the business books and records of the Company to a newly
incorporated subsidiary company, NCT Hearing Products, Inc. ("NCT Hearing") in
consideration for 6,400 shares of NCT Hearing common stock whereupon NCT Hearing
became a wholly-owned subsidiary of the Company. The

                                      F-24
<PAGE>   86
Company also granted NCT Hearing an exclusive worldwide license with respect to
all of the Company's relevant patented and unpatented technology relating to
Hearing Products in consideration for a license fee of $3.0 million, eliminated
in consolidation, to be paid when proceeds are available from the sale of NCT
Hearing common stock and running royalties payable with respect to NCT Hearing's
sales of products incorporating the licensed technology and its sublicensing of
such technology. It is anticipated that NCT Hearing will issue additional shares
of its common stock in transactions exempt from registration in order to raise
additional working capital.

     On July 27, 1998, the Company entered into subscription agreements (the
"Series D Subscription Agreements") to sell 6,000 shares of the Company's Series
D Convertible Preferred Stock ("Series D Preferred Stock") having an aggregate
stated value of $6.0 million in a private placement, pursuant to Regulation D of
the Securities Act, to six unrelated accredited investors through one dealer
(the "1998 Series D Preferred Stock Private Placement"). The sale of 6,000
shares of Series D Preferred Stock having an aggregate $6.0 million stated value
was completed on August 6, 1998. $5.2 million net proceeds were received by the
Company from the 1998 Series D Preferred Stock Private Placement. Each share of
the Series D Preferred Stock has a par value of $.10 per share and a stated
value of one thousand dollars ($1,000) with an accretion rate of four percent
(4%) per annum on the stated value. Each share of Series D Preferred Stock is
convertible into fully paid and non-assessable shares of the Company's common
stock subject to certain limitations. Under the terms of the Series D
Subscription Agreements, the Company is required to file a registration
statement covering the resale of all shares of common stock of the Company
issuable upon conversion of the Series D Preferred Stock then outstanding within
sixty (60) days after the completion of the 1998 Series D Preferred Stock
Private Placement (respectively, the "Series D Filing Date" and the "Series D
Closing Date"). The shares of Series D Preferred Stock become convertible into
shares of common stock at any time commencing after the earlier of (i) ninety
(90) days after the Series D Closing Date; (ii) five (5) days after the Company
receives a "no review" status from the Securities and Exchange Commission
("SEC") in connection with the Series D registration statement; or (iii) the
effective date of the Series D registration statement. The Series D registration
statement became effective on October 30, 1998, and shares of Series D Preferred
Stock became convertible on that date. Each share of Series D Preferred Stock is
convertible into a number of shares of common stock of the Company as determined
in accordance with the Series D Conversion Formula as set forth in the agreement
using a conversion price equal to the lesser of (x) 120% of the five (5) day
average closing bid price of common stock immediately prior to the closing date
of the Series D Preferred Stock being converted or (y) 20% below the
five (5) day average closing bid price of common stock immediately prior to the
conversion date thereof. The conversion terms of the Series D Preferred Stock
also provide that in no event shall the conversion price referred to in the
Series D Conversion Formula be less than $0.50 per share and in no event shall
the Company be obligated to issue more than 12,000,000 shares of its common
stock in the aggregate in connection with the conversion of the 6,000 shares of
Series D Preferred Stock issued under the 1998 Series D Preferred Stock Private
Placement. The Series D Subscription Agreements also provide that the Company
will be required to make certain payments in the event of its failure to effect
conversion in a timely manner. Including shares of common stock issued for
accretion, as of March 12, 1999, all shares of Series D Preferred Stock had been
converted into 12,273,685 shares of NCT common stock.

                                      F-25
<PAGE>   87
     On July 27, 1998, NCT Audio entered into subscription agreements (the "NCT
Audio Subscription Agreements") to sell 60 shares of NCT Audio's Series A
Convertible Preferred Stock ("NCT Audio Series A Preferred Stock") having an
aggregate stated value of $6.0 million in a private placement, pursuant to
Regulation D of the Securities Act, to six unrelated accredited investors
through one dealer (the "1998 NCT Audio Series A Preferred Stock Private
Placement"). The sale of 60 shares of NCT Audio Series A Preferred Stock having
an aggregate $6.0 million stated value was completed on August 17, 1998. NCT
Audio received net proceeds of $5.2 million from the 1998 NCT Audio Series A
Preferred Stock Private Placement. Each share of the NCT Audio Series A
Preferred Stock has a par value of $.10 per share and a stated value of one
hundred thousand dollars ($100,000) with an accretion rate of four percent (4%)
per annum on the stated value. Each share of NCT Audio Series A Preferred Stock
is convertible into fully paid and non-assessable shares of NCT Audio's common
stock subject to certain limitations. Under the terms of the NCT Audio
Subscription Agreements, NCT Audio is required to file a registration statement
covering the resale of all shares of common stock of NCT Audio issuable upon
conversion of the NCT Audio Series A Preferred Stock then outstanding by a date
(the "Series A Filing Deadline") which is not later than thirty (30) days after
the NCT Audio becomes a "reporting company" under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The shares of NCT Audio Series A
Preferred Stock become convertible into shares of NCT Audio common stock at any
time after the date the NCT Audio becomes a "reporting company" under the
Exchange Act. Each share of Series A Preferred Stock is convertible into a
number of shares of common stock of NCT Audio as determined in accordance with
the Series A Conversion Formula as set forth in the agreement using a conversion
price equal to the lesser of (x) 120% of the five (5) day average closing bid
price of common stock immediately prior to the closing date of the Series A
Preferred Stock being converted or (y) 20% below the five (5) day average
closing bid price of common stock immediately prior to the conversion date
thereof. The conversion terms of the NCT Audio Series A Preferred Stock also
provide that in the event that NCT Audio has not become a "reporting company"
under the Exchange Act by December 31, 1998, or the NCT Audio registration
statement has not been declared effective by the SEC by December 31, 1998, the
holder shall be entitled to exchange each share of NCT Audio Series A Preferred
Stock for 100 shares of the Company's Series D Convertible Preferred Stock and
thereafter shall be entitled to all rights and privileges of a holder of the
Company's Series D Preferred Stock. As of December 31, 1998, no NCT Audio Series
A Preferred Stock shareholders had exercised their right to exchange NCT Audio
Series A Preferred Stock into the Company's Series D Convertible Preferred
Stock. On March 30, 1999, holders of 57 shares of NCT Audio Series A Preferred
Stock exercised this election and converted their shares into 11,699,857 shares
of the Company's common stock. At December 31, 1999, 3 shares of NCT Audio
Series A Preferred Stock were outstanding. On January 10, 2000, the remaining
3 shares of NCT Audio Series A Preferred Stock were converted into 634,915
shares of the Company's common stock.

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

                                      F-26
<PAGE>   88
     On September 4, 1998, the Company acquired the issued and outstanding
common stock of Advancel. The acquisition was pursuant to the Stock Purchase
Agreement. The consideration for the acquisition of the Advancel common stock
consisted of an initial payment of $1.0 million payable by the delivery of
1,786,991 shares of the Company's treasury stock together with future payments,
payable in cash or in common stock of the Company at the election of the
Advancel Shareholders based on Advancel's earnings before interest, taxes,
depreciation and amortization for each of the calendar years 1999, 2000, 2001
and 2002. While each earnout payment may not be less than $250,000 in any
earnout year, there is no maximum earnout payment for any earnout year or for
all earnout years in the aggregate. To determine the number of shares of the
Company's common stock issuable in connection with an earnout payment, each
earnout payment is to be calculated using the average of the closing prices of
the Company's common stock for each of the twenty (20) business days following
the 21(st) day after the release of Advancel's audited year-end financials for
an earnout year. At that time, Advancel Shareholders will elect to receive
payment in cash or common stock of the Company. In the event that the Company is
unable to maintain the registration statement covering the resale of 1,786,991
shares effective for at least thirty (30) days, each Advancel Shareholder shall
have the right, until April 15, 1999, to have the Company redeem up to one-third
of the initial payment shares acquired by such Advancel Shareholder by paying in
cash therefor a sum calculated by using the formula used to determine the number
of shares of the Company's common stock to be delivered in payment of the
initial payment of $1.0 million. The acquisition was accounted for as a purchase
and, accordingly, the accompanying consolidated financial statements include the
accounts of Advancel from the date of acquisition. The cost of the acquisition
was allocated to the assets acquired and liabilities assumed based on their fair
values as follows:

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

     At the annual meeting of Stockholders held on October 20, 1998, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock from
185 million to 255 million shares. Such action was deemed by the Board of
Directors to be in the best interest of the Company to make additional shares of
the Company's common stock available for an increase in the number of shares of
common stock covered by the 1992 Plan (see Note 12) pursuant to an amendment of
the 1992 Plan approved by the stockholders at such annual meeting, and for
acquisitions, public or private financings involving common stock or preferred
stock or other securities convertible to common stock, stock splits and
dividends, present and future employee benefit programs and other corporate
purposes.

                                      F-27
<PAGE>   89

     On November 24, 1998, the Company paid $1,000 consideration for
incorporation of DMC which was formed to develop, install and provide an
audio/visual advertising medium within commercial/professional settings.

     On December 30, 1998, the Company entered into a series of subscription
agreements (the "Series E Subscription Agreements") to sell an aggregate stated
value of up to $8.2 million of Series E Convertible Preferred Stock (the
"Series E Preferred Stock") in consideration of $4.0 million, in a private
placement, pursuant to Regulation D of the Securities Act, to six accredited
investors through one dealer (the "1998 Series E Preferred Stock Private
Placement"). The $4.0 million subscription receivable at December 31, 1998
represents a receivable due from the Series E Subscription Agreements. In
addition to the above noted Series E Subscription Agreements, the Company issued
and sold an aggregate amount of $1.7 million of Series E Preferred Stock to
three accredited investors through the above noted dealer, in exchange for an
aggregate stated value of $1.7 million of the Company's Series C Preferred Stock
held by the three accredited investors. The Company also issued and sold an
aggregate amount of $0.7 million of Series E Preferred Stock to four accredited
investors through the above noted dealer, in exchange and consideration for an
aggregate of 2.1 million shares of the Company's common stock held by the four
accredited investors and received net proceeds of $1.8 million. On April 13,
1999, the Company entered into a subscription agreement to sell 1,874 shares of
Series E Preferred Stock, with a stated value of up to $1.9 million in
consideration of $1.9 million to four accredited investors through one dealer.
Each share of the Series E Preferred Stock has a par value of $.10 per share and
a stated value of one thousand dollars ($1,000) with an accretion rate of four
percent (4%) per annum on the stated value. Each share of Series E Preferred
Stock is convertible into fully paid and non-assessable shares of the Company's
common stock subject to certain limitations. Under the terms of the Series E
Subscription Agreements, the Company is required to file a registration
statement on (i) Form S-3 on or prior to the date which is no more than sixty
(60) days from the date that the Company has issued a total of 7,438 shares of
Series E Preferred Stock if filed or (ii) Form S-1 on or prior to a date which
is no more than ninety (90) days from the date that the Company has issued a
total of 7,438 shares of Series E Preferred Stock, covering the resale of all of
the registrable securities. The shares of Series E Preferred Stock become
convertible into shares of common stock at any time commencing after the earlier
of (i) ninety (90) days after the Series E Closing Date; (ii) five (5) days
after the Company receives a "no review" status from the SEC in connection with
the registration statement; or (iii) the effective date of the Series E
registration statement. Each share of Series E Preferred Stock is convertible
into a number of shares of common stock of the Company as determined in
accordance with the Series E Conversion Formula as set forth in the agreement
using a conversion price equal to the lesser of (x) 120% of the five (5) day
average closing bid price of common stock immediately prior to the closing date
of the Series E Preferred Stock being converted or (y) 20% below the
five (5) day average closing bid price of common stock immediately prior to the
conversion date thereof. The conversion terms of the Series E Preferred Stock
also provide that in no event shall the Company be obligated to issue more than
30,000,000 shares of its common stock in the aggregate in connection with the
conversion of the 10,580 shares of Series E Preferred Stock issued under the
1998 Series E Preferred Stock Private Placement. The Company may be obligated to
redeem the excess of the stated value over the amount permitted to be converted
into common stock. Such obligation would be triggered in the event that the
Company issues 30,000,000 shares on conversion of Series E Preferred Stock. The

                                      F-28
<PAGE>   90
Series E Subscription Agreements also provide that the Company will be required
to make certain payments in the event of its failure to effect conversion in a
timely manner. The Company registered an aggregate of 26,648,696 shares of the
Company's common stock for the conversion of the issued and outstanding shares
of Series E Preferred Stock. The Company is given the right to pay the accretion
in either cash or common stock. The conversion terms further provide that the
Company will be required to make certain payments if it fails to effect a
conversion in a timely manner and may have to redeem the excess of the stated
value over the amount permitted to be converted into common stock. As of
December 31, 1998, no shares of Series E Preferred Stock had been converted into
NCT common stock. During 1999, holders of 3,828 shares of Series E Preferred
Stock elected to convert their shares into 26,608,942 shares of common stock of
the Company. On March 31, 1999, the Company signed a license agreement to
exchange 3,600 shares of Series E Preferred Stock for four DMC network affiliate
licenses. During the three months ended March 31, 1999, the Company, in
accordance with its revenue recognition policy, realized only $2.0 million on
the issuance of such licenses in consideration of the receipt of 3,600 shares of
its Series E Convertible Preferred Stock. Subsequently, during the three months
ended June 30, 1999, the Company adjusted such revenue to $0.9 million due to
the valuation of additional shares of Series E Preferred Stock issued during the
period. On December 15, 1999, holders of the remaining 5,026 shares of the
Company's Series E Preferred Stock and holders of 974 shares of the Company's
Series F Convertible Preferred Stock (see below), an aggregate stated value of
$6 million, exchanged such shares for eight DMC network affiliate licenses. No
shares of Series E Preferred Stock were outstanding at December 31, 1999.

     On January 25, 1999, the Company granted DMC, a wholly owned subsidiary
of the Company formed on November 24, 1998, an exclusive worldwide license with
respect to all of the Company's relevant patented and unpatented technology
relating to DMC products in consideration for a license fee of $3.0 million
(eliminated in consolidation). Such license fee is to be paid when proceeds are
available from the sale of DMC common stock. In addition, running royalties will
be payable to the Company with respect to DMC's sales of products incorporating
the licensed technology and its sublicensing of such technology. It is
anticipated that DMC will issue shares of its common stock in transactions
exempt from registration in order to raise additional working capital.

     At the annual meeting of stockholders of the Company on June 24, 1999, the
stockholders approved an amendment to increase the number of shares of common
stock the Company is authorized to issue from 255,000,000 to 325,000,000. This
amendment became effective on July 29, 1999, when the Company filed the
appropriate amendment to its Certificate of Incorporation with the Office of the
Secretary of State of Delaware.

     On June 24, 1999, the Board of Directors approved the issuance of up to
15,000,000 shares of the Company's common stock to be used to settle certain
obligations of the Company. In 1999, the Company issued 13,154,820 shares of
common stock to suppliers and consultants to settle current obligations of $1.8
million and future or anticipated obligations of $0.7 million.

     On August 10, 1999, the Company entered into a subscription agreement (the
"Series F Subscription Agreement") to sell an aggregate stated value of up to
$12.5 million (12,500 shares) of Series F Convertible Preferred Stock (the
"Series F Preferred Stock"), in a private placement

                                      F-29
<PAGE>   91
pursuant to Regulation D of the Securities Act, to five unrelated accredited
investors through one dealer (the "1999 Series F Preferred Stock Private
Placement"). On August 10, 1999, the Company received $1.0 million for the sale
of 8,500 shares of Series F Preferred Stock having an aggregate stated value of
$8.5 million. At the Company's election, the investors may invest up to an
additional $4.0 million in cash or in kind at a future date. Each share of the
Series F Preferred Stock has a par value of $.10 per share and a stated value of
one thousand dollars ($1,000) with an accretion rate of four percent (4%) per
annum on the stated value. Each share of Series F Preferred Stock is convertible
into fully paid and non-assessable shares of the Company's common stock, subject
to certain limitations. Under the terms of the Series F Subscription Agreement,
the Company was required to file a registration statement on Form S-1 on or
prior to a date which is no more than forty-five (45) days from the date that
the Company has issued a total of 1,000 shares of Series F Preferred Stock,
covering the resale of all of the registrable securities (the "Series F Closing
Date"). The shares of Series F Preferred Stock become convertible into shares of
common stock at any time commencing after the earlier of (i) forty-five (45)
days after the Series F Closing Date; (ii) five (5) days after the Company
receives a "no review" status from the SEC in connection with the Series F
registration statement; or (iii) the effective date of the Series F registration
statement. Each share of Series F Preferred Stock is convertible into a number
of shares of common stock of the Company as determined in accordance with a
formula (the "Series F Conversion Formula"), as defined in the agreement. The
conversion formula provides that the stated value of the preferred stock plus 4%
accretion thereon for the number of days between (i) the Series F Closing Date
and (ii) the conversion date be divided by the amount obtained by multiplying
the 80% times the average market price for the Company's common stock for the
five (5) consecutive trading days immediately preceding such date. The
conversion terms of the Series F Preferred Stock also provide that in no event
shall the Company be obligated to issue more than 35,000,000 shares of its
common stock in the aggregate in connection with the conversion of up to 12,500
shares of Series F Preferred Stock. In the interest of investor relations of the
Company, the maximum number of conversion shares was increased to 77,000,000
shares of the Company's common stock. The Company is also obligated to pay a 4%
per annum accretion on the stated value of Series F Preferred Stock in either
cash or common stock, at the Company's election. The Company registered an
aggregate of 25,744,000 shares of common stock issuable upon conversion and
payment for accretion. In connection with the Series F Preferred Stock, the
Company may be obligated to redeem the excess of the stated value over the
amount permitted to be converted into common stock. Such additional amounts will
be treated as obligations of the Company. On September 10, 1999, the Company
received $4.0 million for four DMC network affiliate licenses from four
accredited investors. While the investors agreed upon the exchange of 8,500
shares of Series F Preferred Stock having aggregate stated value of $8.5
million, for consideration of $1.0 million, the Company has treated the
additional $4.0 million for the DMC licenses as additional consideration for the
Series F Preferred Stock. As of December 31, 1999, 2,811 shares of Series F
Preferred Stock have been converted into 25,306,557 shares of the Company's
common stock. On December 15, 1999, 974 shares of the Company's Series F
Preferred Stock, together with 5,026 shares of the Company's Series E Preferred
Stock, were exchanged for eight DMC network affiliate licenses. At December 31,
1999, there are 4,715 shares of Series F Preferred Stock outstanding.

                                      F-30
<PAGE>   92
     The Company has certain contingent obligations under a securities exchange
agreement, dated as of October 9, 1999 (the "Exchange Agreement"), among the
Company, Austost and Balmore. Pursuant to the Exchange Agreement, on October 26,
1999 the Company issued a total of 17,333,334 shares to Austost and Balmore (the
"Exchange Shares") in exchange for 532 shares of common stock of NCT Audio held
by Austost and Balmore. The effective per share price of the Exchange Shares
received by Austost and Balmore was $0.06 per share (representing the total
purchase price originally paid by Austost and Balmore for the NCT Audio shares
of $1.0 million divided by 17,333,334). This effective per share price was
$0.115, or 65.7%, less than the closing bid price of the Company's common stock
as reported by the OTC Bulletin Board on October 25, 1999. This effective per
share price may be subject to increase upon the application of an exchange ratio
adjustment provision contained in the Exchange Agreement on February 15, 2000
(or an earlier date agreed to by all the parties) and may be subject to decrease
upon the application of a reset provision contained in the Exchange Agreement,
as described below.

     Under the exchange ratio adjustment provision, the Company has the right to
re-determine the price of the Exchange Shares issued to each of Austost and
Balmore on February 15, 2000 (or another date that is not later than February
15, 2000 and is mutually agreed upon by the Company, Austost and Balmore). If
the aggregate value of the Exchange Shares issued to Austost and Balmore is
greater than $2,600,000 based upon the closing bid price of the Company's common
stock as reported on the OTC Bulletin Board on such date, Austost and Balmore
are required to return to the Company any such Exchange Shares representing the
excess amount. Under the reset provision contained in the Exchange Agreement, on
April 24, 2000, and again on July 24, 2000, the Company may be required to issue
additional shares to either Austost or Balmore or both if the sum of certain
items on those dates is less than $2,600,000. Those items are: (i) the aggregate
market value of the Exchange Shares held by Austost and Balmore (based on the
per share closing bid price on those dates); (ii) the market value of any
Exchange Shares transferred by Austost and Balmore as permitted under the
Exchange Agreement (based on the per share closing bid price on the date of
transfer); and (iii) any amounts realized by Austost and Balmore from sales of
any such shares prior to April 24, 2000 or July 24, 2000, as the case may be.
The number of additional shares of common stock that the Company would be
obligated to issue in such case would be a number of shares having an aggregate
market value (based on the per share closing bid price on such date) that, when
added to the sum of items (i), (ii) and (iii) set forth above, would equal
$2,600,000. The Company recorded step-up acquisition goodwill of $2.6 million.
This transaction contributed to the Company's recording of a $3.1 million
impairment of goodwill.

     On March 7, 2000, the Company, Austost and Balmore agreed to amend certain
of the terms and conditions of the Exchange Agreement in order to (1) allow
Austost and Balmore to retain 3,611,111 Returnable Shares in exchange for an
additional 533 shares of Audio common stock from a third party investor (the
"Third Party Shares"), which Austost and Balmore shall deliver to NCT, and
(2) substitute cash payments by Austost and Balmore to the Company in lieu of
Austost's and Balmore's obligation to return the remaining Returnable Shares to
the Company pursuant to the Exchange Agreement.

     The Company agreed that Austost and Balmore would retain 10,060,251 shares
of the Company's Common Stock (the "Remaining Returnable Shares"), and Austost
and Balmore

                                      F-31
<PAGE>   93
would agree to pay the Company up to $10,000,000 in cash subject to monthly
limitations from proceeds Austost and Balmore would realize from their
disposition of such Remaining Returnable Shares. Balmore and Austost will
realize a 10% commission on the proceeds from the sale of shares.

     The Company has certain contingent obligations under a securities purchase
agreement, dated as of December 27, 1999 (the "Purchase Agreement"), among the
Company, Austost, Balmore and Nesher, Inc. ("Nesher"). Based on an offer as of
November 9, 1999, the Company, Austost, Balmore and Nesher entered into the
Purchase Agreement whereby the Company, on December 28, 1999, issued a total of
3,846,155 shares (the "SPA Shares") to Austost, Balmore and Nesher for a total
purchase price of $500,000. The price of the SPA Shares was $0.13 per share,
which was $0.03, or 19%, less than the closing bid price of the Company's common
stock as reported by the OTC Bulletin Board on November 8, 1999, and $0.015, or
10%, less than the closing bid price of the Company's common stock as reported
by the OTC Bulletin Board on December 27, 1999. This per share price may be
subject to decrease upon the application of a reset provision contained in the
Purchase Agreement as described below.

     Under the reset provision, on June 26, 2000, and again on September 25,
2000, the Company may be required to issue additional shares to one or more of
Austost, Balmore or Nesher if the sum of certain items on those dates is less
than 120% of the total purchase price paid by Austost, Balmore and Nesher for
the SPA Shares. Those items are: (i) the aggregate market value of the SPA
Shares held by Austost, Balmore and Nesher (based on the per share closing bid
price on those dates); (ii) the market value of any SPA Shares transferred by
Austost, Balmore and Nesher as permitted under the Purchase Agreement (based on
the per share closing bid price on the date of transfer); and (iii) any amounts
realized by Austost, Balmore and Nesher from sales of any such shares prior to
June 26, 2000 or September 25, 2000, as the case may be. The number of
additional shares of common stock that the Company would be obligated to issue
in such case would be a number of shares having an aggregate market value (based
on the per share closing bid price on such date) that, when added to the sum of
items (i), (ii) and (iii) set forth above, would equal 120% of the total
purchase price paid for the SPA Shares. The 20% of the total purchase price paid
($100,000) is deemed a dividend.


COMMON SHARES AVAILABLE FOR COMMON STOCK OPTIONS, WARRANTS AND CONVERTIBLE
SECURITIES:

     At December 31, 1999, the number of shares required to be reserved for the
exercise of options and warrants was 38.8 million. The aggregate number of
shares of common stock required to be reserved for issuance upon the exercise of
all outstanding options and warrants granted was 37.9 million shares of which
options and warrants to purchase 24.7 million shares were currently exercisable
(see Note 12). The aggregate number of shares of common stock required to be
reserved for issuance upon conversion of issued and outstanding shares of Series
F Preferred Stock was 51.7 million shares. The Company has reserved 22.4 million
shares of common stock for issuance to certain holders of NCT Audio common stock
upon exchange of their shares of NCT Audio common stock for shares of the
Company's common stock. The Company has reserved 0.6 million shares of common
stock for issuance upon conversion of the remaining Series A Preferred Stock
into Series D Preferred Stock. The Company also reserved 30.7 million shares of
common stock for issuance upon conversion of the secured convertible

                                      F-32
<PAGE>   94

notes. Common shares issued and required to be reserved for issuance exceed the
number of shares authorized. However, should the aggregate of the number of
issued and outstanding shares and shares required to be reserved for future
issuance reach the authorized limit, shares in excess of the limit will be
borrowed from the 1992 Plan.


12.  COMMON STOCK OPTIONS AND WARRANTS:

     The Company applies APB 25 in accounting for its various employee stock
option incentive plans and warrants and, accordingly, recognizes compensation
expense as the difference, if any, between the market price of the underlying
common stock and the exercise price of the option on the date of grant. The
effect of applying SFAS No. 123 on 1997, 1998 and 1999 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future periods due to, among other factors, (i) the vesting period of
the stock options, and (ii) the fair value of additional stock option grants in
future periods. If compensation expense for the Company's stock option plans and
warrants had been determined based on the fair value of the options or warrants
at the grant date for awards under the plans in accordance with SFAS No. 123,
the Company's net loss would have been $15.8 million, $19.0 million and $27.4
million, or $(0.14), $(0.16) and $(0.20) per share in 1997, 1998 and 1999,
respectively. The fair value of the options and warrants granted in 1997, 1998
and 1999 are estimated in the range of $0.16 to $4.07, $0.24 to $0.81, and $0.26
to $0.64 per share, respectively, on the date of grant using the Black-Scholes
option-pricing model utilizing the following assumptions: dividend yield 0%;
volatility of 1.289, 1.307 and 1.0 in 1997, 1998 and 1999, respectively; risk
free interest rates in the range of 5.79% to 6.63%, 5.28% to 5.55%, and 4.56% to
6.14% for 1997, 1998 and 1999, respectively; and expected life of 3 years. The
weighted average fair value of options and warrants granted during 1997, 1998
and 1999 are estimated in the range of $0.13 to $0.58, $0.53, and $0.28 to $0.48
per share, respectively, also using the Black-Scholes option-pricing model.


STOCK OPTIONS:

     The Company's 1987 Stock Option Plan (the "1987 Plan") provides for the
granting of up to 4,000,000 shares of common stock as either incentive stock
options or nonstatutory stock options. Options to purchase shares may be granted
under the 1987 Plan to persons who, in the case of incentive stock options, are
full-time employees (including officers and directors) of the Company; or, in
the case of nonstatutory stock options, are employees or non-employee directors
of the Company. The exercise price of all incentive stock options must be at
least equal to the fair market value of such shares on the date of the grant and
may be exercisable over a ten-year period. The exercise price and duration of
the nonstatutory stock options are to be determined by the Board of Directors.
Options granted under the 1987 Plan generally vest 20% upon grant and 20% per
annum thereafter as determined by the Board of Directors.

                                      F-33
<PAGE>   95

     1987 Plan activity is summarized as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                 --------------------------------------------------------------------------------
                                          1997                       1998                        1999
                                 ------------------------  --------------------------  --------------------------
                                                 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  1,500,000       $0.54     1,350,000         $0.51     1,350,000        $0.51
Options granted                   1,350,000       $0.51            --            --     1,350,000        $0.51
Options exercised                        --          --            --            --            --           --
Options canceled, expired or
 forfeited                       (1,500,000)      $0.54            --            --    (1,350,000)       $0.51
                                 ----------                 ---------                  ----------
Outstanding at end of year        1,350,000       $0.51     1,350,000         $0.51     1,350,000        $0.51
                                 ==========                 =========                  ==========
Options exercisable at year-end   1,350,000       $0.51     1,350,000         $0.51     1,350,000        $0.51
                                 ==========                 =========                  ==========
</TABLE>

     As of December 31, 1999, options for the purchase of 217,821 shares were
available for future grant under the 1987 Plan.

     The Company's non-plan options are granted from time to time at the
discretion of the Board of Directors. The exercise price of all non-plan options
generally must be at least equal to the fair market value of such shares on the
date of grant and generally are exercisable over a five to ten year period as
determined by the Board of Directors. Vesting of non-plan options varies from
(i) fully vested at the date of grant to (ii) multiple year apportionment of
vesting as determined by the Board of Directors.

     Non-plan stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                 ------------------------------------------------------------------------------
                                          1997                      1998                        1999
                                 ----------------------     ----------------------     -----------------------
                                               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    372,449      $1.08      4,319,449       $0.36      4,319,449        $0.36
Options granted                   7,844,449      $0.41             --          --             --           --
Options exercised                        --         --             --          --             --           --
Options canceled, expired or
 forfeited                       (3,897,449)     $0.53             --          --       (35,449)        $4.86
                                 ----------                 ---------                  ---------
Outstanding at end of year        4,319,449      $0.36      4,319,449       $0.36      4,284,000        $0.33
                                 ==========                 =========                  =========
Options exercisable at year-end   4,319,449      $0.36      4,319,449       $0.36      4,284,000        $0.33
                                 ==========                 =========                  =========
</TABLE>

     On October 6, 1992, the Company adopted a stock option plan (as amended,
the "1992 Plan") for the granting of options to purchase up to 10,000,000 shares
of common stock to officers, employees, certain consultants and certain
directors. The exercise price of all 1992 Plan options must be at least equal to
the fair market value of such shares on the date of the grant and 1992 Plan
options are generally exercisable over a five to ten year period as determined
by the Board of Directors. Vesting of 1992 Plan options varies from (i) fully
vested at the date of grant to (ii) multiple year apportionment of vesting as
determined by the Board of Directors. On October 20, 1998, the stockholders
approved an amendment to the 1992 Plan to increase the aggregate number of
shares of common stock reserved for grants of restricted stock and grants of
options to purchase shares of common stock to 30,000,000 shares. The 1992 Plan
was also amended to eliminate the automatic grant of 75,000 shares of the
Company's common stock upon a new director's initial election to the Board of
Directors and to eliminate the automatic grant of 5,000

                                      F-34
<PAGE>   96
shares of the Company's common stock to each non-employee director for services
as a director of the Company for each subsequent election.

     1992 Plan activity is summarized as follows:

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                 --------------------------------------------------------------------------------
                                          1997                      1998                         1999
                                 ----------------------   ------------------------    ------------------------
                                               WEIGHTED                   WEIGHTED                    WEIGHTED
                                               AVERAGE                    AVERAGE                      AVERAGE
                                               EXERCISE                   EXERCISE                    EXERCISE
                                   SHARES       PRICE       SHARES         PRICE        SHARES          PRICE
                                 ----------  ----------   -----------     --------    ----------      --------
<S>                              <C>         <C>          <C>             <C>         <C>             <C>
Outstanding at beginning of year  6,022,765      $0.86      9,029,936       $0.72     19,831,821        $0.52
Options granted                   4,652,222      $0.55     21,989,000       $0.69      9,398,538        $0.43
Options exercised                (1,141,795)     $0.64         (1,561)      $0.27         (5,000)       $0.27
Options canceled, expired or
 forfeited                         (503,256)     $0.99    (11,185,554)      $1.03     (1,201,122)       $0.60
                                 ----------               -----------                 ----------
Outstanding at end of year        9,029,936      $0.72     19,831,821       $0.52     28,024,237        $0.47
                                 ==========               ===========                 ==========
Options exercisable at year-end   6,592,436      $0.73     12,053,571       $0.60     14,751,044        $0.55
                                 ==========               ===========                ==========
</TABLE>

     As of December 31, 1999, options for the purchase of 318,360 shares were
available for future grants of restricted stock awards and for options to
purchase common stock under the 1992 Plan.

     On November 15, 1994, the Board of Directors adopted the NCT Group, Inc.
Option Plan for Certain Directors (as amended, the "Directors Plan"). Under the
Directors Plan, 821,000 shares have been approved by the Board of Directors for
issuance. The options granted under the Directors Plan have exercise prices
equal to the fair market value of the common stock on the grant dates, and
expire five years from date of grant. Options granted under the Directors Plan
are fully vested at the grant date.

    Directors Plan activity is summarized as follows:

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                 ----------------------------------------------------------------------------
                                          1997                     1998                       1999
                                 ----------------------     ---------------------    ------------------------
                                               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   746,000       $0.73      746,000        $0.73      746,000        $0.73
Options granted                         --          --           --           --      538,500        $0.73
Options exercised                       --          --           --           --           --           --
Options canceled, expired or
 forfeited                              --          --           --           --     (746,000)       $0.73
                                   -------                  -------                  --------
Outstanding at end of year         746,000       $0.73      746,000        $0.73      538,500        $0.73
                                   =======                  =======                  ========
Options exercisable at year-end    746,000       $0.73      746,000        $0.73      538,500        $0.73
                                   =======                  =======                  ========
</TABLE>

     As of December 31, 1999, there were 282,500 options for the purchase of
shares available for future grants under the Directors Plan.

                                      F-35
<PAGE>   97

     The following summarizes information about the Company's stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                     -----------------------------------    -----------------------
                                                    WEIGHTED
                                                   AVERAGE
                                                    REMAINING   WEIGHTED                   WEIGHTED
                                                   CONTRACTUAL   AVERAGE                   AVERAGE
                      RANGE OF          NUMBER        LIFE      EXERCISE      NUMBER       EXERCISE
  PLAN             EXERCISE PRICE    OUTSTANDING   (IN YEARS)     PRICE     EXERCISABLE     PRICE
--------          ----------------   -----------   ----------   --------    -----------    --------
<S>               <C>                <C>           <C>          <C>         <C>             <C>
1987 Plan         $0.50 to $0.63       1,350,000         2.06     $0.51       1,350,000      $ 0.51
                                     ===========                            ===========
Non-Plan          $0.27 to $3.69       4,284,000         2.16     $0.33       4,284,000      $ 0.33
                                     ===========                            ===========
1992 Plan         $0.22 to $0.56      21,093,391         7.07     $0.35       7,927,698      $ 0.33
                  $0.64 to $1.50       6,620,491         2.80     $0.71       6,512,991      $ 0.71
                  $2.38 to $4.00         310,355         0.70     $3.01         310,355      $ 3.01
                                     -----------                            -----------
Total 1992 Plan                       28,024,237                             14,751,044
                                     ===========                            ===========

Director's Plan   $0.66 to $0.75         538,500         0.53     $0.73         538,500      $ 0.73
                                     ===========                            ===========
</TABLE>


WARRANTS:

     The Company's warrants are granted from time to time at the discretion of
the Board of Directors. The exercise price of all warrants generally must be at
least equal to the fair market value of such shares on the date of grant.
Generally, warrants are exercisable over a five to ten year period as determined
by the Board of Directors and vest on the grant date.

     In July 1999, in connection with the PRG Note, PRG was granted a common
stock warrant equal to either (i) the number of shares of the Company's common
stock (6,666,667) which may be purchased for an aggregate purchase price of
$1,250,000 at the fair market value on July 19, 1999 or (ii) the number of
shares representing five percent of the fully paid non-assessable shares of
common stock of DMC at the purchase price per share equal to either (x) if a DMC
qualified sale (a sale in one transaction in which the aggregate sales proceeds
to DMC equal or exceed $5,000,000) had closed on or before December 31, 1999,
the purchase price per share determined by multiplying the price per share of
DMC common stock or security convertible into DMC common stock by seventy-five
percent (75%) or (y) if a DMC qualified sale had not closed on or before
December 31, 1999, at an aggregate price of $1,250,000.

     Warrant activity is summarized as follows:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                   --------------------------------------------------------------------------------
                                              1997                       1998                       1999
                                   -------------------------    -----------------------   -------------------------
                                                    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    3,888,539          $0.72     3,146,920      $0.81      4,372,684          $0.82
Warrants granted                    2,846,923          $0.76     1,588,164      $0.92      2,587,875          $0.75
Warrants exercised                   (854,119)         $0.41            --         --             --             --
Warrants canceled, expired or
forfeited                          (2,734,423)         $0.75      (362,400)     $1.16     (3,225,145)         $0.82
                                   ----------                    ---------                ----------
Outstanding at end of year          3,146,920          $0.81     4,372,684      $0.82      3,735,414          $0.77
                                   ==========                    =========                ==========
Warrants exercisable at year-end    3,146,920          $0.81     4,172,684      $0.86      3,735,414          $0.77
                                   ==========                    =========                ==========
</TABLE>

                                      F-36
<PAGE>   98

     The following table summarizes information about warrants outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
                        WARRANTS OUTSTANDING                 WARRANTS EXERCISABLE
                   -----------------------------------      ----------------------
                                 WEIGHTED
                                  AVERAGE
                                 REMAINING     WEIGHTED                    WEIGHTED
                                CONTRACTUAL    AVERAGE                     AVERAGE
    RANGE OF         NUMBER        LIFE       EXERCISE         NUMBER     EXERCISE
 EXERCISE PRICE    OUTSTANDING   (IN YEARS)     PRICE       EXERCISABLE     PRICE
 --------------    -----------  ----------    ---------     -----------   ---------
 <S>               <C>          <C>           <C>           <C>           <C>
 $0.50 to $0.69       263,914        2.94       $0.62          263,914       $0.62
 $0.75 to $1.66     3,471,500        2.32       $0.78        3,471,500       $0.78
</TABLE>


13.  RELATED PARTIES:

     Between 1993 and 1994, the Company entered into five agreements with Quiet
Power Systems, Inc. ("QSI"). Environmental Research Information, Inc. ("ERI")
owns 33% of QSI and Jay M. Haft, Chairman of the Board of Directors of the
Company, owns another 2% of QSI. Michael J. Parrella, President of the Company,
owns 12% of the outstanding capital of ERI and shares investment control over an
additional 24% of its outstanding capital. In March 1995, the Company entered
into a master agreement with QSI which granted QSI an exclusive worldwide
license to market, sell and distribute various quieting products in the utility
industry. Subsequently, the Company and QSI executed four letter agreements,
primarily revising payment terms. On December 24, 1999, the Company executed a
final agreement with QSI in which the Company agreed to write-off $239,000 of
indebtedness owed by QSI in exchange for the return by QSI to the Company of its
exclusive license to use NCT technology in various quieting products in the
utility industry. Such amount, originally due on January 1, 1998, had been fully
reserved by the Company.

     The Company's President and Chief Executive Officer, who, at December 31,
1999, holds options and warrants for the right to acquire an aggregate of
15,237,000 shares of the Company's common stock, receives an incentive bonus
equal to 1% of the cash received by the Company upon the execution of agreements
or other documentation evidencing transactions with unaffiliated parties. For
the year ended December 31, 1997, 1998 and 1999, approximately $243,000,
$206,000 and $169,000 was incurred in connection with this arrangement.

    During 1997, 1998 and 1999, the Company purchased $0.7 million, $0.2 million
and $0, respectively, of products from its various manufacturing joint venture
entities.


14.  INCOME TAXES:

     The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Accordingly, deferred tax assets and liabilities are established for temporary
differences between tax and financial reporting bases of assets and liabilities.
A valuation allowance is established when the Company determines that it is more
likely than not that a deferred tax asset will not be realized. The

                                      F-37
<PAGE>   99

Company's temporary differences primarily result from depreciation related to
machinery and equipment and compensation expense related to warrants, options
and reserves.

     At December 31, 1999, the Company had available net operating loss
carryforwards of approximately $101.2 million and research and development
credit carryforwards of $1.7 million for federal income tax purposes, which
expire as follows (in thousands):

<TABLE>
<CAPTION>
                                      RESEARCH
                                         AND
                        NET          DEVELOPMENT
      YEAR             LOSSES          CREDITS
      ----            --------       -----------
      <S>             <C>            <C>
      2000               $ 129             $  --
      2001                 787                --
      2002               2,119                --
      2003               1,974                --
      2004               1,620                --
      2005               3,870               141
      2006               1,823               192
      2007               6,866               118
      2008              13,456               321
      2009              16,293               413
      2010               9,415                61
      2011               9,051                67
      2012               4,525(1)            267
      2018              14,183(2)            167
      2019              15,079(3)             --
                      --------       -----------
      TOTAL           $101,190            $1,747
                      ========       ===========
</TABLE>

----------

(1)  Includes approximately $1.2 million net operating loss relating to NCT
     Audio Products, Inc.
(2)  Includes approximately $4.4 million net operating loss relating to NCT
     Audio Products, Inc.
(3)  Includes approximately $6.5 million net operating loss relating to NCT
     Audio Products, Inc.

     The Company's ability to utilize its net operating loss carryforwards may
be subject to an annual limitation. The difference between the statutory tax
rate of 34% and the Company's effective tax rate of 0% is due to the increase in
the valuation allowance of $3.0 million, $1.4 million and $3.3 million in 1997,
1998 and 1999, respectively.

     The types of temporary differences that give rise to significant portions
of the deferred tax assets and the federal and state tax effect of those
differences, as well as federal net operating loss and research and development
credit, at December 31, 1998 and 1999 were as follows (in thousands):

                                      F-38
<PAGE>   100






<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                              ------------------------------
                                                 1998                 1999
                                              --------              --------
<S>                                           <C>                   <C>
Accounts receivable                           $    157              $     13
Inventory                                          173                   180
Property and equipment                              68                    82
Accrued expenses                                    65                    58
Stock compensation                               2,711                 2,924
Other                                              349                   414
                                              --------              --------
    Total temporary differences               $  3,523              $  3,671
Federal net operating losses                    27,258                30,285
Federal research and development credits         1,580                 1,747
                                              --------              --------
                                              $ 32,361              $ 35,703
Less: Valuation allowance                      (32,361)              (35,703)
                                              --------              --------
  Deferred taxes                              $     --              $     --
                                              ========              ========
</TABLE>


15.  LITIGATION:

     On or about June 15, 1995, Guido Valerio filed suit against the Company in
the Tribunal of Milan, Milan, Italy. Mr. Valerio alleged that (1) the Company is
guilty of breach of contract; (2) certain amounts and commissions are allegedly
owed to him; and (3) he had suffered damage to his image and reputation among
other injuries alleged. The Company retained an Italian law firm specializing in
litigation and, through its counsel, filed a reply brief responding to Mr.
Valerio's allegations. The Company argued that even if the Tribunal were the
appropriate forum for the suit, Mr. Valerio's claim is groundless because a
valid contract was never formed. Further, the Company argued that Mr. Valerio is
not enrolled in the official Register of Agents and, thus, under applicable
Italian law is not entitled to any compensation. Since the submission, the
Tribunal has held a pretrial discovery hearing and a hearing before a Discovery
Judge. The Discovery Judge held another hearing on May 19, 1998 and established
deadlines for final pleadings and a trial date. The Tribunal of Milan, sitting
in full bench, heard the case on September 22, 1998. On May 4, 1999, the
Company's Italian law firm informed the Company that the Tribunal of Milan had
granted the Company's objection to lack of venue and had consequently rejected
Mr. Valerio's claim and awarded the Company expenses in the amount of
approximately $7,000.

     By a letter dated September 9, 1997, counsel to competitor Andrea
Electronics Corporation ("AECorp.") informed the Company that AECorp. believed
NCT was improperly using the term "ANR Ready" and infringing upon a trademark
owned by AECorp. Representatives of existing and/or potential customers also
have informed the Company that AECorp. has made statements claiming that the
Company's manufacture and/or sale of certain in-flight entertainment system
products infringe a patent owned by the competitor. The Company received a
notice dated March 24, 1998 from AECorp.'s intellectual property counsel
notifying the Company of its concerns but did not confirm any intention to file
suit against NCT. The Company, through special outside counsel, exchanged
correspondence with AECorp. but the parties could not come

                                      F-39
<PAGE>   101
to any resolution. The Company was informed by representatives of existing
and/or potential customers that AECorp. was continuing to infer that the Company
was infringing.

     On October 9, 1998, the Company's Board of Directors authorized litigation
against AECorp. On November 17, 1998, the Company and NCT Hearing filed a
complaint against AECorp. in the U.S. District Court, Eastern District of New
York. The complaint requested that the court enter judgment in our favor as
follows: (1) declare that the two AECorp. patents at issue are invalid and
unenforceable and that the Company's products do not infringe upon them; (2)
declare that the two AECorp. patents at issue are unenforceable due to misuse by
AECorp.; (3) award the Company compensatory damages of no less than $5 million
and punitive damages of $50 million for AECorp.'s tortious interference with the
Company's prospective contractual advantages; (4) enjoin AECorp. from stating or
inferring that the Company's products or their use are infringing any
AECorp.-owned patents; and (5) award any other relief the court deems
appropriate.

     On or about December 30, 1998, AECorp. filed its answer to the Company's
complaint. AECorp. generally denied the above allegations and brought
counterclaims against the Company. These include claims that the Company has:
infringed the two AECorp. patents at issue and the "ANR Ready" trademark;
violated the Lanham Act through NCT's use of the trademark; and unfairly
competed with AECorp. by using the trademark.

    The Company and NCT Hearing have since filed a Reply and requested that the
court dismiss the counterclaims and enter judgment in favor of the Company and
NCT Hearing. The Company also argued that AECorp. is prevented from recovering
under certain equitable theories and defenses. Discovery in this suit commenced
in mid-1999 and is continuing, although a trial date has not yet been set. In
the opinion of management, after consultation with outside counsel, resolution
of this suit should not have a material adverse effect on the Company's
financial position or operations. However, in the event that the lawsuit does
result in a substantial final judgment against the Company, said judgment could
have a material effect on quarterly or annual operating results.

     On June 10, 1998, Schwebel Capital Investments, Inc. ("SCI") filed suit in
a Maryland state court against the Company and Michael J. Parrella, its Chief
Executive Officer and Director. The complaint alleges that the Company breached,
and Mr. Parrella interfered with, a purported contract entered into "in 1996"
between the Company and SCI. SCI claims that under the contract, the Company
agreed to pay SCI commissions when NCT received capital from its investors. The
complaint further alleged that SCI is due commissions totaling $1.5 million
because the Company refused to honor SCI's right of first refusal. SCI seeks
$1,673,000 in compensatory damages, $50,000 in punitive damages and $50,000 in
attorneys fees from the Company. SCI also seeks $150,000 in compensatory
damages, $500,000 in punitive damages and $50,000 in attorneys fees from Mr.
Parrella. The Company has filed and the Court has granted two motions to strike
or dismiss some of the plaintiff's claims. No further developments in this suit
have occurred. Management believes it has many meritorious defenses and intends
to conduct a vigorous defense. In the event the case results in a substantial
judgment against the Company, however, the judgment could have a severe material
effect on quarterly or annual operating results.

                                      F-40
<PAGE>   102

     On June 25, 1998, Mellon Bank FSB ("Mellon") filed suit against Alexander
Wescott & Co., Inc. ("AWC") and the Company in a district court in the Southern
District of New York. Mellon alleged that either the Company or AWC owe it
$326,000, a sum Mellon purportedly paid to both entities when it acted as escrow
agent for the Company in a private placement of securities with certain
institutional investors. The Company retained counsel and on or about July 27,
1998, AWC filed its answer, counterclaim and cross-claim against Mellon and NCT.
AWC specifically requested that the court: (1) dismiss Mellon's amended
complaint against AWC; (2) grant AWC commissions totaling $688,000 owed to AWC
by the Company; (3) order the Company to issue 784,905 shares of its common
stock; (4) declare that AWC is entitled to keep the $326,000 sought by Mellon;
and (5) order the delivery of a warrant to purchase 461.13 shares of the common
stock of NCT Audio.

     On or about August 20, 1998, the Company filed its reply to AWC's
cross-claims. Discovery is currently scheduled to take place in the action. In
the opinion of management, after consultation with outside counsel, resolution
of this suit should not have a material adverse effect on the Company's
financial position or operations. However, in the event that the lawsuit does
result in a substantial final judgment against the Company, said judgment could
have a material effect on quarterly operating results.

     On December 15, 1998, Balmore and Austost filed suit against NCT Audio and
the Company in New York Supreme Court. The complaint alleged breach of contract,
common law fraud, negligent misrepresentation, deceptive trade practices, and
money had and received. These claims all allegedly arose in connection with an
agreement the Company entered into with Balmore and Austost for the sale of
shares of NCT Audio common stock in a private placement in December 1997.
Specifically, the complaint alleged that: NCT Audio breached an agreement to
register shares of its common stock that Balmore and Austost purchased or, in
the alternative, shares of the Company's common stock exchangeable for NCT
Audio's shares under certain circumstances, and to pay penalties if it failed to
do so; NCT Audio made materially false and misleading representations when it
faxed non-negotiated agreements instead of executed agreements to Balmore and
Austost; NCT Audio and the Company acted negligently and violated duties of full
and fair disclosure; and NCT Audio and the Company engaged in deceptive trade
practices.

     Balmore and Austost further argued that as a result of these alleged
actions, NCT Audio and the Company owed Balmore and Austost compensatory damages
not less than $1,819,000 and punitive damages of $3 million. Balmore and Austost
also requested that the court require NCT Audio and the Company to register the
shares it holds of NCT Audio common stock or rescind the agreement and return to
Balmore and Austost the $1 million purchase price. Finally, Balmore and Austost
requested treble damages, reasonable attorneys fees, costs and any other relief
the court deemed appropriate.

     On January 14, 1999, the Company and NCT Audio filed removal papers to
remove the suit from state court to federal court. On January 22, 1999, the
Company and NCT Audio filed their answer, affirmative defenses, counterclaims
and a third-party complaint. On October 9, 1999, the Company, Balmore and
Austost agreed, in principle, on a mutual release and settlement,

                                      F-41
<PAGE>   103
subject to court approval, whereby all charges, claims and counterclaims which
have been individually or jointly asserted against the parties will be dropped.
Court approval is pending.

     On September 16, 1999, certain former shareholders and optionees (the
"Claimants") of Advancel filed a Demand for Arbitration against the Company with
the American Arbitration Association in San Francisco, California. The primary
remedy the Claimants seek is recision of the Stock Purchase Agreement, the
return of the Advancel stock surrendered in conjunction with the purchase of
Advancel by the Company and damages to be determined by arbitration. The Company
filed a response and counterclaim on October 13, 1999. After consultation with
outside legal counsel, management recognizes that the Company may lose some or
all of its claims, encountering significant liability. In the event this Demand
for Arbitration does result in a substantial judgment against the Company, said
judgment could have a material effect on the Company's quarterly or annual
operating results. Outside legal counsel has indicated that it is impossible to
estimate a range of potential liability at this early stage with any degree of
certainty. The parties have agreed on an arbitrator who has scheduled late May
2000 for an arbitration hearing. Discovery is currently scheduled to take place
in the action.

     On September 16, 1999, NCT Audio filed a Demand for Arbitration before the
American Arbitration Association in Wilmington, Delaware, against TST and TSA
(the "Respondents") alleging, among other things, breach of the asset purchase
agreement by which TSA was to sell its assets to NCT Audio, breach of fiduciary
duty as a majority shareholder owed to NCT Audio which holds 15% of the
outstanding stock of TSA, and breach of obligation of good faith and fair
dealing. NCT Audio seeks recision of the purchase agreement and recovery of
monies paid to TST for TSA's assets. Concurrently, NCT Audio commenced a
preliminary injunction proceeding in the Delaware Court of Chancery, seeking to
prevent TST from selling TSA's assets to Onkyo America pending completion of the
arbitration proceeding. Such court action was subsequently withdrawn by NCT
Audio. On December 8, 1999, Respondents filed an answer and counterclaim in
connection with the arbitration proceeding. Respondents asserted their
counterclaim to recover (i) the monies and stock owned under the extension
agreements; (ii) the $1 million differential between the $9 million purchase
price paid by Onkyo America for TSA's assets and the $10 million purchase price
that NCT Audio had been obligated to pay; (iii) expenses associated with
extending NCT Audio's time to close the transaction; and (iv) certain legal
expenses incurred by Respondents.

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

                                      F-42
<PAGE>   104

16.  COMMITMENTS AND CONTINGENCIES:

     The Company is obligated for minimum annual rentals (net of sublease
income) under operating leases for offices, warehouse space and laboratory
space, expiring through March 2010 with various renewal options, as follows (in
thousands):

<TABLE>
<CAPTION>
          YEAR ENDING
           DECEMBER 31,                      AMOUNT
          -------------                      ------
          <S>                                <C>
              2000                           $  862
              2001                              841
              2002                              380
              2003                              380
              2004                              380
           Thereafter                         2,038
                                             ------
             Total                           $4,881
                                             ======
</TABLE>

     Rent expense (net of sublease income) was $0.4 million, $0.6 million and
$0.6 million for the years ended December 31, 1997, 1998 and 1999, respectively.

     In April 1996, the Company established the Noise Cancellation Employee
Benefit Plan (the "Benefit Plan") which provides, among other coverage, certain
health care benefits to employees and directors of the Company's United States
operations. The Company administers this modified self-insured Benefit Plan
through a commercial third-party administrative health care provider. The
Company's maximum aggregate benefit exposure in each Benefit Plan fiscal year is
limited to $1.0 million, while combined individual and family benefit exposure
in each Benefit Plan fiscal year is limited to $40,000. Benefit claims in excess
of these individual or maximum aggregate stop loss limits are covered by a
commercial insurance provider to which the Company pays a nominal premium for
such stop loss coverage. The Company records benefit claim expense in the period
in which the benefit claim is incurred. As of February 25, 2000, the Company was
not aware of any material benefit claim liability.

     As of December 31, 1999, the Company is obligated under various agreements
for minimum royalty payments as follows: $335,000, $220,000, $240,000 and
$60,000 for 2000, 2001, 2002 and 2003.

     In connection with the acquisition of Advancel, the Company entered into
employment agreements with four employees. The Company is obligated under these
agreements for $471,500 per annum through 2002, subject to the outcome of the
arbitration between the parties (see Note 15).

                                      F-43
<PAGE>   105


17.   BUSINESS SEGMENT INFORMATION:

<TABLE>
<CAPTION>
                                  NCT       NCT     COMMUNI-                     ADVANCEL     TOTAL
                                 AUDIO    HEARING   CATIONS   EUROPE    DMC     LOGIC CORP   SEGMENTS     OTHER    GRAND TOTAL
                               --------   -------  ---------  ------  -------   ----------  ----------    -------  ------------
                                                                    (in thousands of dollars)
<S>                            <C>        <C>      <C>        <C>     <C>       <C>         <C>           <C>      <C>

1999

Net Sales - External           $    856   $   708    $   874  $    4  $    --      $ 1,069    $  3,511    $    --     $  3,511
Net Sales - Other Operating
Segments                              4        --         --     866       --           --         870       (870)          --
License Fees and royalties          506       157        906      --      850        1,100       3,519         33        3,552
Interest Income                     167       --          --       1       --           --         168       (142)          26
Depreciation/Amortization            10       --          --      43        4           16          73      1,897        1,970
Operating Income (Loss)         (10,679)   (3,414)    (2,643)     86   (2,739)      (1,453)    (20,842)    (2,929)     (23,771)
Segment Assets                    2,228     1,791        897     164      963          728       6,771      6,606       13,377
Capital Expenditures                 --        --          1       4       26            3          34         17           51

1998

Net Sales - External           $    383   $ 1,191    $   780  $   28  $    --      $    69    $  2,451       $ 71     $  2,522
Net Sales - Other Operating
Segments                              2        23          6   1,113       --           --       1,144     (1,144)          --
License Fees and royalties          350        86         18      --       --          200         654        148          802
Interest Income                     110        --         --      15       --           --         125        313          438
Depreciation/Amortization             5        --         --      38       --            8          51        979        1,030
Operating Income (Loss)          (4,359)   (3,697)    (4,326)    (12)      --         (658)    (13,052)    (1,131)     (14,183)
Segment Assets                    6,752     2,449        301     218       --          922      10,642      4,823       15,465
Capital Expenditures                 33         8         21     102       --           34         198        350          548

1997

Net Sales - External           $      4   $ 1,709    $   127  $   67  $    --      $    --    $  1,907    $   181     $  2,088
Net Sales - Other Operating
Segments                             --        --         --     847       --           --         847       (847)          --
License Fees                      3,000        --        345      --       --           --       3,345        285        3,630
Interest Income                      --        --         --      18       --           --          18         99          117
Depreciation/Amortization            --        --         --      44       --           --          44        855          899
Operating Income (Loss)             785    (3,618)    (2,582)   (411)      --           --      (5,826)    (4,022)      (9,848)
Segment Assets                    2,333     1,227        397     301       --           --       4,258     13,103       17,361
Capital Expenditures                 12         5         13      26       --           --          56        188          244

</TABLE>


     NCT Audio:

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


     NCT Hearing:

     NCT Hearing designs, develops and markets active noise reduction headset
products to the communications headset market and the telephony headset market.
The products consist of the NoiseBuster(R) product line and the ProActive(R)
product line. The NoiseBuster(R) products

                                      F-44
<PAGE>   106
consist of the NoiseBuster Extreme!(TM), a consumer headset, the NB-PCU, a
headset used for in-flight passenger entertainment systems and communications
headsets for cellular, multimedia and telephony. The ProActive(R) products
consist of noise reduction headsets and communications headsets for noisy
industrial environments. The majority of NCT Hearing's sales are in North
America. Principal customers consist of end-users, retail stores, OEMs and the
airline industry.


     Communications:

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


     Europe:

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


    DMC:

     DMC is a new microbroadcasting media company that delivers licensed
CD-quality music as well as on-air and billboard advertising to out-of-home
commercial and professional venues via a digital network of placed-based
microbroadcasting stations, called Sight and Sound(TM). The Sight and Sound(TM)
system consists of a central control network that communicates to a digital
broadcast station, which plays music selections and advertisements through flat
panel speakers. The speaker grilles double as visual billboards. The speakers
will be provided by NCT Audio.


     Advancel Logic Corp.:

     Advancel is a participant in the native Java(TM) embedded microprocessor
market. The purpose of the Java(TM) platform is to simplify application
development by providing a platform for the same software to run on many
different kinds of computers and other smart devices. Advancel

                                      F-45
<PAGE>   107
has been developing a family of processor cores, which will execute instructions
written in both Java bytecode and C (and C++), significantly enhancing the rate
of instruction execution, which opens up many new applications. The potential
for applications consists of the next generation home appliances and automotive
applications, manufacturers of smartcard processors, hearing aids and mobile
communications devices.


     Other:

     The "Net Sales - Other Operating Segments" primarily consists of
inter-company sales, which are eliminated in consolidation. "Segment Assets"
consists primarily of corporate assets. "Operating Income/(Loss)" primarily
includes corporate charges.


18.  GEOGRAPHICAL INFORMATION (BY COUNTRY OF ORIGIN) -
     TOTAL SEGMENTS (IN THOUSANDS):

<TABLE>
<CAPTION>
                                             DECEMBER 31,
                            -------------------------------------------------
                              1997                 1998                1999
                            -------              -------              -------
<S>                         <C>                  <C>                  <C>

Revenues
 United States              $ 2,089              $ 3,209              $ 3,174
 Europe                       3,270                   71                3,755
 Far East                       359                   44                  134
                            -------              -------              -------
    Total                   $ 5,718              $ 3,324              $ 7,063
                            =======              =======              =======

Net (Income) Loss
 United States              $ 9,211              $13,728              $23,353
 Europe                         411                   12                  (86)
 Far East                       226                  443                  504
                            -------              -------              -------
    Total                   $ 9,848              $14,183              $23,771
                            =======              =======              =======
Identifiable Assets
 United States              $17,060              $15,166              $13,174
 Europe                         301                  218                  164
 Far East                        --                   81                   39
                            -------              -------              -------
    Total                   $17,361              $15,465              $13,377
                            =======              =======              =======
</TABLE>


19.  SUBSEQUENT EVENTS:

     On January 25, 2000, the Board of Directors designated a new series of
preferred stock based upon a negotiated term sheet. The Series G Preferred Stock
consists of 5,000 designated shares, par value of $0.10 per share and a stated
value of one thousand dollars ($1,000) per share with a cumulative dividend of
four percent (4%) per annum on the stated value payable upon conversion in
either cash or common stock. On March 6, 2000, the Company and an accredited
investor entered into an agreement under which the Company sold an aggregate
stated value of $2.004 million (2,004 shares) of Series G Preferred Stock, in a
private placement pursuant to Regulation D of the Securities Act for an
aggregate of $1.750 million. The Company received $1.0 million for the sale at
the closing and will receive the balance of $750,000, upon the registration of
shares of common stock for resale upon the conversion of the Series G Preferred

                                      F-46
<PAGE>   108

Stock. Each share of Series G Preferred Stock is convertible into fully paid and
nonassessable shares of the Company's common stock pursuant to a predetermined
conversion formula which provides that the conversion price will be the lesser
of (i) the weighted average of the closing bid price for the common stock on the
securities market on which the common stock is being traded for five (5)
consecutive trading days prior to the date of conversion; or (ii) the fixed
conversion price of $0.777. The Company plans to register shares of common stock
for the conversion of the Series G Preferred Stock.

     On January 27, 2000, the Series F Preferred Stock Certificate of
Designations was amended to obligate the Company to issue up to 77,000,000
shares of its common stock upon the conversion of the 12,500 designated shares
of Series F Preferred Stock, as noted above. Such increase in the number of
shares of common stock was made in the interest of investor relations of the
Company. The Company intends to register additional shares of common stock for
the conversion of the amended Series F Preferred Stock Certificate of
Designations.

20.     SUBSEQUENT EVENTS (UNAUDITED):

     On March 27, 2000, the Company's subsidiary, DMC, has entered into a joint
venture for the development of a DMC microbroadcasting media market in Israel.
DMC has entered into a license agreement for $2.0 million in connection with
this transaction. The joint venture is equally owned by DMC and its investment
partners. DMC's investor partners are responsible for funding the venture.

        On March 27, 2000, the Company received $1.0 million from Carole
Salkind for an additional secured convertible note with the same terms and
conditions of the Note received on January 26, 1999 (see Note 8).

     On April 3, 2000, the Company's subsidiary, DMC, has entered into a
license agreement for $2.0 million to develop a portion of the DMC affiliate
network in the New York region.

                                      F-47
<PAGE>   109


INDEPENDENT AUDITORS' REPORT ON SCHEDULE II

Board of Directors and Stockholders of
  NCT Group, Inc.

     Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements of NCT Group, Inc. as of December 31,
1998 and 1999 and for each of the years in the three-year period ended December
31, 1999 taken as a whole. The information included on Schedule II is presented
for purposes of additional analysis and is not a required part of the basic
consolidated financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole. Also,
such schedule presents fairly the information set forth therein in compliance
with the applicable accounting regulations of the Securities and Exchange
Commission.


/s/ Richard A. Eisner & Company, LLP


New York, New York
February 25, 2000


With respect to Note 11
March 7, 2000


                                      F-48
<PAGE>   110

<TABLE>
<CAPTION>
                                                             SCHEDULE II
                                                 NCT GROUP, INC. AND SUBSIDIARIES
                                                VALUATION AND QUALIFYING ACCOUNTS
                                                     (In thousands of dollars)
---------------------------------------------------------------------------------------------------------------------------
              Column A                   Column B                 Column C                  Column D             Column E
---------------------------------------------------------------------------------------------------------------------------
                                                            (1)             (2)
                                                                          Charged
                                          Balance at      Charged in      to other                                Balance
                                          beginning       costs and       accounts-         Deductions-          at end of
            Description                   of period        expenses       describe          describe              period
---------------------------------         ----------      ----------      ---------         -----------          ---------
<S>                                       <C>             <C>             <C>               <C>                  <C>

Year ended December 31, 1997                $  123           $130         $  (65)(2)          $  (150)(3)         $   38
Year ended December 31, 1998                    38            232            (42)(2)               --                228
Year ended December 31, 1999                   228             77            (83)(2)             (139)                83
Allowance for doubtful accounts

Year ended December 31, 1997                $  262           $210         $   --              $    --             $  472
Year ended December 31, 1998                   472            365           (329)(1)               --                508
Year ended December 31, 1999                   508             21             -- (1)               --                529
Allowance for inventory obsolence

Year ended December 31, 1997                $2,873           $574         $   --              $    --             $3,447
Year ended December 31, 1998                 3,447            482             --                 (655)(4)          3,274
Year ended December 31, 1999                 3,274            410             --                   --              3,684
Accumulated depreciation

Year ended December 31, 1997                $   --           $ --         $   --              $    --             $   --
Year ended December 31, 1998                    --             68             --                   --                 68
Year ended December 31, 1999                    68            970          3,125 (5)               --              4,163
Amortization of goodwill

Year ended December 31, 1997                $1,478           $335         $   --              $    --             $1,813
Year ended December 31, 1998                 1,813            480             --                   --              2,293
Year ended December 31, 1999                 2,293            585             --                   --              2,878
Amortization of patents

</TABLE>

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

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

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

(3)  To reduce reserve for accounts collected.

(4)  To write off tooling against reserve.

(5)  To write down goodwill to estimated net realizable value.

                                      F-49
<PAGE>   111

                                   SIGNATURES

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


NCT GROUP, INC.
(FORMERLY KNOWN AS
NOISE CANCELLATION TECHNOLOGIES, INC.)


By: /s/ MICHAEL J. PARRELLA                                 Date: April 14, 2000
    ------------------------------
    Michael J. Parrella, President

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

<TABLE>
<CAPTION>
       SIGNATURE                          CAPACITY                           DATE
       ---------                          --------                           ----
<S>                              <C>                                     <C>

/s/ MICHAEL J. PARRELLA           President, Chief Executive             April 14, 2000
-----------------------              Officer and Director
Michael J. Parrella              (Principal Executive Officer)


/s/ CY E. HAMMOND                  Senior Vice President and             April 14, 2000
-----------------------             Chief Financial Officer
Cy E. Hammond                      (Principal Financial and
                                       Accounting Officer)


/s/ JAY M. HAFT                      Chairman of the Board               April 14, 2000
-----------------------            of Directors and Director
Jay M. Haft


/s/ JOHN J. McCLOY II                      Director                      April 14, 2000
-----------------------
John J. McCloy II


/s/ SAMUEL A. OOLIE                        Director                      April 14, 2000
-----------------------
Samuel A. Oolie
</TABLE>

                                       62